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It’s Easter weekend, so we are going to revisit a 2018 letter about the yield curve. The yield curve is much misunderstood and misused by many analysts. This letter will give you the tools to understand the correct importance and relevance of the yield curve. And then, a few comments about Ukraine.

First, a reminder it’s just over two weeks until the beginning of the SIC 2022! I hope you’re as excited as I am. If you haven’t ordered your Virtual Pass yet, I suggest you do so now.

We have over 50 speakers now, including big names like Joe Lonsdale (Palantir), Cathie Wood (ARK Invest), Ron and Michael Baron (Baron Funds), Ross Perot Jr., Niall Ferguson, Tom Hoenig (formerly FDIC and Kansas City Fed), strategist and pollster Frank Luntz, and many more. We’re also working on a special surprise guest whom I can’t tell you about yet, but suffice it to say, every American knows his name.

If you want to know where US inflation and the Russia-Ukraine war are going, where to find hidden gems to invest in right now, or what the Fed will likely do next, you should join us from May 2–13 (on six alternating days). Even if you can’t watch live all six days, every presentation and panel session will be recorded for you and made available after the conference, together with transcripts and presenter slides (as available). Click here to get your Virtual Pass now.

I wrote the following in December 2018, originally titled The Misunderstood Flattening Yield Curve. Some of it is out of date now but still informative. I’ve added a few new comments in [brackets]. With that, let’s jump right in.

***

Everybody is suddenly talking about the inverted yield curve. They’re right to do so, too, but alarm bells may be premature. Inversion is a historically reliable but early recession indicator. The yield curve isn’t saying recession is imminent, even if it were fully inverted, which it is not.

What we see now is really more of a flattened yield curve, with a smaller but still positive spread between short-term and long-term interest rates. That’s not normal, but it’s also not a recession guarantee. However, when we combine this with assorted other events, it adds to the concerns.

I’ve been writing in this letter about the negative yield curve since 2000 when the inverted yield curve said there was a recession in our future, and I called a bear market in equities. Ditto for 2006, though at that time, the yield curve inverted long before the stock market turned. Today, we’ll look at what the yield curve is really telling us.

Breathless Reporting

It’s Easter weekend, so we are going to revisit a 2018 letter about the yield curve. The yield curve is much misunderstood and misused by many analysts. This letter will give you the tools to understand the correct importance and relevance of the yield curve. And then, a few comments about Ukraine.

First, a reminder it’s just over two weeks until the beginning of the SIC 2022! I hope you’re as excited as I am. If you haven’t ordered your Virtual Pass yet, I suggest you do so now.

We have over 50 speakers now, including big names like Joe Lonsdale (Palantir), Cathie Wood (ARK Invest), Ron and Michael Baron (Baron Funds), Ross Perot Jr., Niall Ferguson, Tom Hoenig (formerly FDIC and Kansas City Fed), strategist and pollster Frank Luntz, and many more. We’re also working on a special surprise guest whom I can’t tell you about yet, but suffice it to say, every American knows his name.

If you want to know where US inflation and the Russia-Ukraine war are going, where to find hidden gems to invest in right now, or what the Fed will likely do next, you should join us from May 2–13 (on six alternating days). Even if you can’t watch live all six days, every presentation and panel session will be recorded for you and made available after the conference, together with transcripts and presenter slides (as available). Click here to get your Virtual Pass now.

I wrote the following in December 2018, originally titled The Misunderstood Flattening Yield Curve. Some of it is out of date now but still informative. I’ve added a few new comments in [brackets]. With that, let’s jump right in.

***

Everybody is suddenly talking about the inverted yield curve. They’re right to do so, too, but alarm bells may be premature. Inversion is a historically reliable but early recession indicator. The yield curve isn’t saying recession is imminent, even if it were fully inverted, which it is not.

What we see now is really more of a flattened yield curve, with a smaller but still positive spread between short-term and long-term interest rates. That’s not normal, but it’s also not a recession guarantee. However, when we combine this with assorted other events, it adds to the concerns.

I’ve been writing in this letter about the negative yield curve since 2000 when the inverted yield curve said there was a recession in our future, and I called a bear market in equities. Ditto for 2006, though at that time, the yield curve inverted long before the stock market turned. Today, we’ll look at what the yield curve is really telling us.

Breathless Reporting

It’s Easter weekend, so we are going to revisit a 2018 letter about the yield curve. The yield curve is much misunderstood and misused by many analysts. This letter will give you the tools to understand the correct importance and relevance of the yield curve. And then, a few comments about Ukraine.

First, a reminder it’s just over two weeks until the beginning of the SIC 2022! I hope you’re as excited as I am. If you haven’t ordered your Virtual Pass yet, I suggest you do so now.

