Yield Curve Slightly Flattening in March

The yield curve has been flattening slightly in the month of March.  First, let’s look at the numbers.

I looked at the yields posted by the Treasury.  On March 1, 2017, the one-month rate was. 0.46%.  On March 22, 2017, it had gone up to 0.74%.  During that same time period, the 30-year rate fell slightly from 3.06% to 3.02%.  The 10-year rate fell from 2.46% to 2.40%.

The longer-term rates had actually been going up in the early part of the month, but then started falling around the middle of the month.  When stocks took a tumble this week, the long-term rates fell, while the short-term rates continued upwards.

An inverted yield curve – where long-term rates fall below short-term rates – is a major recession indicator.  Investors are locking in long-term rates, while short-term borrowing is higher in demand.

We are still far away from an inverted yield curve, but a flattening can signal trouble ahead.  It is hard to say whether or not this is just a blip that will reverse.

If I were Trump, I would stop bragging about the stock market or any positive economic indicators for that matter.  When you live by the sword, you also die by the sword.

Trump was warning during his campaign last year that stocks were in a bubble.  If he kept his mouth shut now, at least he could point to those remarks if there is a major downturn.  But if he keeps bragging about stocks hitting new highs, it is going to completely negate any earlier comments where he warned of a possible bubble.  After all, if he claims any credit now for any good news, then he has to take the blame when bad news hits.

Even though we appear to be in something of a mini-boom right now, at least for some assets, this can quickly change.  The Fed has kept a tight monetary policy for the last two and a half years.  QE3 ended in October 2014.  While the increase in short-term rates is not a complete game changer yet, it does not help the economic picture.

From my perspective, we need a correction, even though it will be painful.  It is better to have the correction now than to delay it and have it even worse in the future.  Resources have been misallocated due to previous Fed money creation.  A correction is what is needed in order to reallocate resources to their best use in accordance with consumer demand.  We also likely need a higher savings rate than what currently exists.

Sustainable economic growth comes from production.  Production comes from savings and capital investment.  But the production has to be in accordance with consumer demand, which happens in a free market.  If things are being produced that are not part of our highest priorities as consumers, then it makes us poorer than we otherwise would have been.

It is important that when we do get a correction that the Fed and the government do not try to “fix it”.  They need to let the resources reallocate properly.  Otherwise, they will set us up for more trouble in the future.

Unfortunately, if we hit a major downturn, I don’t think the Fed will do nothing.  They will return to digital money printing.  That is the biggest reason to own some gold as part of your investments.

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