Campbell Harvey, the Duke University professor who uncovered the inverted yield curve as a recession indicator, said in an interview with “The Compound” on Monday that investors should pay attention to the latest signal and prepare.
Harvey earlier told Bloomberg the yield curve was flashing a “code red” signal.
Given its long track record of predicting recessions, the indicator could serve as a heads-up that gives investors time to prepare for another downturn, Harvey said.
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Campbell Harvey, the Duke professor who uncovered the inverted yield curve as a recession signal, says investors should start preparing for a downturn.
“It’s way better to have a plan to go by than find yourself in a situation where the recession hits and you have to improvise,” Harvey said on Monday in an interview with Ritholtz Wealth Management CEO Josh Brown on “The Compound.”
The difference between 10-year and three-month Treasury yields has been below zero since May. This so-called yield-curve inversion is important because similar kinks have preceded all seven US recessions since 1950. Harvey first drew attention to the yield-curve signal in his 1986 dissertation at the University of Chicago Booth School of Business.
When Harvey published his dissertation, the inverted yield curve had preceded four recessions. It’s since gone on to indicate three more, including the financial crisis in 2008.
Now that the indicator is inverted again, he’s been cautioning investors and businesses about what it means and how to prepare.
In an earlier interview with Bloomberg, Harvey said that the indicator was flashing “code red” and that it was “really hard to ignore.”
Harvey also pointed out that the meaning of the indicator has shifted slightly since the 2008 financial crisis — and that actually could be a good thing. Now, he says, consumers, investors, and businesses that pay attention to the curve as a leading indicator (preceding a recession by six to 18 months) can slow down spending and prepare to make it through a downturn.
While spending less can lead to slower growth, it can also be seen as risk management, Harvey told Brown. He doesn’t think that this is a “self-fulfilling prophecy,” or that the indicator could cause a recession by damaging sentiment.
Because his model suggests slower growth — and is not the only indicator reflecting it — it has given an accurate signal even if the US does dodge a recession, he told Bloomberg. His hope is that because the indicator is getting more notice after the latest financial crisis, it might actually help the US steer clear of another one.
“If we go into recession next year, it’s not going to be a surprise” as it was with the global financial crisis, he told Bloomberg.
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