We have over 50 speakers now, including big names like Joe Lonsdale (Palantir), Cathie Wood (ARK Invest), Ron and Michael Baron (Baron Funds), Ross Perot Jr., Niall Ferguson, Tom Hoenig (formerly FDIC and Kansas City Fed), strategist and pollster Frank Luntz, and many more. We’re also working on a special surprise guest whom I can’t tell you about yet, but suffice it to say, every American knows his name.

If you want to know where US inflation and the Russia-Ukraine war are going, where to find hidden gems to invest in right now, or what the Fed will likely do next, you should join us from May 2–13 (on six alternating days). Even if you can’t watch live all six days, every presentation and panel session will be recorded for you and made available after the conference, together with transcripts and presenter slides (as available). Click here to get your Virtual Pass now.

I wrote the following in December 2018, originally titled The Misunderstood Flattening Yield Curve. Some of it is out of date now but still informative. I’ve added a few new comments in [brackets]. With that, let’s jump right in.

***

Everybody is suddenly talking about the inverted yield curve. They’re right to do so, too, but alarm bells may be premature. Inversion is a historically reliable but early recession indicator. The yield curve isn’t saying recession is imminent, even if it were fully inverted, which it is not.

What we see now is really more of a flattened yield curve, with a smaller but still positive spread between short-term and long-term interest rates. That’s not normal, but it’s also not a recession guarantee. However, when we combine this with assorted other events, it adds to the concerns.

I’ve been writing in this letter about the negative yield curve since 2000 when the inverted yield curve said there was a recession in our future, and I called a bear market in equities. Ditto for 2006, though at that time, the yield curve inverted long before the stock market turned. Today, we’ll look at what the yield curve is really telling us.

Breathless Reporting

It’s Easter weekend, so we are going to revisit a 2018 letter about the yield curve. The yield curve is much misunderstood and misused by many analysts. This letter will give you the tools to understand the correct importance and relevance of the yield curve. And then, a few comments about Ukraine.

First, a reminder it’s just over two weeks until the beginning of the SIC 2022! I hope you’re as excited as I am. If you haven’t ordered your Virtual Pass yet, I suggest you do so now.

We have over 50 speakers now, including big names like Joe Lonsdale (Palantir), Cathie Wood (ARK Invest), Ron and Michael Baron (Baron Funds), Ross Perot Jr., Niall Ferguson, Tom Hoenig (formerly FDIC and Kansas City Fed), strategist and pollster Frank Luntz, and many more. We’re also working on a special surprise guest whom I can’t tell you about yet, but suffice it to say, every American knows his name.

If you want to know where US inflation and the Russia-Ukraine war are going, where to find hidden gems to invest in right now, or what the Fed will likely do next, you should join us from May 2–13 (on six alternating days). Even if you can’t watch live all six days, every presentation and panel session will be recorded for you and made available after the conference, together with transcripts and presenter slides (as available). Click here to get your Virtual Pass now.

I wrote the following in December 2018, originally titled The Misunderstood Flattening Yield Curve. Some of it is out of date now but still informative. I’ve added a few new comments in [brackets]. With that, let’s jump right in.

***

Everybody is suddenly talking about the inverted yield curve. They’re right to do so, too, but alarm bells may be premature. Inversion is a historically reliable but early recession indicator. The yield curve isn’t saying recession is imminent, even if it were fully inverted, which it is not.

What we see now is really more of a flattened yield curve, with a smaller but still positive spread between short-term and long-term interest rates. That’s not normal, but it’s also not a recession guarantee. However, when we combine this with assorted other events, it adds to the concerns.

I’ve been writing in this letter about the negative yield curve since 2000 when the inverted yield curve said there was a recession in our future, and I called a bear market in equities. Ditto for 2006, though at that time, the yield curve inverted long before the stock market turned. Today, we’ll look at what the yield curve is really telling us.

Breathless Reporting

As you see in the lower right of the chart, recession probability has been rising and is now around 15%, consistent with their earlier work. It is not rising as quickly as it did ahead of the last recession.

A little history: In September 2000, the yield curve was seriously inverting. I called Estrella to talk about the importance of the curve. I wrote then:

First, he told me he had done another study in 1998 comparing even more predictors. The latest study involved 30 potential predictors of a recession. The conclusion of that study was that the 90-day average of the yield curve was still the most reliable predictor of the 30 they studied, so score one for taking this current situation more seriously.

But he would not go so far as to say that he personally saw a recession coming. I would like to consign that reluctance to the fact that he was still at the Fed.

In 2006, I called another Fed researcher and asked about recession probability. Again, there was great reluctance to actually predict a recession. This Federal Reserve economist actually went so far as to say (I swear, the person really said this): “There are reasons to believe it may be different this time.”

Later in 2006, I was on my friend Larry Kudlow’s CNBC show with Nouriel Roubini and John Rutledge. Larry and John were both adamant the bull market was in no way over, and no recession was on the horizon. Nouriel and I saw it different. Oddly, we were all correct.

