Saturday, July 21, 2018

When is a Flattening Yield Curve Inversion Really Significant?

Tim Duy has written an excellent article on the recession significance of a flattening yield curve inversion in which he concludes it is not likely to result in a recession until the Federal Reserve continues hiking rates after the inversion.  I think he is correct.

There has been a lot of alarmist speculation on yield curve inversions signaling recession without a thorough look at history and the differences with the past that a long flattening of the yield curve in a low interest rate environment has.

Here is a prior yield curve article by Tim Duy.

This blog post by Menzie Chinn highlights flattening yield curves in high income countries and includes a link to a study which has an interactive which allows the reader to look at yield curves over time.

Morningstar had an article which also emphasized looking at the yield curve in relation to Federal Reserve rate hikes.

The Bonddad Blog looked at corporate spreads vs. the flattening treasury curve yields and the  implications.  In June 2017, The Bonddad Blog wrote that two Federal Reserve rate hikes may be sufficient for a yield curve inversion.  The Bonddad Blog also looked at the conundrum of 100 years of spreads.

The yield curve inversion does not cause a recession; it is merely a long term signal in the business cycle, although its actual role in the business cycle is opening debated in economic circles and Jared Bernstein believes it is currently receiving too much attention.

David Glasner had a very detailed look at the the liquidity premium and the yield curve during the 2001-2008 period and he concludes that the Federal Reserve's hand is weaker than in 2004, because
" Nominal GDP has been increasing at a very lackluster annual rate of about 4-4.5% for the past two years. Certainly, further increases in the Fed Funds target would not be warranted if the rate of growth in nominal GDP is any less than 4% or if the yield curve should flatten for some other reason like a decline in interest rates at the longer end of the yield curve."  This  conclusion is consistent with Tim Duy's.

Still it is one thing to look at long term treasury yields declining when GDP is below 4% when, in my opinion, it is more important to look at short term interest rates and spreads in a slow growth economy with low to stagnant wage growth.

7/23/18 Addendum

I forgot to include Stephen Williamson's excellent post on "Don't Fear the Inversion - It's the Short Rate That Kills You".


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Thursday, June 28, 2018

The Path to Pension Reform in Illinois is not Pretty

The Chicago Federal Reserve Bank and the Civic Federation held a conference in April to assess the State's options with respect to its pension systems liabilities.

A copy of "Navigating Pension Reform in Illinois" can be found here.

Basically, the report says what we all know that the State has ignored its funding mandates, that workers and participants in the pension systems must eventually accept pension reductions even if this means a State Constitutional change, which in this political environment would be explosive, and/or find more revenue, such as higher property taxes.

This what happens when several administrations of both parties does not fully fund pension system contributions putting off the inevitable for the suddenly more wealthy future which has failed to arrive.

Double dippers need to be shaved.  Bonus salary and other end of work incentive increases just prior to retirement to increase pension benefits need to cease.  The next administration will need to belly up to the deepening gorge and start shoveling.

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Sunday, April 1, 2018

What Is The Aggregate Real Rate of Return of Risky and Safe Investments In The Economy?

 About four weeks ago in my Weekly Research links provided on a daily basis to subscribers, I linked to a NBER study through an ungated earlier version, because NBER paywalls the general public.  The title is "The Rate of Return on Everything, 1870–2015" by Jorda, Knoll, Kuvshinov, Schularick, and Taylor.  The paper asks "What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in

Sunday, March 25, 2018

Tax Software Exposes Users to Phishing

 When you get email that requests you use a link, you need to ignore it, check the sender source embedded in the mail, and if you think you should take action you do so my going (by entering in your browser) to the known real website and accessing your account.  There are all kinds of tax season and IRS phishing scams.  Be suspicious.  Know the IRS never contacts you be email or phone; they use US mail only.  Most recently users of popular tax software programs have been subject to phishing attacks.


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Emerging Market ETFs and Global Risk

 A recent paper studied investor flow into and out of emerging market ETFs and found they amplified global risks and ignored local conditions unlike market indexes and and mutual funds which did not.

I recommend reading the paper, because it suggests to me that investors ignore what is going on with the actual holdings of the ETF within a more comprehensive macroeconomic assessment.  This exposes those local markets to an exaggerated global financial risk and increases market volatility.

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Thursday, February 1, 2018

Exchange Traded Funds 101

I have written some short articles on ETFs trying to discuss potential liquidity problems, some inappropriate structures, and trading costs (as opposed to buying and holding) and I have some more articles planned as I have time to write.

The newest edition of the Journal of Economic Perspectives has an interesting article, which is linked in my Daily Research Links available to subscribers, entitled "Exchange-Traded Funds 101 for Economists".  While the article addresses structure and types of funds, liquidity, trading implications,

Estimating Potential GDP and Output Gap

 I have been very interested  in output gap estimating and researching the issue, because there are economic theory conflicts which muddy what governmental fiscal policy should be.  While I have not had the time to pull my research together in an article, I continue to follow the subject and add to my research.

The CBPP has a new paper out entitled "Real-Time Estimates of Potential GDP: Should the Fed

Monday, January 15, 2018

2018 Employer Withhholding May Turn and Bite You

The New IRS withholding calculator will not be available until February, the old W4's will continue to be used despite no longer reflecting the new tax law and 2018 employer withholding may result in under withholding  resulting in higher taxes owed at year end and possible tax penalties, particularly if there is more than one income in the family, you work at more than one job during the year, and/or you have multiple jobs at the same time.

You will need to proactively monitor and review your withholding, including using the new

Friday, January 5, 2018

2018 Tax Facts and Dates

 Morningstar has published a very succinct listing of 2018 tax facts, as a result of the new tax law, and important tax dates in the link above. The Pursuit of Financial Happiness(TM) has always been about information.  Some people, when reading our articles, do not read or dismiss the embedded links which provide not only pro but

Saturday, December 30, 2017

Watch for Eonia Year End Spikes

In the last two days of November, the Eonia, which is the one day Euribor rate, spiked 6.1% and 6%, which is very unusual.  Bloomberg gave, as an explanation, that the National Bank of Greece had excess liquidity of 450 million euro which it loaned in the last two days of November to peers in its country, but would that cause two days of 6% spikes?  Was something else going on with eurozone bank liquidity?

The two regional Italian banks Carige and Creval have been struggling for additional funding, along with four other small Italian banks, to meet the ECB balance sheet liquidity rules and lower allowable NPLs (non-performing loans).  But any month end liquidity needs would have been relatively small.  However, new ECB bad loan rules will become effective January 1, 2018 despite significant opposition, particularly from Italy.  This will put additional pressure on Italian banks, because, while eurozone banks as a whole have 5% NPLs, Italian banks have 15% of that 5%.  The final compromise is to enforce the new NPL rules on a bank by bank basis, whatever that means.

Meanwhile, on 18 November Monte dei Praschi di Sienna, had to put $671 million (569.4 million euro) in reserve, before its new reorganization board meets for the first time in December, which

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