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It's a Code Red: Inventor of the Yield Curve Indicator on the State of the US Economy



Campbell Harvey is a Professor at Duke University and a partner at Research Affiliates. He sat down with Michael Batnick and Josh Brown of Ritholtz Wealth Management to discuss the meaning of the yield curve indicator, which he discovered in 1986 while working on a dissertation.

Campbell cites the fact that 7 out of the last 7 recessions had been presaged by a yield curve inversion – which is what happens when it longer term bond yields fall below shorter term bond yields in the Treasury market. He believes that this phenomenon occurs when the market participants begin to grow more pessimistic about the economic outlook. The behavior of executives, lenders, borrowers and investors can change enough during these times to actually become a self-fulfilling prophecy – producing a negative feedback loop that drives a weakening economy into a full-blown recession.

Recessions are a normal part of the business cycle, although they can be painful to live and invest through. They can also vary greatly be degree. Campbell fields questions from Michael and Josh about all of the ways in which this time might be different. He acknowledges that it is always possible that the yield curve indicator might stop working as a recession signal, but he believes that because it hasn’t yet, this might be a good time for people and corporations to rethink the risks they’re taking.

Campbell Harvey regularly posts his thoughts and ideas on his LinkedIn page, which you can find and follow here:
https://www.linkedin.com/in/campbell-harvey-314295/

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dlwatib
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dlwatib

There is a very simple explanation for both recessions and inverted yield curves. Recessions happen when the Fed tries to raise interest rates beyond what the market will bear. The inverted yield curve happens because the Fed has more control over short term interest rates than long term interest rates. The Fed jacks up the short term rate in the expectation that the rest of the curve is going to follow, but the long term rate holds firm at the lower rate and doesn't rise. Unless the Fed recognizes its mistake quickly and reverses course, we get the predicted recession.… Read more »

RantzBizGroup
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RantzBizGroup

Don't worry about the yield curve… worry about the move to a WeChat digital currency exchange that takes most of your wealth from the old system as the exchange rate will be very much loaded on the fedgov's side.

Joel Slavis
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Joel Slavis

well done thank you

Art Traveler
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Art Traveler

I just flipped a coin 7 times and it came up heads each time, so I can conclude whenever I flip a coin it'll come up heads! Don't bet the farm on a inverted yield curve predicting the future!

The Philippine Experience
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The Philippine Experience

We've been in a recession since 2008. We are now headed for a depression. And a very big one at that.

Solids Metallurgy
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Solids Metallurgy

They all be talking like he make it, all ya boy do is identify dat

cardude man
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cardude man

Good discussion, but Josh Brown is a f’n clown.

M K
Guest
M K

Great post! Thank you.

vgernyc
Guest
vgernyc

Another thing is each time the Fed intervenes, it is less effective each iteration. Even they have confessed that they're out of options and are exploring unorthodox solutions (example: Negative Interest Rates, QE Forever)

ROAD WARRIOR
Guest
ROAD WARRIOR

💩 Trump is fixing our economy and we are in a false slowdown because manufacturing is fleeing China!!!!!

SpaceWalkTraveller
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SpaceWalkTraveller

Thanks for the interview, you asked some good questions, very interesting.

Craig Sanford
Guest
Craig Sanford

Ya That's right their looking for a life line. Young delusional right wing Capitalist. Lol

Lo Ve
Guest
Lo Ve

Let the guest finish his train of thought too much interrupting

Isaac Greenough
Guest
Isaac Greenough

They need a detox !

Curtis Gannaway
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Curtis Gannaway

I think it is important to focus on causation vs. correlation.

Mike Hughes
Guest
Mike Hughes

Buy a pop filter for your mics 🙂

L G
Guest
L G

Great Informative Video – Thank you!

Josh P
Guest
Josh P

I am going to chime in here. The world can run on negative rates as long as the USA still has a postive rate. The banking models break when negative rates are imputed so other countries use our rates as input. If the USA rates go under and so does the rest of the world then the whole banking system will collapse. The infrastructure can't handle it and doesn't know what to do with negative rates. Essentially it is the equivelent of dividing by 0.

sbkpilot11
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sbkpilot11

it's no longer inverted as of today.. both 3mo-10 and 2-10

Simple Mind
Guest
Simple Mind

a recession for the rich? yes, for the poor? naah, they're always in recession lol

jooky87
Guest
jooky87

Doesn’t this just mean too much misallocated money chasing safe returns?

Jeffrey Cohen
Guest
Jeffrey Cohen

I still can't believe that Swiss and German citizens, already in negative rate territory are not more vocal and visible in their contempt. Negative rates are the crisis not an impending recession.

BARON De FERLA
Guest
BARON De FERLA

"Throw us a lifeline!" Haha!

Alan Wilson
Guest
Alan Wilson

Huge layoffs, store AND general business closings AND BANKRUPTCIES ARE ALREADY OCCURRING!!! 3-4 months have already passed during this inverted yield curve scenario.

Michael Stinson
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Michael Stinson

We are in a tech driven economy, why do u guys continue to compare this economy to the past!

Sumone Chan
Guest
Sumone Chan

This video deserves way more views.

edbop
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edbop

Banks borrowing short and lending long only makes sense if you still believe the intermediation theory of banking. Banks do not lend out customer's deposits; in fact if you put money in a bank you are not making a deposit you are just a general creditor.

Darth Sidious
Guest
Darth Sidious

The more people saying "this time is different," the more likely there will be a recession.

Ea Jordan
Guest
Ea Jordan

You know what really stifles innovation? Lawyers, the us military, Israel, Catholics. Printing paper is just a way to keep the rabble from storming the castles

Ea Jordan
Guest
Ea Jordan

Most of the world is in a recession it's a greatest depression indicator. Buy silver dont buy government bonds

homerscornbread
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homerscornbread

“and he saith with a great voice, Fear God, and give him glory; for the hour of his judgment is come: and worship him that made the heaven and the earth and sea and fountains of waters.”
‭‭Revelation‬ ‭14:7‬ ‭

Joe Lahr
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Joe Lahr

I love the denial on this board….

Brandon Marchinski
Guest
Brandon Marchinski

Capitalism is not sustainable… Look where it has gotten us… The planet is not infinite, civilization collapse is coming soon!

Daniel Purdy
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Daniel Purdy

It’s been inverted for months not weeks.

curdt79
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curdt79

Inverted yield curve. Overall revenue for the market is down. Unemployment is down. GDP slowing. Over leveraged stocks with no more room to grow. Slow growth of this exhausted bull run. LOOKS LIKE SHORTS ARE ON THE MENU BOYS!!

Bill Brady
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Bill Brady

So what do I do with my 401k?

Alan Wilson
Guest
Alan Wilson

You guys need to talk about the Fed injecting 100's of billions of dollars into the banking system. Some say repo markets, I say the Fed is covering the big banks margin calls, essentially their own fuck ups.