Jeffrey Gundlach0:06
Now, the one thing about the yield curve that people grossly misunderstand, and this is something that you see all the time on CNBC — and I use them as a placeholder for the financial media, but it's certainly not restricted to them — is this thing that if in the morning you walk in and suddenly they focus on this relationship from the two-year and the ten-year, and you walk in and if the ten-year yields half a basis point more than the two-year, nobody cares about it. Then at lunchtime, suddenly the ten-year goes half a basis point below the two-year, and suddenly it's recession alert, recession signal, and the crawler is 'recession warning' flashing in the market. Then, at an hour before the close, suddenly it goes a half a basis point positive again, and 'psyche, off recession, yeah, dodged that bullet.' But what actually matters is really overnight money to the ten-year, the third year — that's the Fed Funds rate to the tenor of the 30-year — and that did get inverted fully across the curve for some months, for several months. And usually it happens well in advance of the front edge of recession. So the alarm bells that go off in financial media on the day that it happens are completely false signals, because it's usually something like 18 months before the recession comes, maybe even 10 years — well, there's a wide range, right? I mean, there's a range. But what actually does happen before the recession — this is where the financial media gets it all wrong — is the curve steepens out before the front edge of the recession comes, because the Fed starts to wake up to the fact that they're not really in sync with the market, and they start using, and they started using usually too late. So what actually is more predictable for recession is first the inversion, and then the de-inversion, which is exactly where we are right now.
Through the reasons why the inverted yield curve may not be a strong signal — there are some I think valid reasons not to say no, no, it's the opposite. Well, when rates are super low, the ten-year is depressed because of quantitative easing and because of negative... If we're doing quantitative easing, they're doing quantitative tightening this year when the curve inverted, so there was no quantitative... but they mean the whole curve is much lower. I know, but my viewpoint is that the lower rates are, the more powerful an inversion signal is. Because let's just say we're old-school, it's the good old days when interest rates were up at 8% on Treasuries. Let's just say that the ten-year Treasury yields 8% and the Fed Funds rate is at 8.5%. I don't think it's imprudent to buy the 8% ten-year if the inflation rate is below 4% and there doesn't seem to be any inflation pressure, and your actuarial assumption on your pension plan is 7.5%, and you can get 8%, and your foundation can actually get for real... I get it, why would you buy the ten-year instead of overnight money or the two-year? However, when the ten-year Treasury yields 1.44% and overnight money is 2.25%, I think your board is certified insane to buy the ten-year, because it doesn't satisfy any investment needs below the rate of inflation. It's below anybody's real or earning needs, particularly after tax, because it's also taxable. And what backs up my idea that the inversion signal is more powerful at lower rates is the case of Japan, which has not had an inverted yield curve since 1991. Why? Because their rates are at nothing. So there is no way for me to believe that an inverted yield curve means less at low interest rates. I think it means much more. So we know Japan has not inverted... stock time when they've had serial recessions. So the term premium being negative — that argument is related to the yield curve, but the point is that historically, if we didn't have a negative term premium we have now... the yield curve, I don't know. That's kind of a really academic argument. I mean, I don't care. I like Joe lunch pail — you know, what do you want? Do you want overnight money at 2.25% or do you want 1.44% on a ten-year? The guy will be like, 'I think I'll take that 2.25%.'
