Following up on the proposition that the recession is seemingly always six months away (as noted in WSJ’s ‘Godot’ recession”), I thought it would be interesting to see if the market had been saying a similar thing. To wit, here’s the one year-6 month Treasury spread.
Figure 1: 1 year minus 6 months Treasury spread, % (light blue). Source: Treasury via FRED, and author’s calculations.
Inversion of this spread means the 1 year yield is lower than the 6 month. Assuming the pure expectations hypothesis of the term spread holds (the 1 year yield is the average of the current and expected 6 month yields):
Then the 6 month interest rate expected in 6 months is:
The expected rate in 6 months is plotted in Figure 2 below in black, while the current 6 month rate is plotted in tan.
Figure 2: 6 month 6 month forward (black), and current 6 month rate (tan), both %. Source: Treasury via FRED, and author’s calculations.
The yield curve is pretty much flat at the 6 month-1 year part of the spectrum at end-July, and again in December of 2022. If one thinks rates are lower when the recession hits, then the recession has been six months ahead for the past six months, on and off for the last 7 months.
I will note that the 10yr-3mo and 10yr-2yr spreads are saying that the recession is coming.
Figure 3: 10 year-3 month Treasury spread (blue), 10 year-2 year spread (red), and 10 year – Fed funds spread (green), all in %. Source: Treasury via FRED.
Based on historical correlations, a recession would be expected around Q2/Q3.
Of course this is because the market and the Fed are setting different prices. Most debt is expanded long term, not short. So the bankers rate ends up pushing banks to pay more interest while consumer rates stay lower. Higher Fed rates tend to increase leverage as banks have to work to make every day money which can increase loan volume. I have always wondered if in that thought, a large part of the housing bubble wasn’t the so called driven by “cheap money” but by making it harder to lend with such low rates in a economy that was dealing with a capex hangover. So let’s work housing with funny plans because we are bored man.
@ Greg Bott Have any of the last three cars you purchased been Fords?? I’m doing an informal survey to verify if people who I gauge as idiots are as dumb as I think they are, and the correlation between morons and people who purchase Fords is high, the “r” is roughly 0.925.
From the WSJ online:
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” (Said J.Powell in testimony today)
The comments seemed to suggest that the Fed may implement a larger rate hike than last month’s 25 basis point increase at its next policy meeting on March 21-22.
At the same time, Powell’s remarks could mean that the peak rate for federal funds, also called the terminal rate, will likely go higher than previously expected, despite investor hopes that the Fed might have stopped hiking soon. (End quote)
Powell’s “if” has the WSJ leaning into higher rates for longer. As I recall, a warning of higher rates for longer was the message of the WSJ’s preview for today’s testimony. I can’t tell whether this is bad journalism or the Journal serving as a conduit for Fed messaging. There is never a time when “if the totality of the data were to indicate that faster tightening is warranted
” wouldn’t lead to faster tightening. It’s tautological.
Meanwhile, the WSJ also has the names of two potential Fed nominees, both economists from Obama’s Treasury:
https://www.wsj.com/articles/white-house-considers-two-economists-for-fed-vice-chair-58f13344
…………then Inflation collapses(probably in a 2 month siege in March/February) and we find out the 9 month rate was 2%. Lazy takes based on one month of hedonic adjustments create illusion. January is a big month for fake inflation. Then it comes off when hedonically months like July wipe it off. The Fed is being ignored. They can see it too. Following the Taylor rule like you say, well, is really a political thing.
Gregory Bott: What you write makes absolutely no sense.
I was starting to wonder if it was only me that could never make sense of Bott.
I’ve always felt life was difficult enough just trying to expand one’s own knowledge base. I would think increasing knowledge becomes more difficult when siphoning of some personal energy to pretending to know more than “you” know. OK, maybe with a pretty girl in a darkly lit bar, maybe possibly, but generally it seems like bad practice. Really even the latter seems like bad policy, just saying I might see it in that one instance.
