I just saw a reference to a recent article by Dean Parker and Moritz Schularick: “The Term Spread as a Predictor of Financial Instability.” The article use the Macrohistory Database by Jordà, Schularick, and Taylor to look at the behaviour of the term spread (slope) between the 3-month rate and the 10-year bond yield in a number of countries over a long history around recession/financial crisis events. As expected, the slope inverts ahead of the event. They then looked at adding other factors to create a financial crisis predictive model. My article here are more general comments about the term spread behaviour.
I have tried discussing before, with you and many others, how rates might be more a function of size, than anything else. Imagine you want to accumulate as much wealth as possible. You would first accumulate the best performing assets, but then you quickly move down the rate curve, to whichever assets offer the largest savings "size" and not return.
The "largest" assets will not offer the highest returns, and the highest return assets will rarely be the largest. (see xkcd, #1102, fastest growing religion).
If this makes sense to you, I would love to see an article discussing your thoughts on the matter of "size
I do not see rates as directly competitive, but rather simply, assets have lifecycles/value paths, and once the price of an asset begins declining too quickly, it can quickly destabilize completely and go to zero.
Trades, in effect, can be thought of simply shuffling owners, and are not directly responsible for price action, even though value changes are only manifest into price through trading activity. In other words, trading volume need not be correlated with price changes.
In an entirely objective sense, a decline in USD value, through inflation, represents an increase of value of everything else, assuming the stock of USD remains constant.
Some of what we call "returns", might be better phrased as "price corrections", the response to duration being a prime example.
When (the marginal) rates change, thereby leading to price adjustments, according to duration, nothing about the asset changes, only the environment in which the asset trades has changed. In effect, the ground you are standing on stays fixed, but the tides rise or lower around you, to create a relative change.
So with that size/rate issue, it is not an equilibrium rate that matters, but rather a "marginal rate", for the assets we are "on the fence about". Which asset will you stack next or abandon next, that is the issue.
But out of some strange professional fixation on the status quo, no one seems to discuss the process of "asset abandonment" with any seriousness, nor why that might not be such a bad thing(if you leave behind something, it is often because you are moving on to something else better).
This is why a yield inversion might be such a recession indicator, it signals a restructuring or reorganization.
Anyway, I would love to here any of your thoughts on this, thanks a bunch for your writing.
I have tried discussing before, with you and many others, how rates might be more a function of size, than anything else. Imagine you want to accumulate as much wealth as possible. You would first accumulate the best performing assets, but then you quickly move down the rate curve, to whichever assets offer the largest savings "size" and not return.
The "largest" assets will not offer the highest returns, and the highest return assets will rarely be the largest. (see xkcd, #1102, fastest growing religion).
If this makes sense to you, I would love to see an article discussing your thoughts on the matter of "size
I do not see rates as directly competitive, but rather simply, assets have lifecycles/value paths, and once the price of an asset begins declining too quickly, it can quickly destabilize completely and go to zero.
Trades, in effect, can be thought of simply shuffling owners, and are not directly responsible for price action, even though value changes are only manifest into price through trading activity. In other words, trading volume need not be correlated with price changes.
In an entirely objective sense, a decline in USD value, through inflation, represents an increase of value of everything else, assuming the stock of USD remains constant.
Some of what we call "returns", might be better phrased as "price corrections", the response to duration being a prime example.
When (the marginal) rates change, thereby leading to price adjustments, according to duration, nothing about the asset changes, only the environment in which the asset trades has changed. In effect, the ground you are standing on stays fixed, but the tides rise or lower around you, to create a relative change.
So with that size/rate issue, it is not an equilibrium rate that matters, but rather a "marginal rate", for the assets we are "on the fence about". Which asset will you stack next or abandon next, that is the issue.
But out of some strange professional fixation on the status quo, no one seems to discuss the process of "asset abandonment" with any seriousness, nor why that might not be such a bad thing(if you leave behind something, it is often because you are moving on to something else better).
This is why a yield inversion might be such a recession indicator, it signals a restructuring or reorganization.
Anyway, I would love to here any of your thoughts on this, thanks a bunch for your writing.