This morning, the Dow Jones took investors on a roller-coaster drop, as reported by outlets such as ABC News:
The reason the Down dropped is due to the yield from 10-year U.S. Treasury notes dropping below the yield from 2-year U.S. Treasury notes, along with distressing signs from Germany and China that could forecast a coming global recession. Let’s see, it’s 2019 . . . the last recession was what, 10 years ago? Right on time.
Why is this bad, though? Well, a normal yield curve is steady; it predicts ongoing economic growth for the long term, meaning investors can take long-term risks with their cash without worrying about serious changes in available capital or inflation. An inverse yield curve indicates that the market expects the economy to slow down and interest rates to drop — so investors lock in at current rates before they do so, eschewing the long run for short term stability.
A disclaimer, though: I’m not a financial analyst or trader. I’m in accounting, and I’ve worked for three major financial firms. I’m familiar with what all this means, but if you want expertise, go find Bonddad, or follow economists who really know what this is all about, like Brad DeLong or Paul Krugman.
Krugman is, in fact, my economist of choice, simply because he knows what he’s talking about and has a proven track record. I look out for anything he writes. In fact, when Nouriel Roubini was featured in a Financial Times piece in June 2019, the first thing I did (after groaning and muttering imprecations; the man is not known as “Dr. Doom” for nothing) was to see what Krugman had to say.
And Krugman did not disappoint.
From his Twitter feed:
I’m taking this as a nod from Krugman that it might not be as bad as the Great Recession, but those of us who remember those times are probably still suffering from the jitters. I can remember the utter despair at my workplace in 2009, although our firm was healthy; they still decided to slash away at our workforce, and we careened from doing the work of 2-3 people and reeling over losing 50-60% of our retirement funds at what Duncan Black (of “Eschaton” blog fame) calls the Wall Street Dog Track. WHEEEEEEEEEEE!
Things aren’t looking good right now, my friends, and they may very well get worse — despite Trump’s decision, according to his insomniac Treasury lackey Wilbur Ross, to hold off on more tariffs against Chinese goods because Christmas is coming.
And because everyone has a critic, I leave you with this exchange on Econbrowser, which is featured on the always-excellent, and often prescient, Calculated Risk Blog:
Reader Rick Stryker accuses me:
progressive economists are practicing a modern form of haruspicy, in which they compulsively examine the entrails of the economy that they are so willing to sacrifice to recession, desperately searching for some downturn prophesy that will be realized before 2020.
If I’m engaging in haruspicy, a lot of Wall Street economists are too. Bloomberg updated today:
Mounting signs of a global economic slowdown hammered stocks and drove demand for sovereign bonds to such an extent that shorter-term yields rose above long rates in the U.S. for the first time since 2007.
The S&P 500 sank 2% as the inverted gap in rates for two- and 10-year Treasuries flashed a warning that has normally preceded a recession. European shares plunged after Germany’s economy contracted in the second quarter, adding to angst fueled by weak Chinese retail and industrial numbers. Oil retreated, gold rallied and the dollar held steady.
. . . yeah.
Have at it, folks. We’re going to hear a lot more about this in the days to come.