It is almost the end of February 2023, and the yield curve is still highly inverted. Just about any measure shows an inversion at this point, and it is quite dramatic.
Some people look at the 10-year yield versus the 2-year yield. Some use the 10-year versus the 3-month (my preferred metric). I have seen some use the 30-year versus the 3-month. They are all inverted.
It is interesting to go back and look at last year. The 2-year and 10-year inverted around the beginning of July 2022. The 2-year yield went above the 10-year yield when they were around 3%.
It was sometime in October 2022 when the 3-month yield finally went higher than the 10-year yield. A few weeks after that and the 3-month went consistently higher than the 30-year.
Perhaps the most notable thing is to look at the beginning of 2022. The short-term yields were almost at zero. Even at the end of February 2022, they were near zero. It is hard to believe how far they have risen over the course of one year.
It is easy to forget that the Fed’s fight against inflation (that it created) really started about a year ago. The Fed never really had a period of stable money.
In 2021, the Fed was still expanding its balance sheet. It was even still expanding at the beginning of 2022. It quickly went from loose money to tight money. The Fed almost immediately went from balance sheet expansion to raising its target federal funds rate.
This actually just shows the complete incompetence of the people at the Fed and the establishment financial community in general. It was already clear that price inflation was rising in late 2021. Why didn’t they stop creating new money out of thin air at that point?
Now we are in a situation where price inflation is not under control, so the Fed is still essentially forced to keep raising its target rate and slowly drain its balance sheet. But it is doing this in the face of an already heavily inverted yield curve.
The Winds Can Change Quickly
Just as the Fed’s stance from loose money to tight money changed quickly, so too can the prospects for the entire economy.
All signals point to a recession. The biggest signal is the highly inverted yield curve.
It’s hard to say how long it will stay inverted, but it actually doesn’t matter that much at this point. It has been highly inverted for so long that a recession is baked into the cake. This is assuming we don’t see a 2020 event again where society is locked down and the Fed goes on a massive money creation spree.
The yield curve will likely flatten before the worst of the recession hits. The worst of the recession typically happens after the yield curve had already been inverted. I don’t see why it would be different this time.
The recession will most likely start in 2023, but it is quite possible it might not show up until 2024. Things seem to happen slowly and then all of a sudden. That’s true of both life and the financial markets.
It is surprising how many in the financial media are actually admitting that there may be a recession coming. But most of them say it will be mild. So even if you thrive on being a contrarian, the contrary position may not be that there will be no recession. The contrary position is that the recession will be a lot worse than mild.
Most people are not ready for what is to come, even though the warning signals are there.