There are 2 terms everyone needs to understand, Government Shutdown and Inverted Yield Curve
GOVERNMENT SHUTDOWN
I wrote an email about the potential government shutdown 5 months ago and here we are again. It was avoided last time by agreeing to raise the federal debt, what’s another trillion or two?
It’s worse this time because if the politicians don’t agree on a budget by tomorrow, Saturday, the 30th of September, it is shutting down.
This means millions of government employees will no longer be paid, including the military. Not to worry though, congress and the senate will continue to collect their salaries and benefits. There are a hundred reasons why this is negative but the top 3 are:
- Government employees and services will suffer…..a lot
- Billions of dollars will instantly leave an already shaky economy.
- It hurts the credit rating and reputation of the United States with other countries. (Not great with the US’s already less than stellar rep around the world)
This is a link to my previous email on government shutdowns and how the rise in interest rates is adding fuel to the fire: Federal Debt and The Prime Rate
INVERTED YIELD CURVE
An inverted yield curve happens when the financial markets think the economy is in store for a rough road ahead. In a healthy economy the outlook is that things will generally be ok and interest-bearing financial instruments reflect it.
- Short Term interest rates are low, 6 months to 2 years.
- If you want higher interest rates you have to commit to longer terms, 3 to 20 years.
- Adjustable-rate mortgages have lower start rates than the fixed rates
That pricing is inverted when the financial markets suspect the economy is going to hit some turmoil, like a recession. Short term offered interest rates are higher than the long-term rates. It means that institutions think people are worried about the future and are willing to lock their money away for a long time, even if they don’t get much in return, just to keep it safe. This economic indicator has been extremely accurate in predicting economic downturns and recessions in the past. Like in the following recessions:
- Global Financial Crisis (2007-2009): This recession was preceded by an inverted yield curve in June 2007.
- Dot-com bubble burst (2001): An inverted yield curve occurred in June 2000, preceding this recession.
- Early 1990s recession: Inverted yield curve occurred in November 1988.
- Late 1980s recession: Preceded by an inverted yield curve in July 1988.
- Early 1980s recession: Inverted yield curve occurred in April 1979.
- 1973 oil crisis recession: Inverted yield curve in April 1973.
- Early 1970s recession: Preceded by an inverted yield curve in January 1971.
- 1969 recession: Inverted yield curve happened in March 1967.
- Early 1960s recession: Preceded by an inverted yield curve in April 1959.
- 1957 recession: Inverted yield curve occurred in July 1956.
I would much prefer to be writing about all the optimism I have for the economy, but this seemed more important. The one potential positive I do think we’ll see is a hard and fast drop in interest rates in the next 12 months to try to turn the economy around. I wrote about this a year ago: September 2022 Financial Report
I hope this helps with the 2 buzzwords you’re likely to hear a lot more of in the next days, weeks and months.
