"Bond Markets Are Sending One Big Global Recession Warning"

This headline from CNBC greeted me this morning and appears to give us a significant reason for the Dow Jones, S&P and NASDAQ indices suffering a sharp decline today. It is just one more instance of media hype on two non-sure-things … a recession is imminent and that a recession is the “end of the world” 2008 revisited).

Read for yourself. The article is full of disclaimers such as: ”Strategists say in order to signal recession, the yield curve cannot just flip in and out of inversion, but it needs to stay there for some time to be meaningful.”

and

“Sometimes the S&P 500 peaks within two to three months of a 2s10s inversion but it can take one to two years for an S&P 500 peak after an inversion,” according to Bank of America Merrill Lynch strategists. “For the ten inversions back to 1956, the S&P 500 topped out within approximately three months of the inversion six times (1956, 1959, 1965, 1973, 1980, and 2000). The S&P 500 took 11 to 22 months to peak after the other four inversions (1967, 1978, 1989, and 2005).”

Read the full article: "Bond markets are sending one big global recession warning”

Recession Defined

According to Investopedia: “The technical definition of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP), although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.”  Of course recessions can take many shapes, and they can be devastating like the Great Recession of 2008. The media hype with regard to the next recession would lead you to believe that 2008 is on the horizon and it would lead you to believe that the Fed and interest rates are the culprits.

My take on the current mini-inversion

There is plenty of liquidity out there, not only in the US but abroad. Despite protestations to the contrary by the White House, the Street and the punditry corps, it’s not the Fed. IMHO IT IS FEAR, fear brought on the by the continuous gyrations in US trade policy … the most recent iteration having been sparked by renewed tariff threats on China from the President. It is also fear bought on by the media who, for the most part, has never really bought into the legitimacy of this bull market. It’s fear brought on by “recency bias,” looking in the rear view mirror and seeing the “Great Recession” of 2008 on our tail. ALL OF THE ABOVE CAUSE INVESTORS TO ESCHEW STOCKS AND FLY TO BONDS, PUTTING UPWARD PRESSURE ON THEIR PRICES AND DOWARD PRESSURE ON THEIR YIELDS.

One other important cause of our inversion is that other countries are involved in Quantitative Easing (stimulating, printing money) which is causing their rates to go negative. Our positive rates act as a magnet for their investment … a source of demand that puts downward pressure rates and has nothing to do with a potential bad economy. Of course the tumult in the US market is also driving for in demand for US government securities.

So why the sharp, severe action to yield curve inversion?

The only thing I can attribute this to is THE COMPUTERS!  There is no way at current writing that a computer program can be as nuanced as the discussion that I just put forth. Their programs are keyed on algorithms that spot certain news items, numbers and words.  They react to these by immediately buying or selling.  Basically it’s mindless trading and volatility and it has little to do with the actual health of the economy or the companies that you have in your portfolio.

All I can say to the unrest and volatility computerized trading is causing is that this too will pass. Investors should not confuse this current action with rational activity in the market.

Finally, I became a stockbroker in 1970. The day I joined my firm the Dow Jones industrial average was 750. Today it closed at 25,479.42, down 800.49 …  more than its entire value October 1, 1970, my first day In the business. All of this decline was based on, what I believe to be, irrational fear rather than any discernible change in the fundamentals … basically panic. Although we’ve seen many, any disquieting (downright scary)events over the past 49 years, all I had to know in 1970 was “stay the course.” I think that’s good advice for times like these.

“All we have to fear is fear itself.” FDR

 What’s your take?