10-Year Yield Sinks

With retail sales numbers coming in weak earlier today, stocks were down significantly.  But the more interesting story is how low the 10-year yield has gone.  It closed at 1.84%.  It briefly dipped below 1.8% during trading.

I believe this is an indication of a coming recession.  I have been cautious to call a recession too soon and I still don’t know how long this will take to play out.  But I am trying to warn my readers that they should prepare for a significant downturn in the economy.  You can never fully prepare, but it helps if you have an idea of what is coming.

The Fed stopped its massive QE program at the end of October.  We have had a couple of months of relatively stable money from the Fed.  It is rolling over maturing debt, but not adding to its balance sheet.

Yet long-term rates are dropping.  This means it is coming from investors, as opposed to the central bank.  This means that investors are locking in rates, even below 2% for 10 years.  The yield curve is flattening.

An inverted yield curve – where longer-term rates are lower than shorter-term rates – is typically a very good indicator of a coming recession.  In our present situation, short-term rates are near zero.  So we are unlikely to see an inverted yield curve.  For me, this flattening is good enough to indicate a substantial weakening in economic activity.

This should come as no surprise to those familiar with the Austrian Business Cycle Theory.  We have seen huge monetary inflation over the last 6 years and now it has stopped.  If the Fed doesn’t start pumping more money soon, the malinvestment is going to become evident soon.  Resources have been misallocated, and without the new injections of money, the artificial bubbles will be revealed and will go bust.  This has already happened to oil.  It will probably happen to stocks.

Keep an eye on the 10-year yield.  It is good if you are getting a mortgage or refinancing.  It is probably not good if you are invested in stocks.