Personal Wealth Management / Expert Commentary
Fisher Investments Founder, Ken Fisher, Discusses The Yield Curve
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher shares his thoughts on yield curves (the difference between short- and long-term interest rates), which investors use as a rough proxy to assess financial credit conditions. According to Ken, the 10-year to 3-month US yield curve has historically been a reliable leading economic indicator. However, given today’s global banking system is more interconnected than ever, Ken suggests the global yield curve is a better indicator of broad economic conditions.
With the recent flattening of the US yield curve, many investors and pundits fear an inverted yield curve (when short-term rates exceed long-term rates) might signal impending economic recession. However, Ken believes today’s globalized banking system means one country’s yield curve only tells a small part of the economic story since money can be lent across the globe in near instant transactions. While the global yield curve has narrowed this year, it has remained positive—indicating an overall healthy lending environment, which is a driver of continued economic growth. The fear of a flatter US curve, therefore, may be misplaced.
Title screen appears, “Fisher Investments Founder, Ken Fisher, Discusses the Yield Curve.”
A man appears on the screen wearing a navy suit, sitting in an office with a thick forest behind him.
He begins to speak.
A banner identifies him as Ken Fisher, Executive Chairman and Co-Chief Investment Officer, Fisher Investments.
Ken Fisher doing hand gestures time to time explaining.
Ken Fisher: People have been habituated to thinking about the yield curve as a telling indicator.
And that's, like so many other things
that become ubiquitous in our financial culture, somewhat true and somewhat not.
And I want to talk on the somewhat true and also on the somewhat not, just to get you to see this in ways
that I think or more correct than they're commonly seen.
Ken Fisher: The traditional concept of the yield curve as it's played in history is that when it's gotten flat, that's a little scary.
And when it's gotten, quote, inverted, meaning that short
term interest rates become higher than long term interest rates, using the same apples to apples comparison of what the rates are about, then that actually has
been bearish leading to recession.
And there's no question that history
shows that to be true.
However, when I say there's no
question, there's a couple of questions.
Ken Fisher: One question is, what yoke are we talking about?
And the other question is does
it change at all over time?
So, on the first question, traditionally going back in time, this has been a very good leading indicator for the economy, for the United States of America and in lots of other countries.
And the indicator that's worked has been the three-month treasury bill versus the ten-year treasury note.
Both treasuries and showing
short term versus long term.
When short rates have gotten above long term,
that has been predictive in America fairly heavily going back a very long way into the 1920s and before of recession and then of course, the stock market precedes that.
The fact, however, is that in recent decades it's become less powerful when and only when, there's been
a divergence between it and the yield curve of other major countries on a GDP weighted basis.
Ken Fisher: As I've said in books of mine and written about other places, it has been true for a very long time now that the global yield curve is more important than the US yield curve singularly or any singular country, why?
Because in today's world the big global banks can all borrow in one country, lend in another country,
hedge the currencies and move the money faster than I can do one of these videos.
And the reality is that when the US yield curve gets to be problematic, but the non-isn't,
when I say non, I mean the overseas GDP weighted yield curve such that the global yield curve is not, then in fact, what you mostly get is shifts in currency that don't have that much
impact on the economy or capital markets.
Ken Fisher: The other point is that I believe fundamentally that the yield curve is less powerful today than it used to be a long time ago, at least from the time of my entry into the investment world 50 years ago.
Because, and simply because in those days it reflected a very important feature it no longer reflects.
Let me describe that.
Why does the yield curve matter? Why do short rates versus long rates matter at all?
And the answer is because the traditional business of banking has been to take in short term deposits,
using them as the basis for long term loans.
And the spread is reflective of future bank profitability as they take in those deposits at a cost and lend
them out at normally a higher interest rate for the long-term loans. When the yield curve flattens and then becomes inverted, their cost of borrowing has gone up relative to their revenue from lending and they become much less prone to lend.
And when lending gets hard to do for a borrower and when I say a borrower I'm not necessarily talking
about you corporations, businesses, but also consumers in aggregate then that tends to make the economy tougher.
It tends to cause recession.
It tends to cause what you think of as tight money.
It tends to cause businesses, for example that need to borrow to finance their inventory, to have to just pull back.
Ken Fisher: Now the reason it's different now than it used to be, which is just singularly important in the United States of America, is that when I'm young in the business, time deposits for those short-term interest rate equivalent, the cost that banks had for getting money to use as a base for making those longer term loans was almost all time deposits.
It was almost all things like savings accounts, certificates of deposit, they had to pay on them.
The banks paid you to put the money there. Nowadays and when I say that of the lend base that banks had in those days it was approximately in those days 70% of the lend base they had to pay for.
Today it's approximately 6% of the lend base that they have to pay for.
All the rest of what's deposited in their banks that they use as the basis for making loans they're not paying anything for, they're getting for free.
So, the yield curve is a little less
important today in America than it used to be because the spread is less important.
Their cost is close to zero now.
So, you need to make that adjustment.
Ken Fisher: When you think of the yield curve now compared to the yield curve of 20,40, 60 years ago.
But then it's also true when we think of right now, forgetting about America, the land of the free and the home of the brave, that the foreign yield curve still remains more than adequately steep.
There is a big spread between the US yield curve and the non-US yield curve.
And what does that translate into?
That translates into exactly what
I was referencing before.
In this instance, it could go the other way.
In a different instance where money gets borrowed overseas, lent into America because our central bank
has been raising our interest rates.
Ken Fisher: That pushes up the dollar which has been hugely strong this year against all major currencies and therefore doesn't change the lending capability nearly to the degree that traditional notions of 20, 40 and 60 years ago were for the US yield curve only.
And so, my urging for you is to
look at the spread between short and long rates in most major countries overseas.
Japan, China, the major European countries, Britain, Germany, France,
Italy, and compare those just simply, thinking about how big the economy is to ours, and you'll see that the fear that you see in the marketplace
today about the US yield curve being flat, which flat alone is not enough to do the terrible thing inverted traditionally was.
But that that fear is a misplaced fear, both because of the shift in how much banks get their lending from that which they have to pay
for versus not, they have to make that adjustment.
They're basically flush with reserves right now and they're getting that which they lend against for free.
And also, the global yield curve is what really matters and has for some decades now.
When the US yield curve varies from the global pay attention to the global, less so to the US.
Thank you very much for listening to me.
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A Series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.
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