In October 2024, the yield curve finally un-inverted after 793 days in negative territory.
This marks the longest yield curve inversion in history, surpassing even the 700-day inversion from 1928 that preceded the Great Depression.
The yield curve has now steepened back above zero.
Historically, this is a major red flag, as economic recessions have systematically followed after yield curve un-inversions.
But here’s the puzzle: the US economy has not entered a recession according to the NBER.
This raises a crucial question: could this notorious recession indicator be failing this time?
Well, when we look at the yield curve’s track record, it is quite impressive.
In 2007, its un-inversion occurred 6 months before the 2008 recession began.
In 2001, just a couple of months separated the signal and the downturn.
Yet here we are, 4 months after the un-inversion, and everyone remains on edge waiting for a recession that hasn’t materialized.
When we look at coincident economic indicators (which reflect current economic conditions), we see the yield curve historically leads it by 1 year.
Throughout 2024, the yield curve predicted an economic downturn, but instead the economy has held up surprisingly well.
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The Exceptions That Matter
Looking back through history, there are 2 notable exceptions to the yield curve’s perfect record: 1998 and 1967.
In both instances, the yield curve inverted, but economic indicators remained positive and no recession followed.
Granted, today’s inversion has been deeper and longer than those examples, but there are striking similarities worth noting.
For example, initial jobless claims (measuring layoffs) typically rise alongside yield curve steepening.
Yet in 1998 and 1967, and even today, the yield curve steepened, while jobless claims remained low.
Compare this to 2008, when the yield curve steepened alongside rising jobless claims – quite different to today…
Many will argue government numbers don’t reflect reality, as most people don’t feel the economy is strong.
This perception has a real basis as welll – over the last 60 years, the top income quintile has grown by 120%, while the middle quintile has increased just 50%.
We’re living in a bifurcated economy supported by a fraction of the population.
The middle quintile still has jobs but feels poorer in today’s economy, despite official metrics showing growth.
By standard measures, like GDP growth, labor market, stock market performance, we are not in recession yet.
This divergence between the yield curve and the job market suggests the signal might be misleading this time.
What Happens Next?
Looking at the 1967 and 1998 provides a potential roadmap now.
In both cases, the yield curve re-inverted over the following year, and those subsequent inversions did precede recessions though.
This pattern suggests we might see the yield curve re-invert before the next recession happens.
While we’ve pushed out our recession timeline, we still believe the next economic downturn isn’t too far off.
Investment Implications
A delayed recession likely means continued upward pressure on financial assets.
This is the inevitable consequence of seeing the top 10% grow their wealth significantly over the last few years – money that flows directly into stocks, gold, and real estate.
For those looking to grow their wealth, participation in financial markets is essential.
With traditional assets at historically expensive levels, crypto has also become an attractive alternative, especially for younger investors seeking their own path to wealth creation.
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