Stop us if you’ve heard already, but Bill Gross is a wee bitworriedaboutmonetary policy. He thinks every central bank—especially this one!—is screwing everything up and putting us in mortal danger of financial apocalypse. And now he’s found something else easy money and quantitative easing and gigantic balance sheets have ruined: the previously near-flawless link between yield curve and impending recession.
You see, Bill Gross sees everyone pointing to the width of the yield curve and saying, “Look: No recession!” He also sees that Donald Trump is president. The two are linked, you see: Just as far too many people on Wall Street seem to think that having an unstable child at the helm of the free world (for now) is a bullish indicator, far too many don’t see that Ben Bernanke, Janet Yellen & co. have weighed down the yield curve with all of those bond buys and all of those years of near-zero interest rates to such an extent that it doesn’t know which way it’s pointing anymore.
The adherence of Yellen, Bernanke, Draghi, and Kuroda, among others, to standard historical models such as the Taylor Rule and the Phillips curve has distorted capitalism as we once knew it, with unknown consequences lurking in the shadows of future years….
Logically, (a concept seemingly foreign to central bank staffs) in a domestic and global economy that is increasingly higher and higher levered, the cost of short term finance should not have to rise to the level of a 10-year Treasury note to produce recession….
While today’s yield curve would require only an 85 basis increase in 3-month Treasuries to “flatten” the yield curve shown in Chart 1, an 85 basis point increase in today’s interest rate world would represent a near doubling of the cost of short term finance. The same increase prior to the 1991, 2000 and 2007-2009 recessions would have produced only a 10-20% rise in short rates. The relative “proportionality” in today’s near zero interest rate environment therefore, argues for much less of an increase in short rates and ergo – a much steeper and therefore “less flat” curve to signal the beginning of a possible economic reversal.
Curveball [Janus Henderson]