Investing

Inversion

Lots of concern in the media and world of academia about the flattening yield curve lately. The WSJ has a great article today putting the current slope of the yield curve in perspective. Basically, the yield curve has historically inverted 6 months to 2 years before the beginning of a recession. Everyone is clearly on some kind of high alert right now (and always, I guess) whether it be recession or stock market crash. I’m not saying that a recession or crash are outside of the realm of possibility right now but it doesn’t pay to overly worry about them.

For the past three recessions (1990, 2001 and 2007), the yield curve inverted about 2, 1 and 2 years before the actual onset of the recessions. If an inverted yield curve is in fact a reliable recession indicator then recent experience would imply that the start of the next recession could be more than 1-2 years away. That’s a long time to be worrying.