Submitted by Taps Coogan on the 31st of August 2018 to The Sounding Line.
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CNBC’s Rick Santelli recently spoke with Bianco Research President Jim Bianco about the looming possibility of a yield curve inversion. As a reminder, every time since at least World War II that the 10-Year to 2-Year yield curve has inverted, a recession has followed. Many are now arguing that ‘this time is different’ and that an inversion would not mean recession due to distortions caused by central bank monetary policies over the past decade.
Santelli Exchange: The yield curve as an indicator of future recessions from CNBC.
Jim Bianco:
“Everybody seems to think that (inversion would not signal recession) right now. They’re using the excuses of term premium, which means that the 10-Year yield is too low. I think they are sadly mistaken. The yield matters a lot. Every cycle when the yield curve inverts, we always make these arguments. In 2006, it was the global savings glut. In 1990, it was the S&L crisis. It was the crowding out theory in 1980. All those times when the yield curve inverted, ‘it didn’t matter’… It does. The yield curve inverting, especially the 10-Year 3-Month curve, means that money is too tight. It doesn’t matter what the inflation rate (is). It means that money is too tight. The 10-Year 3-Month curve is 75 basis points. It’s still got a ways to go. But if it inverts, that’s a problem and there’s no other way to sugar-coat that.”
Rick Santelli:
“… Why is the curve in danger of inverting?… Who is responsible?”
Jim Bianco:
“The Federal Reserve… The natural state of an economy is expansion. When we have recessions something breaks it. The leading cause of it breaking: too tight Federal Reserve policy. A signal that your policy is too tight: your yield curve is inverting…”
Rick Santelli:
“You are making the argument that the way to normalize isn’t raising rates, it’s a reduction of the balance sheet.”
Jim Bianco:
“That’s exactly where I am going. If I was Federal Reserve Chairman, I’d stop raising. I’d say look at that bloated balance sheet.”
There is more to the interview, so enjoy it above.
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