The Morning Jolt

Economy & Business

That Crazy Inverted Yield Curve

A trader on the floor of the New York Stock Exchange (NYSE) in New York City, July 31, 2019. (Brendan McDermid/Reuters)

Making the click-through worthwhile: the yield curve inverts amid drama on Wall Street; new developments in the Jeffrey Epstein saga; and, at long last, John Hickenlooper drops out of the Democratic primary.

Are We Heading Towards a Recession?

The yield curve inverted yesterday, with yields on two-year bonds rising above yields on ten-year bonds for the first time since 2005. The inversion of the yield curve has been among the most reliable postwar predictors of a recession, though some analysts are attributing yesterday’s events to a confluence of global and seasonal variables that don’t necessarily portend a domestic economic decline. Still, the Dow Jones Industrial Average dropped over 800 points yesterday, reflecting market anxiety about the inverted yield curve, the Trump administration’s trade dispute with the Chinese and the threat of retaliatory tariffs, as well as fluctuations in global and domestic interest rates. The ever-acerbic President Trump weighed in on Twitter:

If it would stimulate the economy—even if it wouldn’t, actually—I would buy a crazy inverted yield curve t-shirt. Buy American, and all that.

Fortune examines the anomalous nature of the inversion:

“Typically these inversions occur 12 to 18 months before a recession,” said Andrew Aran, a partner at Regency Wealth Management. But an inversion is just an indicator, as in recent times, only two-thirds of them have actually come before a recession.

But the inversion today is different from the past. “Every recession that we’ve had in the U.S. since World War II, with one exception of the Great Recession, was preceded by the Federal Reserve raising interest rates too far, too fast from much higher levels than the current levels,” said David Kass, clinical professor of finance at the University of Maryland. The Great Recession, which Kass called “one of a kind,” was the result of “an excessive amount of debt in the housing market and the collapse of the housing market and the economy.”

But the Fed just dropped the rate by 0.25% and investors expect as many as three more small cuts by the end of the year. As for debt, “I don’t see an excessive amount of debt in any sector,” Kass said…”Generally speaking…what is a little different is a broad flattening across the curve,” said Tim Alt, portfolio manager at Aviva Investors. People may not expect trouble in the long run but are nervous about medium-term prospects. “One way to interpret that is the market is pricing in lower odds that this is a mid-cycle slowdown and higher odds that it is going to end up in a recession,” he said. There is also worry that central banks may have run out of tricks to stimulate the economy. “The concern is that the market is moving toward believing that fiscal policy is the only thing to move the needle,” Alt said.

A recession or significant economic slowdown would make the president’s reelection much more tenuous.

Epstein’s Autopsy Reveals Injuries Consistent with Homicide

Jeffrey Epstein, the finance mogul accused of sex trafficking, died last Saturday in his Manhattan cell under curious circumstances. Officials had initially deemed it a suicide, but the story appeared unseemly and ad hoc from the outset—the prison camera broke, Epstein was removed from suicide watch, his cellmate was relocated, the guards inexplicably vacated the area, etc. New details from the medical examiner are adding further intrigue to a story that has, from the start, been subject to conjecture and conspiracy.

From the Washington Post:

An autopsy found that financier Jeffrey Epstein suffered multiple breaks in his neck bones, according to two people familiar with the findings, deepening the mystery about the circumstances around his death.

Among the bones broken in Epstein’s neck was the hyoid bone, which in men is near the Adam’s apple. Such breaks can occur in those who hang themselves, particularly if they are older, according to forensics experts and studies on the subject. But they are more common in victims of homicide by strangulation, the experts said.

The details are the first findings to emerge from the autopsy of Epstein, a convicted sex offender and multimillionaire in federal custody on charges of sex trafficking. He died early Saturday morning after guards found him hanging in his cell at the Metropolitan Correctional Center in Manhattan and he could not be revived.

Attorney General William P. Barr, whose department oversees the Bureau of Prisons facility where Epstein died, has described his death as an “apparent suicide.” Justice officials declined to comment on the new information from Epstein’s autopsy.

The office of New York City’s chief medical examiner, Barbara Sampson, completed an autopsy of Epstein’s body Sunday. But Sampson listed the cause of his death as pending…People familiar with the autopsy, who spoke on the condition of anonymity due to the sensitive stage of the investigation, said Sampson’s office is seeking additional information on Epstein’s condition in the hours before his death. That could include video evidence of the jail hallways, which may establish whether anyone entered Epstein’s cell during the night he died; results of a toxicology screening to determine if there was any unusual substance in his body; and interviews with guards and inmates who were near his cell.

CBS is reporting that “shouting and shrieking” were heard in Epstein’s cell the morning he died as corrections officials tried to revive him.

John Hickenlooper Drops Out

John Hickenlooper, one of the ostensible moderates in the 2020 Democratic primary field, is dropping out of the race. The long-time Colorado governor was polling well in his home state but was a non-entity otherwise; most national polls had him between 0-1%, per Axios. Hickenlooper was famously booed at the California Democratic Convention for asserting that “socialism is not the answer” for the Democratic party. They boo all the wrong things, don’t they?

From USA Today:

Hickenlooper was struggling to meet the donor and polling thresholds set by the Democratic National Committee to qualify for the September debate in Houston and was unlikely to make the stage.

One of the aides told USA TODAY that Hickenlooper is still weighing a Senate bid against Colorado Sen. Cory Gardner, among the most vulnerable Republicans up for re-election in the 2020 election cycle. The aide said Hickenlooper will not announce whether he’ll seek the party’s nomination to run against Gardner during Thursday’s announcement.

Hickenlooper has previously acknowledged that Democratic leadership would like him to run for the Senate, but pushed back against the notion that the party needs him with a large field of high-profile Colorado Democrats who have already announced their candidacy.

“There are several other top-flight candidates running for Senate in Colorado, I think any one of which could beat Cory Gardner,” Hickenlooper said during a campaign stop in Iowa last month. “I mean, he is amazingly vulnerable.”

Hickenlooper is presumably burning—draw whatever inference you like— to return to his home state to mull over his political future.

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