Capital flow and Inverted yield curve

Historically inversion in yield curve is a predictor of a recession and when somebody writes “This time it is different” I would normally not take that “different view” into account. Martin Armstrong looks at it from Capital flow point and after reading his blog I must admit that this time it might not be predicting a US recession but something else. He writes

Last week, the yield on the 10-year U.S. Treasury bill fell below that of the 3-month note for the first time since 2007. This is what everyone calls an Inverted Yield Curve, and is seen as an early indicator of a recession. In that regard, it is conforming to the Economic Confidence Model (ECM) which has been warning that this last leg should be a hard landing economically for most of the world. Nonetheless, while the yield curve has inverted, it has done so in a rather unusual manner. This is NOT suggesting a major recession in the United States. Instead, it is a reflection of global uncertainty outside the USA.

This Inverted Yield Curve is confirming that as the political chaos emerges around the world, the more foreign capital is parking in the dollar. With the May elections on the horizon in Europe, and the October elections in Canada, April elections in Israel … etc. etc., the capital flows are still pointing ever stronger into the dollar right now. The foreign capital has been buying the 10-year notes driving the spread lower. Just look at the daily chart of the Euro and you will see it has taken a nose-dive from the March 20th high.

My two cents

Looking at strictly from capital flow point of view…. Capital always flows from periphery (rest of the world) to its Core (US.. being a reserve currency)in times of trouble. Hence this inversion could simply be the global money hiding into US treasuries and it will also lead to stronger Dollar in coming years.