Soybeans and confidence intervals are coming to mind now. Predictions on military invasions in East Europe…… Yeah, I have said some dumb things online and IRL, but I think keeping it to a minimum is good personal policy. I don’t think one can do that when throwing marshmallow creme up against the wall and seeing what portion sticks.
It’s called understanding finance. Before Volcker, the Federal reserve system was pretty ignored. There is a reason why.
@ Greg Bot
Yes…… Bot…… a lot of “people don’t realize” the Federal Reserve was “pretty ignored”. And “only you” know the “reason why”.
https://www.washingtonpost.com/politics/people-dont-realize-trump-and-the-historical-facts-he-wants-you-to-know/2018/04/18/a453adc6-4311-11e8-bba2-0976a82b05a2_story.html
Greg Bot, “educating” the blog readers about history and finance “in real time”. I haven’t been in this much awe of someone’s exclusive knowledge set since Rick Stryker told us Covid-19 would be nothing and that all the solutions to Covid-19 would pour forth from donald trump’s ugly deformed mouth:
https://econbrowser.com/wp-content/uploads/2020/07/covid_annotated_invictus_10jul20.jpg
OK, this is bad:
https://thehill.com/policy/international/3887479-graham-says-he-will-introduce-bill-to-set-the-stage-for-us-to-use-military-force-in-mexico/
“I would put Mexico on notice,” Graham said. “If you continue to give safe haven to drug dealers, then you are an enemy of the United States.”
But the Mexican government is trying to take down the drug dealers. Now maybe Canada should invade the US as MAGA types like Graham are giving safe haven to white terrorists.
They are not white though. Something that may shock you.
Who told you that? Racist Tucker Carlson.
Do you know who Tucker Carlson really is, what his real sexual preferences are, his ethnicity,his long service to Murdoch????? I mean, your easy to manipulate.
@ Greg Bot
Many media observers have said that a film Tucker Carlson produced had a disturbing amount of homoerotic film footage. Fortunately I haven’t seen the film. Many closet gays tend to overcompensate to hide their true proclivities by continually making “macho” statements (for example making open statements that you’re eager for war with Mexico) and deriding their own group. Just interesting.
https://www.thenation.com/article/society/tucker-carlson-end-of-men/
Yeah, assumptions made can be embarrassing and make a person look bad, but if you’ve been in this world a long time and get 19 out of 20 guesses right, should you really hang your head on the 1-in-20 you got wrong?? I don’t know, ask Lindsey “Let’s Bomb Mexico” Graham’s pool boy.
Like it matters. Most drugs don’t come through Mexico and the Republican party is nothing more than fraud de force of the globalist billionaire elite he serves. Didn’t you people learn anything from Jim Jordan who the Republicans really serve. Its nothing more than a play. It does nothing, solves nothing and in the end, looks stupid, ignorant and shows their true intentions.
How is this different from what the US has done for 200 years? And let’s not forget the Monroe Doctrine. After all, the US is entitled to do what is forbidden to others as part of the “rules based order.”
JohnH Scores Again! US BAAAAAAAAAD! Has been for 200 years.
Look at me, I know history. What’s wrong with the rest of you?
Impeach James Monroe! End US Tyranny!
Funny how, when one idiot U.S. politician says an idiot thing, Johnny takes the opportunity to regurgitate his usual bile, but never says a thing against Russia killing tens of thousands of Ukranians in an illegal war.
What Johnny will jever write:
How is this different from what Russia is doing now and has always done? And let’s not forget the Katyn Forest. After all, Russia is allowed to what is forbidden to others as part of the “rules based order.”
Disgusting.
DonJuanH es un heroe a los jovenes de Rusia. Y tambien a los trabajodores del mundo —menos Ukraine—por que DonJuanH es un hombre muy glorioso.
Viva DonJuanH! Los Estados Unidos? No vale!
I’m dusting up on my Spanish so I can appreciate excellent comments such as this one!
The Putin Doctrine – exterminate anyone in his way. And make sure little Jonny boy gets to re-watch the war crimes whenever he wants as that gets little Jonny boy all excited.
