Michael Bradburn December 07, 2018

A Leading Indicator of a Looming Recession


The yield curve is now at its flattest post-recession level. The Fed has reduced expectations for more rate hikes at the behest of the White House. Yield curve inversion historically is an indicator that a recession is eminent. This happenstance typically signals that Fed is stopping, slowing or reversing course in anticipation of an economic slowdown. Should you worry?

We're Not Negative Yet

It's important to recognize that the yield curve has only flattened. Not inverted yet. Inversion is the nexus where long rates fall below short-term ones.

Research on the yield curve as a recession predictor looks at the difference between 3-month and 10-year rates. The point of using short-term rates in the comparison is important to note.

Currently the difference between 2 and 10-year interest rates is only at 10bps. Calculated a different way, there is only a 50bps difference between 3-month and 10-year rates. If very short rates rise or the 10-year yield falls, the landscape could look much different in a big hurry.

The Yield Curve Is a Leading Indicator

The yield curve indicator is early. In many cases, early can mean the same thing as wrong. Saying that recessions will occur in the future is academic. Recessions are an unavoidable fact. As with all things, the uncertainty of the timing and the optics of a recession are largely unknown and only visible after the fact.

Historically, the yield curve indicator has taken two to three years to materialize. The signal is valid in predicting recessions and perhaps the data indicates a recession in 2020 - 2021.

Recessions come in different flavors too. We all remember 2008 which is about as bad as they come but in all likelihood, the next one will not be as pronounced.

Investing is fluid, emotional and dynamic. People learn. Sometimes, the wrong things. Investor's confirmation bias from former experiences often lead them to make emotionally charged decisions that are not necessarily in their best interests. Investing to win is not the same as investing not to lose. This is all to say that so much attention on a single predictor of projected economic peril may be a misnomer as peoples' behaviors change.

So, what to make of all of this? If you dig deep, you come up with the same answer that I did. I don't know!

People and markets constantly struggle with uncertainty. The fear of the dark. No visibility into the future and the myriad potential outcomes and endless "what if's."

Senior Life Settlement Alternative Asset Class

Senior Life Settlements can remove much of the uncertainty of outcomes. As an investor, what you are purchasing is the spread between the cost basis of a life insurance policy and its face amount. The yield is know in advance. What is not known is the timing.

But how is timing any more clear than investing in anything else? Of course, low yielding bank CD's and other structured products have stated maturity dates but there is a hefty premium paid for that certainty. Low ROI. Senior Life Settlements create a scenario where time is equally weighted with other investment options but the outcome is known in advance. On a risk-adjusted basis, Senior Life Settlements have historically achieved attractive returns relative to other fixed-income investments and the life insurance industry has a flawless track record of solvency to pay death claims.

As an alternative asset class, Senior Life Settlements perform like no other market traded instrument. A life insurance contract is monetized by only one single trigger. The mortality of the insured. Most all other volatility catalysts become irrelevant. Since the conversation centers around rates and the Fed's indicated direction is to halt the tightening process, yielding investments are going to remain suppressed. Senior Life Settlements can be the answer to security and attractive returns without the downside capture risk.

One can insure against portfolio losses over time as Senior Life Settlements boast absolute return characteristics. Senior Life Settlements can be a critical element in one's asset allocation to insure capital formation while enjoying the security of knowing your principal is not at risk.

While the White House and the Fed battle through their respective credibility gaps and the markets gyrate in wide swings, having a portion of your portfolio anchored in an alternative asset class that only moves in one direction is certainty in an unbearably uncertain world.

Interested in learning more about Senior Life Settlements? Let's talk. Click below to ask further questions or to schedule an introductory call: