Economics: Why The Yield Curve Is Meaningless

(Drivebycuriosity) - Last Friday the US stock market suffered another sharp drop. If we believe the media than stock traders got spooked by the bond market. The interest rates for 10-year-bonds fell below the interest rates for short term bonds, economists call this phenomena inverse yield curve (chart above). Normally the interest rates for longer terms are higher because long term bonds are more risky than short term.

As you can see above the inversion of the yield curve happened the first time since the begin of the 2008 recession and the yield curve has inverted before each of the last seven recessions. Apparently many saw Friday´s new inversion as a bad omen and a harbinger of an approaching recession.

I don´t believe in omens, they belong to the Greek mythology. The yield curve does not predict the future, it is not a magic crystal. Nobody can read the future, no crowd, no market. The inverse yield curve mirrors just the current pessimism. Bond investors are a shy & risk avers crowd, otherwise they would invest in riskier assets like stocks. Friday`s inversion shows that the bond buyers got more a bit more risk avers. They don´t believe in economic growth. For years pessimists have been claiming that we reached a secular stagnation, a thesis coined by Bill Gross, a famous and notorious pessimistic bond investor.

The pessimistic bond buyers ignore that emerging markets like China & India have still high growth rates and are driving the global economy. The catching-up process in China (which is still growing 6 plus %), India, Indonesia and a lot of other countries translates into high growth in large parts of the global economy that creates continuously rising revenues & profits for global companies. The pessimists also disregard that we are experiencing a new industrial revolution: Advances in Internet, mobile computing, 3-d-printing, robotics, nano- & biotechnology and other technologies are reducing costs, raising efficiency and creating new markets. And they dismiss that lower taxes and less regulation in the US will also support economic growth. I assume that the global economy will re-accelerate soon, thanks to relatively cheap oil and the still reduced US taxes, disappointing the pessimists and disproving the recent yield cuve inversion.