Actionable insights straight to your inbox

Equities logo

Why the Yield Curve Is the Best Recession Indicator

?Every investor wishes they had a crystal ball.

Image via Infowire/Flickr CC

Every investor wishes he had a crystal ball. But there’s one thing, says David Rosenberg, chief economist at Gluskin Sheff, that has predicted imminent recessions without fail.

Speaking at the Strategic Investment Conference in Orlando, Florida, Rosenberg pointed out that since 1950, there have been 13 cycles where the Federal Reserve tightened interest rates… and 10 of them ended in recession.

Should we be prepared for another US recession in the near future? Jonathan Roth interviewed Rosenberg to get to the bottom of the issue (full video interview below).

The Yield Curve: The Best Recession Indicator

“I think what people should be focused on is the shape of the yield curve,” Rosenberg said. “[Every] single inversion of the yield curve, where short-term rates go above long-term interest rates, has presaged a recession—every single time.”

The three times where rate hikes did not lead to recessions, he noted, were due to the Fed stopping short of inverting the yield curve.

At the moment, Rosenberg suggested, “the yield curve is flat enough that if the Fed raises rates four more times, that’s all it takes. We probably will have a recession next year.”

Looking at the dot plots shows that more than 50% of all FOMC officials are ready to raise rates four more times going into 2018, so “the risk isn’t necessarily high right now, but it is rising.”

Politics Is Just Short-Term Noise

Asked about the possible economic implications of the ongoing problems the Trump administration faces, Rosenberg shrugged off the question. “Here’s what I’m going to forecast with 100% guarantee: that no matter what happens with Donald Trump, the United States will still have a president.”

He noted that the Comey affair caused all of a one-day plunge in the stock market, “so politics, to me, unless it has a substantive impact on the earnings outlook or the economy, is just short-term noise.”

The Fourth Industrial Revolution Is Underway

What’s much more important, Rosenberg said, is the supply side of the economy, an aspect that no one pays enough attention to. “What’s happening in terms of artificial, robotic intelligence and the shared economy… Right now, we’re going through the fourth Industrial Revolution, and it’s having a profound impact on worker anxiety.”

Yes, corporate tax reform is necessary, he conceded, but there are other constraints we have to deal with. For example: “How is it that we have 23 million Americans between 25 and 54, in their prime working age, that are out of the labor force?”

He surmised that “there’s some real structural things happening here that really transcend the need to cut taxes or what’s happening in terms of immigration policy.”

What Are the Implications for Investors?

There’s no doubt we are late cycle, said Rosenberg. “That means you really want to tuck it in.”

For his thoughts on what a late-cycle portfolio should look like and more, watch the full interview below.

Get Live Updates from the Sold-Out 2017 Strategic Investment Conference

Don’t miss out as some of the world’s leading asset managers, geopolitical experts, and Federal Reserve insiders, including John Mauldin, George Friedman, and Ian Bremmer, discuss how to assemble a winning portfolio for the Paradigm Shifts now destabilizing the world. Click here to tune in.

if AI were the California Gold Rush, then NVIDIA would be the biggest seller of picks and shovels.