Real Wealth Concepts

Yield Curve Inversion Same as 1928

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Everything is fine. Until it’s not. This has been the story before almost all recessions throughout history.

Unemployment remains low and output high right until the moment the economy slams into a brick wall.

Those who predict the hard landing scenario are often laughed off stage. Perhaps they’re wrong. While we could be in for a ‘soft landing’ (whatever that means) or even ‘no landing’, nobody really knows.

Public interest in the soft landing scenario has skyrocketed over the past year. One might assume, therefore, the soft landing scenario is what markets are pricing in. This means that if we end up with a hard landing after all, investors could be in for a shock.

The data – and interpretation of the data – is conflicting. More so than normal. For this reason, I believe one must double-down on the risk-first perspective to investing.

While the market hovers close to record highs, risks remain on the horizon. The inverted yield curve has a perfect track record forewarning of recession and is at the same level as in 1928.


Things are different today, but both periods had their market bulls.

On October 16, 1929, Irving Fisher made the following infamous call:

Why should anyone care about an inverted yield curve? Well, a more practical metric is credit conditions. When credit is tight, economic growth is constrained. Loan surveys back up the quantitative with the anecdotal. Right now, money is tight.

Annotations by Game of Trades. Data from St Louis Fed.

Valuations – as indicated by equity risk premium – also suggest a risk-measured approach to asset allocation.

With yields near 20-year highs, the advantage goes to bonds. Of course, the S&P 500 earnings yield to 10 year Treasury yield isn’t exactly an apples-to-apples comparison, with one growing and the other stagnant.

Still, the comparison is indicative of relative investor compulsion to one asset over the other. Investment fund flows back this up.