Recession is coming in 2020. Here is the proof

https://www.youtube.com/watch?v=SWN2Y3xx7yo

Inverted Yield Curve 

In 1986, Campbell Harvey published his study of the link between the inverted yield curve and recession. Harvey’s thesis was the first publication clearly indicating that the yield curve can forecast US economic growth (or recession). Harvey studied the four previous recessions (from the 1960’s to the 1980’s), and in every case, the inverted yield curve—if it remained inverted for a full calendar quarter—proved to be a reliable indicator that a recession was coming in a year (or two years). 

Normally, interest rates are higher for long term Treasury bills (or “Treasuries” for short). So, a 5-year Treasury pays more interest than a 3-month Treasury. And a 10-year Treasury pays more interest than a 5-year Treasury pays.

If the economy is expected to grow, then long term Treasuries have to pay higher interest rates than short-term Treasuries in order to attract investors. Otherwise, these investors would not buy Treasuries at all, they would just invest in the economy, in businesses. So, Treasuries are a useful indicator of what investors around the world believe that the US economy is going to be doing next year.

But when long term interest rates on Treasury bills fall below short term interest rates on T-bills, we say that the yield curve has inverted. In sum, when the US economy is expected to grow, then long term Treasuries pay more interest than short term Treasuries. The yield curve has inverted if the interest rates on long term Treasuries falls below the interest rates on short term Treasuries. All of this gives an indication why an inverted yield curve is a reliable forecast that a recession is on the way in the coming year. One thing to keep in mind is that to be a reliable forecaster of a recession, the yield curve must remain inverted for a full calendar quarter (3 months).

Campbell Harvey’s 1986 study looked at all the times since the 1960’s that the long term interest rates on Treasury bills had fallen below the short term interest rates on Treasury bills and remained there for at least a quarter. Every single recession was preceded by an inverted yield curve. This indicates that the Treasury market is a more reliable indicator of growth (or lack of it) than is the stock market.

In 1987, the stock market took a huge fall. Everyone predicted a recession for 1998 except for Campbell Harvey. Harvey knew a recession was NOT coming in 1988 because the yield curve had not inverted, even though the stock market was way down.

In spite of this, some people argue that an inverted yield curve does not necessarily mean a recession is coming next year. Their reason? In a word, “distortion.” These skeptics argue that whenever the gov’t buys a lot of T-bills in order to stimulate the economy, then the yield curve gets distorted. And it is true that since 2008, the gov’t has bought a lot of Treasuries in order to stimulate the economy.

But in March 2019, the yield curve inverted and it has stayed inverted for significantly more than a quarter (the quarter ended June 30, 2019). 

It’s also important to note that the yield curve does not cause the recession. But the yield curve reflects what investors (who want to buy Treasuries) around the world have concluded about the US economy. Treasuries are the safest way to invest money. When everyone wants to buy them all at the same time, the US gov’t does not have to offer high interest rates to make T-bills attractive to buyers. The inverted yield curve means that investors around the world have concluded that they need a safe place to put their money. The profitable time to invest in business is ending.