Wall Street pundits throw a big curve

There has been much talk of an inverted yield curve indicating an impending recession, which has amped up traditional August market volatility.

It is, of course, brought to you courtesy of the usual fear-mongers, some of whom are politically bent, and of course Wall Street’s ever-growing crop of intellectually lazy “economists.”

Fear not, because the recessionists really have no idea what they are talking about.

The text-book definition of a recession is two consecutive quarters of economic contraction, or negative GDP. GDP for the first half of this year is running at an average of 2.55 percent — Q1 came in at 3.1 percent, and Q2 at 2.1 percent.

According to the Atlanta Fed GDPNow — the most prominent and unbiased estimator out there — Q3 is tracking at approximately 2.2 percent.

Here’s the rub: Yield curve inversion held meaningful merit prior to the financial crisis, when the Fed wasn’t the biggest player in the US bond markets. But that has changed.

Today the yield curve could be very misleading for two major reasons.

In Germany and other European countries, interest rates are substantially negative, hence there is a massive influx of European money pouring into our Treasury market.

The other giant distortion is the Fed’s reinvesting of proceeds from maturing bonds back into the market instead of reducing its massive $4 trillion balance sheet.

That creates an additional abnormal and massively outsized buyer depressing five- to 10-year bond rates.

The pundits are foolish for not examining the weight of these two massive variables.

It seems the most relevant inversion may be what’s going on inside the minds of the inept Wall Street economists.

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