I get you never understood history so it is no surprise you have no clue what the Monroe Doctrine was:
https://www.britannica.com/event/Monroe-Doctrine
https://www.msn.com/en-us/news/world/mexico-warns-biden-about-crossing-red-line-over-americans-killed/ar-AA18kYOo?ocid=msedgdhp&pc=U531&cvid=98f869556719463f80951c5d3090a2c0&ei=15
Mexican President Andrés Manuel López Obrador tells little Lindsey Graham to go eff himself!
Sean Hannity interviews Donald Trump on how Trump would have kept Putin from invading Ukraine:
https://www.msn.com/en-us/news/politics/fox-news-edits-out-trump-saying-he-might-ve-let-russia-take-over-parts-of-ukraine/ar-AA18kS1t?ocid=msedgdhp&pc=U531&cvid=c3f117b942524e41bb460eec628e3571&ei=15
“I could’ve made a deal to take over something, there are certain areas that are Russian-speaking areas, frankly, but you could’ve worked a deal.”
The Princeton Steve solution! Give Putin the eastern part of Ukraine and call it a day.
Funny thing – when Faux News ran this interview this key portion of the interview just disappeared. I guess Trump’s cowardice for too much for Faux News to report.
And Jeffrey Sachs. And…
trump could (any time from 2015 to jan 2021) have exposed the german/french/ukraine disregard of the minsk ii accords.
and publicized the osce observed artillery strikes.
while he may have handled nord stream sabotage differently:
neocon media the nyimes admits, the sabotage (act of terrorism) was NOT the russians, but “pro-Ukrainian” group.
those who accused the russians. should feel bad?
nytimes contradicted the earlier insinuation that it was the russians.
It also contradicts the earlier claim that it was a state actor.
would trump have been impeached for not ordering nord stream blown up?
Even that is suspect. The media has no clue who sabotaged it. The Trump Administration is pro globalism and kosher nationalism. Putin should have moved in 2018 as planned.
Tucker Carlson calling the 1/6 committee members liars? Check out how Adam Kinzinger responded:
https://www.msn.com/en-us/news/politics/i-can-look-at-myself-in-the-mirror-adam-kinzinger-responds-to-tucker-carlson-calling-him-a-liar/ar-AA18lgRb?ocid=msedgdhp&pc=U531&cvid=73c1f55b17544ca48f57af1551fd7062&ei=12
Huh – we should all remember this when the Usual Suspects (JohnH, CoRev, Bruce Hall etc.) calls us liars!
I cannot believe Tin Worstall writes (rather arrogantly) on transfer pricing. Note in this laugher – he mentions the Starbucks oped he wrote which I ripped over at Econbrowser:
https://www.forbes.com/sites/timworstall/2016/04/20/france-hits-mcdonalds-with-341-million-tax-demand-possibly-unfairly/?sh=1ac0380c6dd5
But his focus here is to “defend” McDonald’s in France. OK France did not develop the intangibles – the US parent did. But wait Timmy says McDonald’s has the right to shift income that belongs in the US to a tax haven? I’m sure if the IRS had its act together, they would have a problem with this.
But I guess there is something arrogant Timmy did not know. McDonald’s used to charge France a 5% royalty rate which was reasonable as that is what they charge 3rd parties. But it turns out that they started charging France TWICE this market rate back in 2009. Now charging twice the market rate is not exactly arm’s length unless you are a right wing arrogant toadie writing for Forbes!
” The only remaining question is whether McDonald’s are charging their own subsidiary the same royalty rate that they charge a franchisee? That’s the part that we don’t know. But that is the part that the French tax claim rests upon.”
Eh Timmie – we do know McDonald’s charges 5% of sales to third party franchisees. Before 2009, this charge to the French subsidiary was also 5% but then magically jumped to 10% from 2009 onwards. Everyone paying attention knows that. So Timmie – what don’t you know? Oh right – you are not sure whether 10% is above 5%. Forbes lets idiots like Timmie write for them I guess.