The 1619 Project and the Inverted Yield Curve. William Michael Cunningham, Creative Investment Research

An inverted yield curve reflects a situation in which interest rates on long term bonds are lower than those on short term bonds (bills). Supposedly, this is one of the surest signs that a recession is looming, since, normally, interest rates are higher on long term bonds than they are on short term bonds.

The standard explanation for the normal yield curve relies on something called "liquidity preference", which states that "an investor demands a higher interest rate or premium on securities with long-term maturities that carry greater risk because, all other factors being equal, investors prefer cash or other highly liquid holdings."

On Sunday, August 18th, the New York Times published the print edition of the 1619 Project. The Project documents the 400th anniversary of the arrival of the first forced labor brought from Africa to the then-Virginia colony. The paper notes that "in colonial times, when land was not worth much and banks didn’t exist, most lending was based on human property." Thomas Jefferson "mortgaged 150 of his" Black workers, who were being held without freedom of choice or action, to a Dutch firm to build Monticello. "In the early 1700s, (Black workers) were the dominant collateral in South Carolina," and, according to one historian, ‘‘the extension of mortgages to human property helped fuel the development of American (and global) capitalism.’’ Thus, the bond market in America started and grew with the "intentional exploitation of black people."

Wall Street itself was, literally, built by Black workers, again, held without freedom of choice or action. They "put in place much of the local infrastructure, including Broad Way and the Bowery roads, Governors Island, and the first municipal buildings and churches." On the investment side, "New Yorkers invested heavily in the growth of Southern plantations, catching the wave of the first cotton boom. Southern planters, who wanted to buy more land and Black people, borrowed funds from New York bankers and protected the value of bought (humans) with policies from New York insurance companies."

Much has been written recently concerning the inverted yield curve and the possibility of a recession: "The Federal Reserve Bank of Cleveland found that (an invested yield curve) has reliably predicted a recession would occur about a year out. The Fed only said there's around a 35% chance of a recession."

This is, of course, incorrect, coming as it does from the same people who missed the 2008 crisis: There is a 100% likelihood of a recession. How and when it will occur are the only questions.

Our Fully Adjusted Return Model points to social, ethical (as in the 1619 Report) and technological factors as the dominant recession risk indicators over this part of the economic cycle.