The yield curve – the spread between the interest rate on a 10-year Treasury note and a two-year Treasury has turned decisively negative. This means the rate of interest on short-term bonds is higher than on long-term bonds. Many economists have noted that this is a strong predictor of a coming recession and is an expression of severe investor risk aversion. The yield curve now stands at -0.8% and that is the most negative since 1982.
Most recessions are preceded by inverted yield curves, as shown below.
An analysis by economists at the University of Chicago notes that “the yield-curve slope becomes negative before each economic recession since the 1970s.”
But we aren’t buying the idea that a recession is baked into the cake for 2023. There’s a very benign explanation for why we have a negative/inverted yield curve. Investors believe that inflation is going to continue to gradually come down, and stay down, for the next decade. If they didn’t believe this, they wouldn’t be buying long-term bonds at such a low-interest rate yield.
In other words, if you thought that the average inflation was going to be above 5% for the next decade, you would be losing money (adjusted for inflation) by buying a 10-year bond yielding the current interest rate of 3.75%. But investors ARE buying long-term bonds at these low rates which means inflationary expectations are falling. This is reflected in the 10-year break-even interest rate (TIPS spread) which stands at 2.6% today and has been drifting downward since July.
Or let us state the point differently. Would you feel better about the prospects for the U.S. economy if the long-term interest rate were, say, 10%? That would certainly end the reign of the inverted yield curve, but it would also mean a 12% or more interest rate on a mortgage or a business loan.
Our view is that the best way to fight off a recession and inflation is for Republicans in the House to call for massive ($1 trillion or more) cuts in government debt spending and by expanding the supply side of the economy by opening up the spigots on American energy production.
Sometimes we think everyone in Washington is suffering from severe financial amnesia.
It was only 14 years ago a trillion-dollar housing market propped up by lenient lending standards, and subsidies through Uncle Sam's giant mortgage insurers Fannie Mae, Freddie Mac, and FHA, crashed the economy. Even with hundreds of billions of government bailouts, the economy suffered its deepest recession since the Great Depression. The politicians told us that Fannie and Freddie were invulnerable, but instead, the taxpayers rushed to funnel in more than $100 billion to rescue them.
Here we go again. The WSJ reports that Fan and Fred are now being authorized to insure homes of more than $1 million (in high-cost housing markets) for the first time ever. How many first-time home buyers purchase a million-dollar home? How many middle-class Americans can afford a million mortgage?
Trump tried to rein in these massive mortgage insurers and tighten their lending standards. Just the opposite is occurring. Many mortgages now insured by taxpayers carry down payments of less than 5% of the mortgage. These are the mortgages at the greatest risk of default.
We are at great risk of another housing bubble bursting and Washington just further inflated it with more at-risk taxpayer money. This could get ugly.
3) Now The Left Wants High School And Even Grade School Students To Vote
Our rule of thumb about public policy is that conservatives have mastered POLICY and the lefties have mastered POLITICS.
Nowhere is that more nakedly obvious than when it comes to elections. Liberals’ successful strategy has been if they can’t win elections, then just change the rules.
That helps explain the Left’s successful push to expand mail-in voting, partisan ballot harvesting, and allowing people to register and vote on Election Day. Their energies this year focused on getting the public to approve crazy ranked-choice voting schemes. They succeeded in Nevada, Seattle, Portland, Oregon, and Portland, Maine, bankrolled in part by now disgraced FSX CEO Sam Bankman-Fried.
The Left now wants to change the voting age and allow 16- and 17-year-olds to cast ballots. Last year, a MAJORITY of the House Democratic Caucus voted to allow them to vote in federal elections. Outgoing House Speaker Nancy Pelosi has endorsed the idea.
This week, Boston’s city council is due to support lowering the voting age for city offices.
There is no limit to how imaginative the Left can be. The Public Interest Legal Foundation is suing Howard County, Maryland to block its law allowing a member of the school board to be elected by sixth through 11th-grade students. A student is typically 11 or 12 years old and in sixth grade.
If the Left's unwise or harebrained election ideas keep getting adopted we’ll wake up one day wondering how the country has been completely transformed.
China insists it is keeping its draconian Zero COVID policy, but the heroic protesters may be changing that policy.
Several cities on Monday have announced the lifting of some restrictions. Beijing will no longer cordon off access to apartment blocks. Many people will be excused from mass testing in Guangzhou. Businesses in the Xinjiang region will reopen. A National Health Commission spokesman says local officials should resolve “reasonable” COVID complaints in a timely manner.
Fatigue and anger at the government is forcing change. Even people who aren’t going near a protest became furious at broadcasts from the FIFA World Cup in Qatar, which show crowds watching the soccer match without masks.
Given the unreliability of Chinese data, it's impossible to say whether COVID has already spread throughout China or whether draconian lockdowns there were able to suppress the virus leading to an exit wave when they finally lift. We do know that Covid is on the rise in China. At some
point everyone will be exposed - which is why lockdowns don’t work.
We expect the exit from Zero Covid will be bumpy and slow. But at least the Chinese people now realize that their protests are starting to improve daily life instead of prompting an even harsher crackdown as many feared.
5) Reminder: Biden STILL Has America On This Dubious List
It would be one thing if being vaccinated reduced the spread of the virus but it doesn’t. The vaccinated and unvaccinated are roughly equally likely to spread the virus. So this travel restriction makes no sense.
Novak Djokovic will play in Australia this year, but we're starting to have doubts about the American hard-court tournaments at Indian Wells and Miami in March.
