My friend and former colleague, David Rosenberg (Rosie, as he is affectionately known), wrote a great article on Wed Oct 26th in the Financial Post: business.financialpost.com/investing/investing-pro/david-rosenberg-all-signs-are-flashing-this-market-is-late-in-the-game.
I don't mean to steal from his article but I wanted to simply add a graph, although a difficult one to create, to help explain one theme he talks about - the yield curve flattening.
The yield curve is commonly referred to as the 30yr rate less the 2yr rate. If we line the "2's/30 curve" up with recessions over the last 40yrs, we can see that Rosie is correct - the yield curve flattened before each recession.
Here it is with the recessions in hand-drawn boxes (sorry, it was hard to create any other way):
Now this is based on quarterly data but if we looked a the yield curve on a daily basis, we would see it bottomed out for this move at 141bps in late Aug/16 where today it is at 176bps (long bonds have been monkey-hammered this month).
Also note that the yield curve was way flatter before each recession and, in all but the 2008 recession, it actually went inverted (red parts on the graph).
So I would argue and conclude the following:
(Note that this is just one of many US recession predictors)
As I stare at this chart of the yield curve and past US recessions, I now realize that this topic will be my first one as Rosie and I meet for an overdue drink catch-up next Wednesday. Not sure what his explanation will be but I bet he has one. Unfortunately for him, I get far more benefit from our conversations than he does. Maybe I should pay for the drinks...?