Quote:
Originally Posted by LouisVanDerWright
Bond inversion is not a dead ringer predictor for recession and this is likely a lot of chaos coming out of China as they are having a hell of a time controlling capital flight right now. People are dumping cash in the US right now and that, not economic data, is causing the bond rally.
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"This time is different." Be wary.
While the 10 yr - 2 yr is not a dead ringer (nothing is), it's a quite good predictor - among the best there is, and I would say just about on par at the top of predictive indicators with the output gap (which is also ringing alarm bells).
It's much more likely that this time will not in fact be different. The main question is one of timing - Time to onset of recession after inversion varies meaningfully. We really have likelyanywhere from as little as 6 months to as much as 2 years until we are officially in recession (and you do not officially know until well into recession - or potentially even after it's ended (when the NBER does the official dating).
The long-end bond rally is likely being driven by multiple factors. China is a factor, however in my view it is not a dominant one. Slowing global - and yes, US - growth (and increasing downside risk) is a major driving force. Keep in mind that bond markets - like other markets - are ever forward-looking. And long yields, at first approximation, reflect investors' expectations for future short-term (or policy) rates. Investors anticipate lower short term rates into the future because they think that - in large part - US growth and inflation will be lower in the quarters ahead (and thus the Fed will - in part in reaction, and in part in anticipation - lower its key policy rate.
Guaranteed second half 2019 US growth is going to slow measurably....however, we will likely not be in recession sometime in 2020 - or even potentially as far out as the first half of 2021. It will come though. In the meantime, we still have some expansion left to savor (we could have relative growth spurts in the interim, mind you). In terms of development, I believe we're looking at a last mini-wave of starts for the cycle, now through next spring or summer....
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