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Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here. |
This chart has garnered global attention for quite a while. The yield curve across most durations has been inverted for an extended period. Its reputation as a recession predictor remains impeccable, with a 100% track record.
Why the obsession with recessions? Consider the aftermath of the Dotcom bubble and the GFC: unemployment surged to 7.7% and 10%, respectively. Averaging those figures against today's US workforce of 135.45 million suggests around 10.83 million people would be out of jobs. Using 1982's 10.8% unemployment rate, that number jumps to 14.6 million. You can see how this very quickly starts to affect retirement flows.
Right now, we're witnessing a "bear steepening": the long end of the curve is rising faster than the short end without the short end falling. During this yield curve normalization or de-inverting phase, unemployment typically surges, and we get the recession in all its glory. The inversion serves as a harbinger.
Consider this: Between September 7th and October 12th, 1987, the 10-year yield surged from 9.32% to 10.17% (85 bps in 36 days) in a year characterized by a bond market crash and equity rally. By October 26th, rates dropped to 8.7%, with equities sinking 34% that month. Jumping to 2023, from September 1st to October 4th, the 10-year yield rose from 4.06% to 4.87% (81 bps in 34 days), a year of bond market tumult and equities rallying on terrible breadth. A repeat of October 1987 would make for some fascinating Thanksgiving conversations with the in-laws.
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Learn more about the Market Situation Report written by Tier 1 Alpha. |
