TL;DR: Legacy financial markets are shaking as a key half-century economic indicator appears to signal a looming global recession on the horizon. Wednesday, 14 August 2019, yield for the 10-year Treasury note fell to 1.623%, inching below its 2-year counterpart at 1.634%, inverting for the first time since about 2007. Many experts consider such a metric the harbinger of bad news, taking up to nearly 2 years to fully manifest as it did to kick off the so-called Great Recession. Cryptocurrency markets have only known institutional boom years. Are they ready for a global bust?
50 Year Old Economic Indicator Points to Recession
Cryptocurrency was born from the Great Recession’s ashes, coyly alluding to bailouts as a reason for Bitcoin’s existence in its genesis block. Since then, Cassandras, disaster pornographers, economic Jehovah’s Witnesses have forecast doom … to no avail. The legacy financial world has hummed along for more than ten years, quantitatively easing its way through negative interest rates toward eye-popping records, be they in weighted key stock averages or employment numbers.
Pacing alongside has been the growth of cryptocurrency as a global phenomenon. A fledgling math problem shared between anarcho-libertarian kooks in early 2009 has since captured a quarter trillion-dollar market capitalization among more than 2,000 projects doing $60 billion in daily volume. How much of that relative success is due to traditional finance being on a decade-plus hot streak is anyone’s guess, but enthusiasts might be about to find out.
A 10-year Treasury note is essentially a private sector loan to the United States government. It’s wildly popular because the US hasn’t defaulted, reliably paying on time each time. The yield raises to attract buyers usually when an economy is hot, as there are other opportunities to be had and Treasury notes are considered conservative financial plays. The reverse is true when the yield begins to dip. That number becomes something of a confidence game.
Trump Era Records
The Trump era set new records in this regard, and by early 2019 the 10-year Treasury note peaked at 2.79%. As Spring approached, however, the yield curve inverted, crossing below its 3-month counterpart, 2.44% compared to 2.46% respectively. An uncharitable reading of that phenomenon meant investors were spooked about the shorter-term prospects for the economy than further down the road. It has struggled to stay afloat since, bouncing back and forth, reaching a 3-year low of 1.65% just days ago, falling beneath the 1-year note at 1.75%.
Investors, if the inversion is to be believed, appear to be losing shorter-term confidence in the US economy. This combined with 30-year bonds turning downward, Germany reporting less than stellar numbers, a trade war with China, Hong Kong on the brink, the Fed promising to lower its rates, Argentina election worries and peso devaluation, and, well, something might be brewing. What should be a simple reading, “investors will earn slightly more in two years than ten,” is being translated into a US stock market slide on top of everything else (at the time of reporting).
The meme, however, pushed in legacy circles is how that inversion curve, that difference, proceeded nearly every recession for the last half a century (each of the recent half dozen for sure). Yield in that context has a much scarier meaning, as in yield to history, yield to the past indicators. It’s also known as a 2-10 inversion, and a recession accompanies them slightly less than 2 years after, during which there are counter signals such as a market run-up or boom as if to compensate. Experts are placing a possible recession to begin right around early 2021 if history is any tell.
That’s just enough time for politicians to cast blame or credit without addressing root causes. The 10-year Treasury note also helps set mortgage rates, and has actually become a global economic barometer due to how weaved together international finance is, how insidious, to some, globalization has become. The Federal Reserve could lower rates still further, which comes with its own set of economic pitfalls.
There have been exceptions. In 1954 and 1965, nothing came of the inverted metric, proving numbers can’t really do more than gauge sentiment rather than “cause” certain occurrences in an economy. But it’s enough to earn headlines, and apparently enough to slow the Trump administration in further applying more tariffs against China, at least for the moment.
Cryptocurrency enthusiasts, however, are in completely uncharted territory. Ecosystem markets themselves are no paragons of stability and confidence, and so their ability to act as a kind of counter-measure might be overstated, to put it mildly. Right now, such markets are based on fiat denominations for success measurement, meaning as the formal economy goes so might crypto. But it could also be the first real, substantive test of a robust, wide cryptocurrency market where trading begins to be set against the ecosystem itself rather than fiat. The entire industry will be watching.
DISCLOSURE: The author holds cryptocurrency as part of his financial portfolio, including BCH.
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