Professor who first found inversion's recession link dismisses 'this time it's different' argument
The professor who first identified the yield curve inversion as a reliable indicator of a looming recession has a simple message for anyone arguing that this time is different: Don’t.
In an interview on BNN Bloomberg, Duke University professor Campbell Harvey said nothing in the wake of the great financial crisis has convinced him inversion’s role as a recession indicator has broken down.
“Some of the most dangerous words I hear from policymakers and central bankers are: ‘This time is different,’” he said. “Well, c’mon. We’ve got an indicator that’s seven-for-seven [in predicting recessions] with no false signals, and to brush it off, saying, ‘oh, this time is different?’”
An inversion occurs when long-term treasury yields fall below those of shorter maturity notes.
Harvey, who established the link between the inversion and recessions more than 30 years ago, said that while the financial system has seen some significant changes through the years, he hasn’t yet heard a compelling argument as to why a recession isn’t in the offing.
“You have to explain to me the structural reasons why this indicator is broken, and don’t tell me this [quantitative easing] stuff… ‘oh, we didn’t have QE in the past,” he said. “Well, frankly, the role of the Fed was much more powerful in the 1960s and the 1970s when the bond market was a lot smaller.”
“If you’re making the case ‘this time is different’ because of quantitative easing, I’m not impressed with that.”
Harvey warned investors shouldn’t be lulled into a false sense of security by strength in a number of economic fundamentals due to their backward-looking nature.
“You can be fooled by the fundamentals – you look at the fundamentals of the economy: ‘Oh gee, we’ve got close to three per cent real GDP growth, everything’s humming along no problem.’ Well, that can be extremely misleading,” he said.
“What you need is a lens into the future, rather than getting hung up on the past.”