How can that be, you ask? A bear market began about six months after the show, and recession six months later. But the stock market rose almost 20% after that show as well, so if you had exited the stock market, you would’ve missed a 20% rise (but still avoided a 50% bear market).

Sidebar: That has now happened to me twice. I’ve called recessions early and missed some opportunities. That is one of the reasons that I now use money managers with quantitative timing models. At the beginning of 2017, the four managers I use were heavily invested in equities. This year, they have slowly moved into cash and are now, as a group, holding a significant portion (over 70%) of cash and cash equivalents. But then again, their models could become bullish. I have come to the point that I simply trust their models. For me, it feels a lot better than trying to make a prediction based upon my own analysis.

I haven’t found a way to predict the future accurately, and certainly not with anything close to precision timing. And so, while I can watch the yield curve and begin to get an idea of when there might be a recession in our future, applying that in a portfolio is difficult at best.

A Little Time

So pulling all this together, the flattening yield curve is a fair bit away from signaling a recession in the next year. That could change, but it’s where we are now. But it is certainly something to watch.

On the other hand, history never repeats itself quite so perfectly. Other things are different—all the European Threats I described last week or the prospect of wider trade war as President Trump tries to make China change its ways.

I would not conclude from the yield curve that recession is either imminent or impossible. It says what I already knew: A recession will strike at some point, but we probably have a little time. I suggest using that time to prepare. As I’ve been saying for the last few months, you should prepare to exit positions that may become illiquid, think of ways to hedge, and generally get ready for a volatile 2019. Think of cash as an option on the future.

As you see in the lower right of the chart, recession probability has been rising and is now around 15%, consistent with their earlier work. It is not rising as quickly as it did ahead of the last recession.

A little history: In September 2000, the yield curve was seriously inverting. I called Estrella to talk about the importance of the curve. I wrote then:

First, he told me he had done another study in 1998 comparing even more predictors. The latest study involved 30 potential predictors of a recession. The conclusion of that study was that the 90-day average of the yield curve was still the most reliable predictor of the 30 they studied, so score one for taking this current situation more seriously.

But he would not go so far as to say that he personally saw a recession coming. I would like to consign that reluctance to the fact that he was still at the Fed.

In 2006, I called another Fed researcher and asked about recession probability. Again, there was great reluctance to actually predict a recession. This Federal Reserve economist actually went so far as to say (I swear, the person really said this): “There are reasons to believe it may be different this time.”

Later in 2006, I was on my friend Larry Kudlow’s CNBC show with Nouriel Roubini and John Rutledge. Larry and John were both adamant the bull market was in no way over, and no recession was on the horizon. Nouriel and I saw it different. Oddly, we were all correct.

How can that be, you ask? A bear market began about six months after the show, and recession six months later. But the stock market rose almost 20% after that show as well, so if you had exited the stock market, you would’ve missed a 20% rise (but still avoided a 50% bear market).

Sidebar: That has now happened to me twice. I’ve called recessions early and missed some opportunities. That is one of the reasons that I now use money managers with quantitative timing models. At the beginning of 2017, the four managers I use were heavily invested in equities. This year, they have slowly moved into cash and are now, as a group, holding a significant portion (over 70%) of cash and cash equivalents. But then again, their models could become bullish. I have come to the point that I simply trust their models. For me, it feels a lot better than trying to make a prediction based upon my own analysis.

I haven’t found a way to predict the future accurately, and certainly not with anything close to precision timing. And so, while I can watch the yield curve and begin to get an idea of when there might be a recession in our future, applying that in a portfolio is difficult at best.

A Little Time

So pulling all this together, the flattening yield curve is a fair bit away from signaling a recession in the next year. That could change, but it’s where we are now. But it is certainly something to watch.

On the other hand, history never repeats itself quite so perfectly. Other things are different—all the European Threats I described last week or the prospect of wider trade war as President Trump tries to make China change its ways.

I would not conclude from the yield curve that recession is either imminent or impossible. It says what I already knew: A recession will strike at some point, but we probably have a little time. I suggest using that time to prepare. As I’ve been saying for the last few months, you should prepare to exit positions that may become illiquid, think of ways to hedge, and generally get ready for a volatile 2019. Think of cash as an option on the future.

In the first section, you will designate the amount of your donation. There is a “Designation” menu that defaults to “Fondo General.” You’ll need to change that part. Just click the arrow, and you will see the choice for the “Ukraine-Jesuit Refugee Service.” Make sure it looks like this:

While this isn’t for anti-tank weapons or planes, it is critical and life-supporting. We need to help the refugees and the families who are taking them in. Please be as generous as you can. They can take cryptocurrency, wire transfers, etc., through another facility.

Your watching the yield curve carefully analyst,

John Mauldin Thoughts from the Frontline
John Mauldin

 BullsNBears.com was founded to educate investors about the eight secular bear markets which have occurred in the US since 1802.  The site publishes bear market investing recommendations, strategies and articles by its analysts and unaffiliated third-party and qualified expert contributors.

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