The money line was buried far down: “This is a very healthy economy, absent the inflation numbers,” Patrick Harker, president of the Federal Reserve Bank of Philadelphia, told CNBC Tuesday after the inversion.
Sigh!
We’re nearing a recession, if this always-accurate indicator is right again
By Lucy Bayly, CNN Business | Updated 2:51 PM EDT, Tuesday, March 29, 2022
New York (CNN Business) — The bond market just flashed a warning sign that has correctly predicted almost every recession over the past 60 years: an inversion of the US Treasury note yield curve.
An inverted yield curve is often seen as a signal that investors are more nervous about the immediate future than the longer term, spurring interest rates on short-term bonds to move higher than those paid on long-term bonds.
The curve inverted briefly Tuesday for the first time since September 2019. That shouldn’t be particularly surprising, given how Russia’s invasion of Ukraine – and its economic ramifications – continue to weigh heavily on the global economy.
Treasury notes are essentially a loan to the US government and are generally seen as a safe bet for investors since there is little risk the loan won’t be paid back.
These government bonds have seen a flood of interest in recent weeks, amid geopolitical uncertainty and tightening financial conditions – the Federal Reserve said at its policy meeting earlier this month that it is considering as many as six more rate hikes in 2022 alone. That’s making investors lose their appetite for stocks and other more volatile assets and turn to dependable investments like Treasuries.
But, as more people rush to buy bonds, that causes the yield to fall, which ends up making them a less attractive investment. Some investors are even starting to seek out assets like Bitcoin and cash, which traditionally offer less stability than bonds.
A 10-year Treasury note typically delivers a higher rate of return than shorter term notes, since an investor’s money is committed for longer. Shorter-duration Treasury notes, such as a 2-year or a 3-year bond, generally offer lower yields, because risks are more predictable than over a longer time horizon.
But when the return on a 10-year note is lower than the 2-year, that indicates a pessimistic outlook on the part of investors and a reluctance to commit their money. The 10-year yield fell to 2.383% on Tuesday afternoon, while the 2-year yield rose to 2.387%, before the yield curve reverted once again – barely. A year ago, the 10-year Treasury yield was 1.50% higher than the 2-year.
A few paragraphs lower came Mr Harker’s statement. MarketWatch was on the story as well, and Germany just reported its highest level of inflation in four decades.
The year-over-year U.S. inflation rate reached a 40 year high in January, with prices significantly outpacing wage growth, and it was even worse in February.
You know what I note: the year-over-year inflation rate was 2.6% in February of 2021, Joe Biden’s first full month in office, and then BAM! up it jumps, more than doubling by June, and now, at 7.9%, it’s tripled.
Two obvious points: treasury yields cannot remain as low as they are if the current inflation rate persists. Treasuries are considered a safe store for money, but when the inflation rate is significantly higher than the yield, treasuries become a safe place to lose money, just someplace to hide it to avoid even greater losses.
The second obvious point is that most Americans know little or nothing about financials. With the explosion in 401(k) retirement plans, a lot of people are invested in stocks, but still don’t know much about how they work, and are dependent upon their mutual fund managers. And Americans who aren’t invested in stocks and bonds, mostly poorer people, are just stuck looking at how higher gasoline and food and electricity prices are eating away at their paychecks.
It was September of 2016, when the economy was supposedly moving along just splendidly, thank you very much, in which Americans just didn’t understand!
Problem: Most Americans don’t believe the unemployment rate is 5%
by Heather Long | September 6, 2016 | 3:18 PM EDT
Americans think the economy is in far worse shape than it is.
The U.S. unemployment rate is only 4.9%, but 57% of Americans believe it’s a lot higher than that, according to a new survey by the John J. Heldrich Center for Workforce Development at Rutgers University.
The general public has “extremely little factual knowledge” about the job market and labor force, Rutgers found.
It’s another example of how experts on Wall Street and in Washington see the economy differently than the regular Joe. Many of the nation’s top economic experts say that America is “near full employment.” The unemployment rate has actually been at or below 5% for almost a year — millions of people have found jobs in what is the best period of hiring since the late 1990s.
But regular people appear to have their doubts about how healthy America’s employment picture is. Nearly a third of those survey by Rutgers believe unemployment is actually at 9%, or higher.
Republican candidate Donald Trump has tapped into this confusion. He has repeatedly called the official unemployment rate a “joke” and a even “hoax.”
Ordinary Americans could not just see, but feel in their bones, that the economy was not the wonderful, purring engine the Obama Administration said it was, what Americans believed, that unemployment was “actually at 9%, or higher,” was correct, if you looked at U-6 rather than the ‘official’ U-3 unemployment rate.
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- U-1: Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
- U-2: Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
- U-3: U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)
- U-4: Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
- U-5: Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force
- U-6: Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.
NOTE: Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.
U-6 at the time was 9.6%, so what “nearly a third” who believed that unemployment was “actually at 9%, or higher,” were pretty much right on target, and despite all of the Obama Administration’s statements that everything was peaches but the cream, Hillary Clinton was left a private citizen after the election.
It’s not unemployment this time around, but inflation, and this time, the numbers aren’t trying to hide the pain people feel. Who knows, the inflation numbers might come down before November, but the increased prices are already built into the economy. If the Democrats lose their congressional majorities following the November elections — from my keyboard to God’s monitor screen! — it will be, at least in part, due to the pain that Bidenomics has inflicted on the American people. When a Federal Reserve official tells us, “This is a very healthy economy, absent the inflation numbers,” he’s whistling past the graveyard.
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