On Wednesday morning, the yield curve inverted, which, if you’re a halfway normal person, sounds extremely boring, but it sent the financial press into a tizzy.
CNBC called it a “recession warning,” while the Street said it “sparked recession fears” and Bloomberg noted ominously that the same thing was happening in the UK “as ‘Doom and Gloom’ spreads.”
It’s probably good for policymakers to be at least moderately alarmed by this, because worrying about possible recessions is part of how recessions get avoided.
This whole conversion is about fluctuations in the price of Treasury bonds, with “yield curve inversion” standing as a shorthand for the prices of different kinds of bonds arranging themselves in an unusual pattern.
Yields and their curve, explained
One way a government or company can borrow money is to sell a bond. A bond will have a face value (say, $100) and, like any loan, will pay an interest rate (say 3 percent). It will also have a maturity (say, five years). A $100 bond with a 3 percent interest rate and five-year maturity is like a $100 loan at 3 percent interest that needs to be paid back after five years. Another way of talking about it would be to say that this five-year bond yields 3 percent.
But bonds can also be bought and sold on secondary markets over time. So somebody might end up spending $110 to buy a bond with a face value of $100. The interest would still be calculated based on the original face value, so the yield is lower now that the bond is more expensive.
The US government sells lots of bonds with lots of different maturities, and people buy and sell them in secondary markets all the time. Consequently, on any given day you can chart a whole bunch of yields for Treasury bonds of different maturities. The Treasury Department even publishes this handy table:
You can draw a chart plotting the yields for the different maturities and you get a curve — the yield curve for that day.
Normally, the curve slopes upward somewhat steeply.
But recently it’s tended to be “inverted,” with the short-term bonds having higher yields than some of the longer-term runs. And then on the morning of August 14, the two-year bond’s yield ended up slightly higher than the 10-year bond. That’s a rare and potentially disturbing occurrence.
Who cares? This doesn’t sound important.
Okay, so here’s the deal. Normally, yield curves slope upward. All else being equal, people demand higher interest rates for longer-term loans because there are various kinds of risk involved in lending (in the case of Treasury bonds, that’s primarily inflation risk) and the risks get riskier over longer time horizons.
So for the curve to invert implies that investors are forecasting that something unusual will happen. Something that will push future interest rates down low enough to justify long-term yields being low despite the risks. Something like a future collapse in private sector investment demand that makes government borrowing cheap. Or something like a series of Federal Reserve moves to try to reduce interest rates and spur more economic activity.
In other words, a future recesson.
And, indeed, if you look at the historical track record every time the 2-year/10-year inversion has happened a recession has followed.
That’s what has people worried. The bond market appears to be forecasting a future recession.
Should I panic and sell everything?
No. Please do not do that.
If you get through to the end of this explainer, you will walk away with an understanding of what’s happening in financial markets that’s superior to that of the typical person. But I promise you that sophisticated money managers with access to large pools of cash and ultra-fast algorithms understand this better than either you or I do and have already assimilated this information and made trades based on sophisticated models. The prices of stocks and whatever else may or may not be in your 401(k) have already adjusted in response to those trades.
It is, of course, very possible that the smartest, richest people on Wall Street are nevertheless getting this wrong and prices will fall further in the future. But the odds are that you, reading Vox explainers on your phone, are not going to beat the professionals.
The only good way to plan for a recession on an individual level is to try to make prudent overall financial choices, exactly as you would even if you didn’t think a recession was likely in the near term.
But seriously, does this mean there’s a recession coming?
Look, it’s not a good sign.
But while the empirical link between past inversion events and recessions is real, it’s also clear if you look at the chart that there’s a time lag involved. That means there’s nothing automatic about this process. And while the theoretical link between recessions and inversions is real, there are also other sets of future financial situations — like a sudden spike in the value of the dollar — that could produce the same result.
Now, of course, a spike in the value of the dollar could, in fact, cause a recession by killing export industries. Or it could be a sign of other problems (like a foreign banking panic) that themselves lead to a recession.
But — and this is the critical part — these are problems the Federal Reserve and other policymakers could respond to in ways that keep the American economy out of recession. Indeed, just as the fancy hedge fund managers and algorithmic traders are aware of the yield curve situation, so too is Federal Reserve Chair Jay Powell. He and the rest of the Fed board already started cutting interest rates because they’re worried about economic weakness, and they could try to take further steps to boost the economy. The past three times the yield curve inverted, policymakers failed to stop an oncoming recession, but that doesn’t mean they will fail again.
The other important thing to consider is that yield curves seem to have grown structurally flatter over time in developed countries due to a mix of stable low inflation and lower population growth rates. If curves are flatter in general, then inversion events may just start happening from time to time due to more or less random trading noise that doesn’t necessarily signal very much.
All that said, while you can spin out various reasons why last week’s inversion may not spell a looming recession, the fact is these inversion events have normally been followed by recessions. Under the circumstances, reassuring cautionary notes can only be so reassuring — it’s a distinct dark cloud in an economy that was mostly giving us good news all last year.
Full E-book The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and
Paperback. Pub Date :2012-08-03 Pages: 496 Language: English Publisher: FT Press For years. investors. business strategists. and policymakers worldwide have turned to one book to help them translate the massive flow of economic data into knowledge for intelligent decision-making. The Wall Street Journal called this book … the real deal. saying it miraculously breathes life into economic indicators and statistics. That book is Bernie Baumohl s classic best-seller The Secrets of Economic Indicators. Now. in a brand-new Third Edition. Baumohl has thoroughly updated his classic to reflect the latest US and foreign economic indicators. and brand-new insights into what all of today s leading indicators mean. Baumohl introduces dozens of new. forward-looking economic markers. including those that monitor small business plans. freight traffic shifts. web searches. and even gamblin…
7 Hidden Messages in “Alice’s Adventures in Wonderland” That Weren’t Meant for Kids
Lewis Carroll’s tale Alice’s Adventures in Wonderland had an amazing influence on cinema, literature, and even psychology: movies and ballets were based on it, sequels and remakes were written. There is even a psychological disorder named after the main character: Alice in Wonderland Syndrome (AWS). This seemingly innocent children’s story was the subject of heated discussions by scientists of the 20th century and even Freud talked about it. The point of the discussions was simple: was the tale written for children or for adults?
