Inverted yield curves
Every time yield curves go ‘inverted’ people start to spew forth a lot of garbage. And by people I mostly mean financial journalists and commentators… and really, in my mind at least, there is some debate on whether you can classify these as actual people or something you should rather be trying to scrape off the bottom of your shoe using the pointy edge of the curb…
But I digress.
Let me try break it down Barney-style. There are a couple of ‘financial’ markets. The Stock market is the one your hear about most often. Its the one where people buy and sell stocks or shares in a companies. (condescending enough?) The stock market is also complete bullshit. I mean that in a nice way, but really its a layer cake of psychology, imperfect information and nebulous hoo-ha which is given some weird holy cow legitimacy by people in suits who front themselves as having some sort of divinely ordained ability to interpret the chaos machine. The stock market while a good indicator of sentiment for where you are at, isn’t necessarily a great litmus test for whats happening in real life. In fact if stock prices were accurately portrayed in a perfect information kinda way traders wouldn’t know how to make any money… in this gig you make money by playing the other player, not playing the game.
In any event, other markets include the Bond market. Which is… less spurious and MUCH more important than the stock market (imo). Bonds are thingamajigs that big companies and governments use to borrow money. They say to the market, buy this bond-thing and hold onto it for x-period of time and then after x-period we will give you your money back plus a little extra for your trouble. That little bit extra, is called the yield.
Main case in point. US Treasury bonds. They come in a variety of shapes and sizes. You are lending the US Government money for 3 months or two years… or ten years. The yield that the government is treasury bond is usually compensatory with the time period. Ie. If you lend the government money for 10 years they will pay you a bigger yield than if you only lend them money for three months. Which seems fair, I mean a lot of things could happen over a ten year time period.
Investors put A LOT of thought into their bond purchases, because you need to crunch A LOT of asymmetrical information that could affect
your their money. The company or government you are lending your money to could go bankrupt and you could lose some or even all of your money, countries and companies with riskier lending profiles obviously offer higher yields to entice people to buy their bonds. That whole risk versus reward chestnut.
Recently something uncommon happened. The yield curve became inverted. Which means that short term bonds (3 month and two year) were yielding a better return than the longer term bonds (10 year). Wait… why… would… that happen…
Well there is a perception that in two years… there will be more… lets call it uncertainty… and so there is demand for bonds at the higher end of the spectrum which causes the yield to fall. People start loosing their minds because the yield curve inverting is seen as a precursor to a recession. (I think an inverted yield curve has appeared before every US recession in the last 50 years… or something like that… cbf to look it up right now)
Yeah. *shrug* So what.
Which I realize may sound flippant because recessions cause a lot of hardship for people. We want the good times to last forever. It’s a weird phenomenon that we can appreciate in something like the seasons and weather, spring eventually because winter. Sometimes the winter is mild… sometimes its not. Our ancestors prepped for this eventuality by storing food, maintaining the homestead and stacking up the firewood. When this happens in the economy its an unmitigated disaster because we kinda expected summer to last forever.
Well… that’s not entirely true, because in modernity we don’t see ourselves as having to survive cyclical events. We work for a company…we get paid a salary for the work we do… its the companies job to worry about that… you know… economic stuff. I’m just here to fill out my TPS reports. Super unfair if I get punished for something I have no control over… the government should be taking care of that area for me. And they do try… sorta… they try and stem the inevitable with interest rates cuts and printing more money and stuff… but eventually… a cycle is gotta do what a cycle has gotta do.
Now is the autumn of our discontent. (I didn’t want to say winter is coming… but you know, the Starks know eh… knew stuff). Actually… the thing is, it might actually not be autumn yet. It might still be summer. Its probably not spring anymore. But who knows? And therein lies the rub. No one fucken knows. The world is full of dickheads who want to be right all the time and predict the turning point.
But know this, that if the master of the house had known in what part of the night the thief was coming, he would have stayed awake and would not have let his house be broken into…
Which I think is Matthews way of telling us about firearm ownership right? The bible is so confusing.
This a series of posts I’m doing for my kids. In case I die (ie. Go Darke) and am not around to to teach them (personal) finance when the time comes. Its mostly stuff I wish someone had taught me when I was sixteen. You can find more posts like this…