Federal Reserve – Page 33 – The Contrarian Investor Podcast

Contrarian Calls, Revisited: Barry Knapp on Yield Curve Inversion

Published February 5, 2020

What Was Said

In this podcast’s pilot episode last April, economist Barry Knapp of Ironsides Macroeconomics discussed the economic news of the day: the 3-month/10-year yield curve inversion.

The conventional wisdom at the time was that the yield curve inversion would lead to recession in the U.S.

But there had been numerous “false positives” from the yield-curve indicator in the past, Knapp said: 1966, 1998, and 2005. “There was no evidence that the inversion of the yield curve was really having any demand side effects on the actual availability of credit,” he said at the time. “It’s not debilitating for growth.”

The U.S. consumer remained healthy as households continued to delever from the excesses of the 2008 financial crisis. “The savings rate is high, income growth is picking up,” Knapp said. While global exports were slowing, this was “not enough of a shock to drive the U.S. into a recession.”

Additionally, there were reasons to believe the inversion wouldn’t last long. The Federal Reserve was indicating that its next Treasury-buying initiatives were more likely to lead to a steepening of the curve.

Knapp was bullish on bank stocks, having upgraded his view in 2017. He also liked U.S. small caps, expecting a rally on domestic demand.

What Happened

Ten months later, there are no signs of recession for the U.S. economy. Financial stocks have done well, judging by the SPDR S&P Bank ETF (KBE), which is up more than 14% in the intervening months:

Small caps have also done well, with the iShares Core S&P Small-Cap ETF (IJR) gaining more than 11%:

The 3 month/10 year yield curve stayed inverted for a few months before steepening. It has since inverted again, though this time few economists are calling for a recession.

Season 2, Episode 3: News Headlines Are a ‘Subtle Fallacy’ Confounding Investors

Published January 29, 2020

Nicholas Reece of Merk Research says news has no real impact on the global economy or markets

January 2020 has been an eventful month. Geopolitical events and other exogenous factors have roiled global financial markets. In the end, they may not matter all that much where the trajectory of the global economy is concerned. In fact, they may not matter at all.

Nicholas Reece of Merk Research shares his thesis that there is a “subtle fallacy” that events in the news are important to the global economy and financial markets. This is due to evolutionary biography, behavioral biases, and the nature of the news business in the digital age.

In a wide-ranging conversation, Reece tells listeners how to cut through the noise to identify data that has real economic repercussions. One conclusion is that in 2020 (at least so far) to be a contrarian means being optimistic.

Content:

The “subtle fallacy” of news (1:32)
Humankind’s innate negativity bias (2:43)
So what news is relevant to the economy and to markets? (4:09)
Discerning the signal from the noise for investors (5:50)
Economic damage from the coronavirus (7:53)
“Unknown unknowns” (9:32)
Nick Reece’s “origin story” as an investor (12:41)
The changing public perception of the Federal Reserve (20:30)
Being positive is contrarian (26:21)
A short discourse on political commentary (27:25)
Favorite economic indicators that can supply contrarian signals (30:19)

For more information about Nick Reece and Merk Research, visit their website.

Season 1, Episode 16: No Ill Effects from Yield Curve Inversion for US Economy

Published August 19, 2019

The 2-year/10-year yield curve inversion is a bad sign for the global economy, but less so for the U.S., says Barry Knapp

Barry Knapp of Ironsides Macroeconomics joins the podcast to discuss the 2-year/10-year yield curve inversion. The gauge is viewed as a harbinger of recession and while global trade has clearly slowed, the U.S. economy should not necessarily see any ill effects in the immediate future, says Knapp.