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MoBuffs

Joined: 10/1/14 Posts: 760
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Only a few "brief" inversions have resulted in much slower growth and not..


full blown recessions since the early seventies. The big variable to watch here is how long the curve remains inverted. If it lasts at least a couple of quarters history says we're likely headed for a recession. A sustained Treasury inversion really hurts arguably the biggest growth driver in the economy - consumer and business lending. Banks and other financial lenders are forced to "borrow high and lend low" when short term Treasury rates are higher than long term rates. Their profit margins on loans get squeezed and understandably they become less aggressive to lend money. There's a time lag here so look for bank earning results (as a group) to disappoint later this year. No coincidence bank stocks have gotten crushed over the last few months. Combine the inversion problem with potential reduced consumer and business demand as well as rising defaults and it can get ugly quickly. Suffice it to say the pressure is on the Fed to keep the curve from inverting more by lowering short term rates as they have little control over longer term rates. My concern here is the Fed doesn't reduce short term rates as aggressively as may be needed because its fearful a full blown trade war will (contrary to the misrepresentations Trump has been making to the uninformed) pressure consumer prices higher. While Team Trump will unfairly continue to blame the Fed for slowing growth, the stock and bond markets are signaling a very different and more accurate message - that poorly-conceived fiscal policy and trade wars can have dire economic consequences.

Posted: 08/15/2019 at 3:42PM



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