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Causal Capital ~ The Knowledge Capital Specialists

Boost Growth by Inverting Yield Curves

Tuesday, March 8, 2016

There are several market dynamics that when viewed together will paint a very clear forward-looking picture on the state of an economy, even the global economy can be drawn this way. The five indicators we are looking at today are:

 

  • 1 Low trade volumes

  • 2 Collapse of prices in commodities

  • 3 Limitless growth of debt

  • 4 A declining rate of growth for the nominal Global Gross Domestic Product

  • 5 An inversion of the yield curve

 

Two factors that are specifically concerning is the declining growth of nominal GDP and a yield curve that is moving into an inverted state. If history repeats itself, as it has done every time in the domain of fixed income; a yield curve inversion or the narrowing of spreads between the two and ten-year treasury note tells a sad story about the expected growth of an economy. I recommend those interested in this treasury dynamic take a peep at this video from the FT [LINK].

 

US Yield Curve moving towards inversion | FT [LINK]

 

All this said, whether history repeats itself or not, we never quite experience the same event in the same manner and today, at least a quarter of the planet is now running some kind of Quantitative Easing scheme. QE mechanics or processes aside, the purpose of this central banking tactic is to force yields on the front of the curve (the 2 year note end of the game) negative so that the back of the yield curve is upward pointing rather than inverted.

 

One can't help but wonder whether this central bank artificial stimulant for growth isn't anything more than a last desperate effort to save the economy. However, at present what it seems to be doing is driving down cross rates between jurisdictions and pressing up FX volatility.

 

Perhaps Quantitative Easing only works when one player is engaged in the game and it fails when entire regions of the planet fight for that negative corner. Let's see because it appears to be a race to the bottom between countries at the moment.

 

US Yield Curve moving towards inversion | FT [LINK]

 

Moving onto something most people would appreciate, the flip side of the yield curve that entangles the real economy and something tangible that we can see, is growth. Does the global economy have a growth problem?

 

Maybe central banks have telegraph pole syndrome or perhaps there isn't much else they can do and they have become entrapped in their own game of chasing towards the false hope of negative yields to escape from the inevitable doom and damnation of an inverted yield curve. We all know that the inverted yield curve leads to recessionary stress, given the history of it all that is and so many of the central banks are fighting over who fails last but away from all of this: Is global economic growth really at a crossroad today?

 

The IMF certainty thinks so ...

 

"Global activity has slowed unexpectedly at the end of 2015, and it has weakened further in early 2016 amid falling asset prices. The global economy needs bold multilateral actions to boost growth and contain risk."

 

Christine Lagarde | International Monetary Fund [LINK]

 

The heart of the problem isn't so much a lack of global growth or perhaps a capital system dependent on it, let's not go to that place founded deep in the Austrian School of Economics. It is possible that the growth which was cherished by the international investment community was superficial, certainly in the emerging markets and China has been engaged in a GDP facade over the last decade that may not have caught everyone off guard but has certainly run its course.

 

 Ghost Cities of China | Wade Shepard [LINK]

 

We have to ask ourselves how many more Ghost Cities can be built in China that the west can invest in, indirectly invest in through the consumption of commodities that is. Can China's economic output figures truly be trusted and if not, what's next?

 

To finish up, manipulating yield curves to boost global economic growth is not the answer in my opinion when the real issue is a tangible problem that currently doesn't have a solution beyond a monetary one.

 

Bit left field today I know but we have all been here before too. History does repeat itself and those that questioned the growth of the US housing market or speculated on loans that supported it were also seen as estranged from the populace. That is, they weren't part of the lemming camp until the house of cards collapsed.

 

An Inflection Point for China

As the Financial Times describes in this most fantastic video, China has migrated enough people into new cities that they have in effect created 88 centres the size of London.

 

The end of the Chinese Miracle | FT [LINK]

 

This migration phase is coming to an end and China has reached a Lewis Turning Point [LINK] which can drive up urban wages as a consequence but only in the short term. The big questions is what is next?

 

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