Are inverted yield curves signaling a recession or a deflationary boom?
Updated: Feb 12
Cathie Wood of ARK Invest explains:
Now that yield curves are inverting, investors seem to be bracing for bad news. In the last 100 years, inverted yield curves have foreshadowed recessions within roughly a year.
Based on the 50 Years Ended 1929, We Believe the Yield Curve is Signaling a Deflationary Boom
For the first time in 100 years, we believe that innovation is picking up at a pace not seen since the turn of the nineteenth century, causing a confluence of abnormal economic signals that are stirring fear, uncertainty, and doubt. In our view, however, these signals could be harbingers of boom times ahead.
While many equity and fixed income investors have been puzzled by the flattening yield curve, especially in the face of stronger than expected economic activity, we have gained confidence that the five innovation platforms upon which ARK Invest focuses its research are gaining traction and wreaking havoc with traditional economic and financial metrics. The five innovation platforms are DNA sequencing, robotics, energy storage, artificial intelligence, and blockchain technology. Technologically enabled, each platform is characterized by declining cost curves, surges in productivity, and rapid real growth. Not since the late nineteenth century have multiple innovation platforms evolved at the same time.
Roughly 150 years ago, the three innovation platforms that changed the way the world worked were the internal combustion engine, telephone, and electricity. During the 50 years ended 1929, unit growth and productivity surprised on the high side of expectations as inflation surprised on the low side, creating a “deflationary boom” and an inverted yield curve. In fact, unlike the case in the last hundred years, positively sloped yield curves were rare and, in the absence of the Federal Reserve until 1913, the economy was much more susceptible to downturns than it is today.
Innovation platforms today are evolving at a rate faster than those in the late 1800’s. Perhaps contributing to some confusion in understanding their impact today, the government still reports statistics that evolved during the industrial age as gauges of economic momentum in the digital age. As a result, they probably are understating real growth and productivity, and overstating inflation. Combined with tax reform and deregulation in the US and China, the five platforms could unleash tsunamis of innovation that will change the way the world works, creating a deflationary boom rivaling that which led to the Roaring Twenties early in the twentieth century. In that environment, an inversion of the yield curve would be exceedingly good news for the equity markets.
Read the whole story at ARK Invest - Inverted Yield Curves