Bright Side has read the book “Alice’s Adventures in Wonderland Decoded” and tried to figure out which parts of the story can only be understood by adults.
1. Alice’s shrinking and growing is a sign of puberty.
When Alice ate a cake or drank a certain mixture, Alice would shrink or grow, and she was scared that she would disappear completely. While there were no actual reasons for the changes in her body in the text, scientists have 3 versions of what could have been the hidden meaning behind that episode:
- Alice’s body changes in a similar way to how it would change as a teenager during puberty. Many people think that Carroll showed the puberty of the character. But why this idea may also be wrong is because Alice is only 7 years old and it is too young to be a teenager.
- Astronomers link the character with the expanding Universe. According to one of the theories, the amount of matter in the Universe is constantly decreasing which will ultimately lead to its disappearance. Obviously, this is why the character was worried about shrinking so much that she would vanish.
- Other people see an indication of hallucinogenic substances, which make people completely disoriented, just like Alice.
2. The pig the character has is an English King.
It is believed that the tale is an allusion to the War of the Roses that took place in England in the 15th century. This time period was full of scheming, betrayal, and there were a lot of chopped heads — just like in the tale.
Assuming the guess is correct, then baby that turned into the pig is a member of the White Rose. And more specifically, it was Richard III who had a sigil with a white boar. Shakespeare even wrote a play about it where he presented Richard in a very bad light.
3. The smell of pepper in the house of the Duchess hides the smell of bad food.
The tale casually mentions that the house of the Duchess smells a lot like pepper because the scullery was adding pepper to the soup. But it may have been a hint at the problem that the food at the time was peppered a lot, to kill the smell of rotten ingredients.
4. Alice is Eve, who becomes a sinner.
The adventures of Alice starts in a quiet garden. It was an idyllic place, green and quiet, and that’s why it reminds many people the Garden of Eden. But Alice doesn’t take an apple, she goes down the rabbit hole and goes into a world that gives rise to incredible changes in her. This theory seems to be pretty logical: children are innocent but when Alice went into the hole (took the apple), she entered the world of puberty, adult life, and became a sinner.
5. Keys, doors, and caterpillars are Freudian symbols.
When Freudian theories became very popular around the world, the tale of Alice turned out to be full of gynecological symbols. The fans of Freud managed to see the symbols in the doors that were hidden behind the curtains, and keys that open these doors. Of course, they couldn’t have missed Absolem — the giant caterpillar that looks like a you know what.
Even though this theory has life, it is not very believable, because people can see these symbols everywhere if they really want to.
6. Walrus and Carpenter are actually Buddha and Jesus.
This is the name of the poem that the twin brothers Tweedledee and Tweedledum read to Alice. The poem tells the story about Walrus and Carpenter, that walk on the beach and call out for oysters to walk with them. The oysters go to the shore and Walrus and Carpenter eat them. Walrus then cries at the end.
There are several interpretations:
- Walrus is a caricature of Buddha, and Carpenter is Jesus. For example, the character Loki from Dogma believes this. The logic is simple: Walrus is fat and happy, so he is Buddha or elephant Ganesha, and Carpenter is the direct reference to the profession of the father of Jesus.
- J. Priestly is convinced that the poem is the story of England’s (Walrus) colonization of America (Carpenter).
- There is a more violent interpretation. Some people believe that Walrus and Carpenter are politicians that kill the masses — the oysters.
7. The poem about the White Rabbit in chapter 12 uncovers the love mystery of Carroll himself.
Some researchers see the reference to the unusual connection between Lewis Carroll and Alice Liddell that was the prototype of the main character. Here are the lines we are talking about:
He sent them word I had not gone
(We know it to be true):
If she should push the matter on,
What would become of you?
This is one of the most sensitive moments in the interpretation of the tale. Some people think that when the girl was supposed to come of age, the writer was going to marry her, but for some reason he had an argument with Mrs. Liddell and he never saw the members of the family since.
Do you want to read the tale now that you have some new knowledge about it in order to find some new hidden meaning? If yes, you can read the original manuscript written by Carroll himself here.
What 20 Celebs Looked Like at the Start of Their Career
Celebrities are usually known for their biggest successful works, but most of them stepped into the entertainment world with smaller roles. A lot of them have been in the industry for so long that we’ve forgotten what they looked like when they first started. Taking a look at some of their earliest works is indeed a blast from the past.
Bright Side looks into some of the earliest works from certain actors and is amazed at how much they have grown within the industry.
1. George Clooney
2. Dwayne “The Rock” Johnson
3. Keanu Reeves
4. Brie Larson
5. Betty White
6. Leonardo DiCaprio
7. Drew Barrymore
8. Tom Hanks
9. Scarlett Johannson
10. Halle Berry
11. Harrison Ford
12. Denzel Washington
13. Reese Witherspoon
14. Angelina Jolie
15. Johnny Depp
16. Jennifer Garner
17. Robert Downey Jr.
18. Will Smith
19. Nicole Kidman
20. Sandra Bullock
Have you seen the early works of these celebrities before? Do you know what any other famous entertainers looked like when they first began their career?
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