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ECON Bond Market Sends Up a Recession Warning Flare
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  1. #1

    Bond Market Sends Up a Recession Warning Flare

    Bond Market Sends Up a Recession Warning Flare

    Federal Reserve boss Jerome Powell's speech will be closely followed after another attack from Donald Trump over his decision to press ahead with raising interest rates
    4 Dec 20182,417

    Part of the yield curve inverted on Monday, the first time this has happened since 2007.

    That sent jitters through the stock market as investors worried it could foreshadow slower growth or even a recession in the future. The Dow Jones Industrial Average fell by 600 points, or 2.32 percent, on Tuesday morning.

    The yield curve is a way to show the difference in compensation investors get depending on how long a bond takes to mature. Most of the time, the curve slopes upward because investors usually want to be paid more in exchange for locking their money up for longer.

    But at times the relationship can flip, or invert, with shorter-term bonds yielding more than longer-term bonds.

    That’s what happened on Monday and Tuesday. First, the yield on five-year Treasurys dipped below three-year Treasurys. That was closely followed by the five-year yield falling below two-year yields.

    This can be an indicator that investors think the Federal Reserve will have to cut its short-term interest rate target because of slumping economic growth or an approaching recession.

    In other words, the inversion is the latest piece of evidence that the Federal Reserve may be acting too aggressively in raising interest rates. Although the economy has many areas of strength, particularly in the labor market and manufacturing sector, the more interest-sensitive areas–such as housing and autos–have been weak.

    The last time the three-year yield fell below the five-year, the economy slipped into a recession in the following year. Recessions also followed similar inversions in 1990 and 2001.

    But the crystal ball of the yield curve is murky. Bespoke Investment Group said in the last three recessions the first inversion of three-year and the five-year yields came an average 26.3 months before the start of a recession, with a range between 17 and 38 months.

    And an inverted yield curve does not always predict a recession. The gap between the two-year and five-year yields turned negative in 1998, for example, but no recession followed until after the gap between the two-year and 10-year yield inverted in 2000.

    When the gap between the 10-year Treasurys and 2-year turns negative, the yield curve is said to be inverted. This can indicate a recession is approaching.

    The most closely watched parts of the curve are the gaps between the two-year to ten-year yield curve and the three-month to ten-year curve. These are thought to be the best predictors of a recession. Studies by Federal Reserve economists say we should pay particular attention to the three-month to ten-year gap. And these are still positive, although the gap is narrowing as the yield on ten-year Treasurys has fallen further than short-term yields.

    The 2-year yield Tuesday was around 12 basis points–each basis point is a one-hundredth of a percentage point–below the 10-year yield, while the 3-month yield was about 50 basis points below from the 10-year.

    History suggests that a temporary inversion in discrete parts of the curve is not all that predictive. Nor does a flatter yield curve have much predictive power. So if the three-month and two-year yields stay above the ten-year, a slump or recession may not be in the offing.

    The yield curve may also have lost some of its predictive power. Very large budget deficits have increased the amount of bonds the government is selling. The government’s choices about which bonds to sell could cause an over-supply or under-supply in some parts of the yield curve, which in turn could invert the curve.

    The Federal Reserve’s actions as it shrinks its balance sheet, inflated from years of bond buying under the central bank’s quantitative easing program, may also be putting pressure on the curve. This is largely an unprecedented event so its effects are hard to predict and likely will not be known for years.

    The bond market is often fickle. In the early months of this year, the market was signaling that the Fed was expected to raise interest rates three times in 2019. Now it sees rates rising once or, possibly, twice.

  2. #2
    Coming Crash Coming Crisis — 2008 Prophecy David Wilkerson

    Date: May 1, 2015Author: lance goodall 0 Comments

    Published several months before the big Crash…

    2008 PROPHECY by DAVID WILKERSON – First published June 2nd, 2008.
    Right now, America is facing an economic “perfect storm.”

    This past March (2008), the American financial system nearly collapsed. Bear Stearns, one of the nation’s top financial institutions, had to be rescued from bankruptcy by the Federal Bank. The Wall Street Journal, a newspaper not prone to alarmism, blared the startling headline: “Fed Saves American Financial System From Collapse.”

    The Fed had to pour $30 billion into the deal initially, to stave off a panic that would have sunk this nation into the worst economic depression in its history. To date, more than $300 billion has been put into the system to save it.
    Ten years ago, I wrote a book entitled, America’s Last Call: On the Brink of a Financial Holocaust.

    In that book, I warned of the following events:

    There would be a meltdown of the bond market.
    God’s judgment would strike suddenly on the U.S. economy.
    A brief, false sense of prosperity would precede the coming economic collapse. (This short flicker of prosperity would be God’s final mercy call before the chastening to come.)
    There would be a real estate meltdown, with a market made up of mostly sellers and very few buyers. Multitudes would lose their homes to repossession.
    There would be an ominous rise of homosexual power.
    A sudden storm of confusion would take place on Wall Street.
    God’s watchmen and prophets would be silenced.
    The U.S. dollar would collapse.
    America would lose control of its economy. To date, China has loaned America hundreds of billions of dollars. We have become the world’s number one debtor nation, no longer in control of our finances.

    To read more —

  3. #3
    Along with the bond the price of oil.
    Sow the Wind....Reap the Whirlwind

  4. #4
    Join Date
    May 2005
    North Georgia Mountains
    Quote Originally Posted by doctor_fungcool View Post
    Along with the bond the price of oil.
    You need to watch the stock market also.

    IMO - In general most folks sell their investments at exactly the wrong time. After seeing the value in their 401k's, IRA's, and any investment accounts fall by a 1/3 or more they sell everything just so they don't lose every thing. Then when the markets rebound they are to slow to get back in and thus miss the rise up from the market lows.

    Then you have professional investment advisers stating to 'Buy the Dip'. Stock market volatility is good for traders but not for most normal folks who only pay attention to the index numbers as they are reported on the nightly news. Plus professional investment advisers usually get paid on commission so they want you to trade.

    Again IMO if you ask around you will find that most normal folks with stock market wealth were buy and hold investors. Joe six pack who worked at the power company and bought shares through payroll deductions over the course of a 30 year career. Or someone who drank Pepsi and ate the chips so bought stock in the company and DRIP'd their dividends for their adult life.

    But going back to stock market indexes. As the indexes go down the selling of stocks and mutual funds will increase. Which will cause the indexes to fall farther. But beware of bounces to the indexes as market makers say things are oversold and you should by this or that.

    To predict the economy and get a slight hint of market direction watch the numbers coming out of the companies. How is Ford doing. Walmart, HomeDepot, Caterpillar, Boeing, PG, J&J, etc. How are sales, earnings. Domestic and overseas. Utilities, How is electric demand compared to the last couple of years. Gas and fuel consumption. But remember numbers lag and the smart money has seen them well before you do so take that into account.

    Unexpected events, like the recent arrest, also can impact things. So expect the unexpected.


  5. #5
    Watch Europe.

    Search Results
    Web results
    Europe on the verge of a big new crisis, 6 years after last one - CNN
    Jun 2, 2018 - In 2012, Europe's problems centered around toxic banks, overwhelming debt and budget deficits. Now it has the "PHIGS" of 2018, and the ...

    Eurozone crisis | Business | The Guardian

    Eurozone crisis. November 2018 ... Fresh losses in New York sees the Dow lose its 2018 gains, and the Nasdaq enter a correction. Published: 24 .... Nils Pratley on finance Italy's eurozone crisis: no easy fixes for the European Central Bank.
    Last edited by China Connection; 12-06-2018 at 04:13 PM.


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