Are we going to fall into the trap of a self-fulfilling prophecy? Could investors trigger recession only because they are so worried about inversion of the yield curve? We invite you to read our today’s article about the yield curve and find out whether the popularity of the yield curve as an indicator of recession will bring on the recession that everyone is so afraid of.
In the last edition of the Market Overview, we have discussed whether gold investors should worry about the yield curve. Or should they keep their fingers crossed for its inversion? We concluded that not necessarily, as its predictive power has weakened and it doesn’t say anything about the timing of recession.
However, the yield curve theory of recession has become extremely popular. It’s so hot topic that even Congressmen have been asking the Fed Chair about it in recent times, in particular, Chairman Powell on July the 17th and the 18th. So the key question arises: if investors are so afraid of the inversion, is it possible that it will eventually cause recession? It might be an objectively wrong predictor, but if investors believe that it is the right indicator, will they not start selling assets, triggering correction, or even recession?
In other words: can we fall into the trap of a self-fulfilling prophecy? What is it? As American sociologist Robert K. Merton defined, it is initially “a false definition of the situation evoking a new behavior which makes the original false conception come true.” The key here is the observation that people’s actions are determined not only by the actual reality but also by its perceptions and expectations. For example, if people are convinced that the war is inevitable, they can start it, fulfilling the prophecy. Or if people expect inflation tomorrow, they can buy goods today, which boosts prices, creating an inflationary spiral. Or, if people are certain that the inversion of the yield curve will bring recession, they can stop investing in risky assets or even start selling them in anticipation of the crash. If investors do it en masse, they can bring on the recession they were so afraid of!
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