We had an inverted performance curve in 2019 and yet the planet did not fall from its axis. The sky did not fall. So does that mean that an inverted performance curve is not really a problem?
In a word, NO! What casual economists do not realize the yield curve is that the effects on the economy of changes in yields are delayed. In general terms, it takes about 15 months for these effects to appear in the general economic data.
This week's chart is a great example of this point. It presents the differential between the yields of the 10-year T-Notes and the 3-month T-Bills, and compares it with the corporate earnings data. This earnings information is for all American companies, not just for publicly traded companies. Comes from apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2, and then you have to go to Table 1.10, line 15. It is worth all that trouble because it could be said that this series of corporate earnings data gives a better indication of the overall earnings of the US. UU. than use the earnings of the SP500, for example.
To help clarify that the economy is lagging in the yield curve, I have compensated the 10Y-3M differential in 15 months, which allows us to better see how its movements are shown again in the corporate earnings data. Making this adjustment for the 15-month delay aligns the ups and downs in the two data sets much better. And it allows us to see that we have not yet reached the point where the investment of the 2019 yield curve will be more important for the economy.
This 15-month delay is part of the same point I made on January 23, talking about how The low return on small capitalization is not over. Small capitalization shares tend to be more sensitive to the ups and downs of the economy in general, and therefore the relative performance of small capitalization is also delayed by 15 months with the 10Y-3M differential.
And so does the GDP:
The latest real GDP data for the fourth quarter of 2019 shows that it still has a positive growth rate and has not become negative despite the reversal of the yield curve last year. But remember that the 15-month delay says that GDP should not hit bottom until 15 months after the most extreme point for this yield differential, that is, sometime in 2020.
In this 2020 election season, we're going to hear a lot about the "Trump economy," with refutations that say it's still really the "Obama economy." It is none. Economic growth, or lack thereof, has much more to do with the Fed doing the right thing with interest rates. And yes, reversing the performance curve remains extremely damaging: you just have to look in the right place to see where the damage appears. The investment in the yield curve last year has not yet been felt, and that does not even take into account the additional effect of economic slowdown of the coronavirus.