How long is long enough with a inverted yield curve signal

 

I have been disappointed by the inverted yield. I truly like the simplicity of yield curve inversion as a key recession indicator. It makes perfect sense that an inversion increases the cost of short-term money and is a good reflection of tight monetary policy. Given the lag of around, at most, nine months for a monetary shock to impact the real economy, we should have seen the slowdown anticipated, yet nothing points to a recession, and we are now beyond 400 days.

Do a throw-out this recession indicator? No. First, I must understand why it does not work. What am I missing? A good signal has a strong link between signal and market response. A highly variable response timing is an ineffective signal. Second, I must recalibrate thinking so this signal loses power for any allocation decision. Markets change. Signals fail. New work is necessary.