Ladies and gentlemen, the weekend! In this space each week, Greg and I share some of our favorite articles, notes, and graphics from the past week along with our commentary. Please feel free to provide feedback and forward along to others if you enjoy. We appreciate you taking the time to read. 

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Using Yield Curves to Predict Recessions

“The Treasury yield curve is widely used as a first approximation of estimating recession risk. This is usually limited to one or two sets of maturities. Does this simple model find traction if we expand the analytics across the full sweep of the yield curve? The short answer, yes…

As a rough rule of thumb, we can say that when the number of inversions rises above the 50% mark (more than half of curves inverted), that’s a strong signal that a recession is near. On that basis, the current data (through July 19) indicates that recession risk has increased sharply but has yet to cross above the 50% mark. In other words, there’s still room for debate about the near-term path for the economy, although the outlook is becoming increasingly precarious.”

The yield on a 2-year Treasury note is 0.19% higher than the yield on a 10-year Treasury note. Weird, wild stuff. That inversion is not a good indicator, but the original research of the yield curve as a leading economic indicator was done on the 3-month vs. the 10-year. Those Treasury maturities still have a positive spread, but could very well invert after the Fed’s decision next week.

James has an interesting take on using the whole curve as a recessionary risk model, rather than arbitrarily picking two maturities. The resulting takeaway is that while recession risk is elevated, we’re not at a tipping point, yet.

When the Fed-Sponsored Market Beatings Will End

“At the central bank’s June policy meeting, Fed Chair Jerome Powell all but confirmed that the bank is hoping for a bear market, saying, ‘Over the course of this year, financial markets have responded and have generally shown that they understand the path we're laying out.’

So we have financial markets being held hostage by the Fed until it sees 'clear and convincing' evidence inflation is cooling.

Until we get that evidence, the central bank does not want to see things like falling interest rates and higher stock prices. They would reflect easing financial conditions, which would stimulate demand in the economy, which in turn could keep inflation high.

And now, we await that signal that the Fed will ease up.”

This article hit the nail on the head when it comes to the current market environment. Capital markets want confirmation of inflation data rolling over and the Fed easing off the gas before we have a sustained rally. However, the stock market will respond before the economy and likely before an official Fed policy shift announcement.

The Cost of Kids

“Brace yourselves: The cost of raising a child to the age of 17 is more than $230,000, according to a report by the U.S. Department of Agriculture (that’s excluding college expenses!). Adjusted for inflation, that’s probably around $270,000 today. A cool quarter of a million dollars or so to make a loud, drooling, pooping machine become a taller, more functional loud, drooling, pooping machine…

Behavioral researchers from Cambridge University say that kids start learning about money as young as age three, and most of their attitudes and feelings about money are formed by age seven. Meanwhile, a Journal of Economic Psychology paper suggests that parents’ financial behaviors and attitudes towards money, from talking to kids about money to showing delayed gratification, influence their children’s financial behavior all the way into adulthood.

This is a testament to the importance of teaching children about money, whether it is through an allowance, setting up a lemonade stand or involving them in financial decisions. The cumulative effect is why money should never be a taboo household topic.”

I can’t necessarily say that I enjoyed this article personally as a father of four. It’s a sprawling cost-benefit analysis of having children in the U.S. today. Some of the data confirms why the birth rate in the U.S. has dropped from 3.65 in 1960 to 1.66 in 2021 (unsustainable for maintaining/growing the population going forward). 

What’s the expected payback of home improvement projects if you sell your home? Housing research firm Zonda lists the average cost and expected amount recouped for 22 popular remodeling projects. Based on their recent estimates, none are expected to net add value. 

Here is the link to the report if you’re interested in regional and local estimates as well.

Thanks for reading. Have a great weekend!