Wednesday , April 24 2019
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Three Things I Think I Think – Yield Curves and Stuff

Summary:
Here are some things I think I am thinking about: 1) Ahhhh, the yield curve inverted again!  There have been lots of scary articles about how the yield curve is inverting and that that means recession because, well, yield curve inversions pretty much always lead recessions. I wrote about this a few years back and my conclusions were simple: An inverted curve usually leads by 18-24 months so you have quite a long time to be worried, or, um, not worry. According to the Cleveland Fed today’s readings are consistent with about a 30% chance of recession. To be clear, recessions sometimes occur with readings of 40-50% so this could mean we’re fairly close to recession. I’d also add that the compression of the term premium over the last 10 years means that it doesn’t take much to invert the

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Here are some things I think I am thinking about:

1) Ahhhh, the yield curve inverted again!  There have been lots of scary articles about how the yield curve is inverting and that that means recession because, well, yield curve inversions pretty much always lead recessions. I wrote about this a few years back and my conclusions were simple:

  • An inverted curve usually leads by 18-24 months so you have quite a long time to be worried, or, um, not worry.
  • According to the Cleveland Fed today’s readings are consistent with about a 30% chance of recession. To be clear, recessions sometimes occur with readings of 40-50% so this could mean we’re fairly close to recession.

I’d also add that the compression of the term premium over the last 10 years means that it doesn’t take much to invert the curve. So there’s a chance that the yield curve doesn’t tell us as much as it used to because flat yield curves could be the new normal? In any case, it’s just one indicator and I wouldn’t go jumping out of windows because of it at this point.

2) Why Does Everyone Hate MMT?  Here’s the predictably excellent James Montier writing about MMT. Montier does a nice job describing the good in MMT, but doesn’t quite cover some of the bad. For instance, I think the reason people “hate” MMT is because they’ve been consistently asked for specifics about how their policies would work in practice and they pushback with hyper-aggressive ranting and oftentimes very personal attacks. And it’s not just their army of online trolls. Some of the most insulting MMT writers are the founders. I don’t understand this. They are constantly attacking people who are sympathetic to their views because they think that an economic THEORY might not be grounded in empirics. And let’s be clear – MMT is not supported by empirical evidence. There is virtually no evidence that a Job Guarantee works the way they claim yet MMT people act like their case has been proven already. This makes no sense. You’d think that an untested, unproven theory like this would spend more time building bridges to sympathetic economists and less time attacking them. And THAT is why people hate MMT.¹

3) The 4 Sources of Alpha. Here’s Michael Mauboussin, whose name I will never be able to spell correctly on the first try, discussing the 4 sources of alpha with Patrick O’Shaughnessy. I don’t have much to say about this other than it’s excellent. Patrick runs one of the very best podcasts around in case you don’t subscribe.

¹ – Oh yeah, it also has hints of a free lunch style of Socialism. There’s that also.  

Cullen Roche
Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

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