The lower Susquehanna river valley is making headlines this month, both good and not-so-good.
First the good: On March 12th, President Trump signed a law designating York and Lancaster counties as the newest national heritage area, named the Susquehanna National Heritage Area to be precise.
There are only fifty-five NHAs around the country and the new designation is expected to be a nice economic boon for the region. It means federal money and other resources to help promote the historical, cultural and recreational significance of the river.
The Susquehanna river is weird yet beautiful. It is rocky, non-navigable, a mile wide and shallow along much of the York/Lancaster corridor.
The Susquehanna is the second oldest river in the US and fourth oldest in the world. Before bridges, crossing the river was arduous, which actually helped to save the colonies from the British during the Revolutionary War. In 1777, the Continental Congress was forced to flee Philadelphia and wisely chose the frontier town of York(towne) as their temporary quarters because the Susquehanna was such a formidable safety barrier.
And don’t get me started on the critical role the lower Susquehanna River played in the Underground Railroad circuit. One of the most common slave escape routes included a river crossing from York to Lancaster. While highly risky, a successful crossing often meant freedom. Here’s hoping the new NHA designation will better tell this important history story.
So, the lower Susquehanna river valley’s hard-earned new heritage designation is a big deal and will encourage more people to visit – and spend money.
The second local news story this week marked the fortieth anniversary of the Three Mile Island partial nuclear accident. Early in the morning of March 28th, 1979, a partial reactor meltdown occurred at the TMI nuclear power plant near Harrisburg. TMI is considered a smaller nuclear plant, but it still forms a towering presence in the middle of the Susquehanna River, damn close to the York County shoreline.
A rather minor malfunction in the cooling system of one of TMI’s reactors turned into a full-blown crisis and international news story when faulty instrumentation and poor training allowed the reactor core to overheat and partially melt down. There was a small release of radiation associated with the core meltdown.
Many local farmers claimed the loss of livestock after the accident, but independent studies concluded there no pervasive radiation-related medical conditions for local residents. That, however, remains a contested topic around Harrisburg and northern York County still today.
Ironically, the TMI plant is now facing a different existential threat. Due to high production costs, the plant is no longer competitive in the electricity market. Without state subsidies, which may not be forthcoming, TMI’s owner is poised to shut down the plant for good, perhaps as early as this fall. If not, TMI may become a nuclear plant museum someday soon.
It was not as unnerving as the TMI alarm sirens decades ago, but an investment risk alarm did activate last week. The yield curve finally inverted – ugh. Technically that means the yield on the ten-year Treasury note fell below the yield on the three-month Treasury bill. In other words, an investor would earn more interest by investing in short-term US interest rates than in longer term Treasury debt, which rarely happens.
Or did it? Per the US Treasury website, the closely watched ten-year – two-year Treasury yield relationship has not yet inverted in March – but it’s razor close. No doubt, the US Treasury yield curve is now teetering on the cusp a full-on inversion and let’s proceed assuming a yield-curve inversion did happen this month.
So what? Well, I’ve been espousing the significance of the Treasury yield curve as a recession bellwether in our recent outlook blogs. In fact, in the past a yield curve inversion has been one of the best predictors of a recession.
An easy way to understand a yield curve shift is that when investors get nervous, they run to the safety of the 10-year Treasury bond, lowering yields. When the Fed gets nervous, they raise short-term rates to cool down the economy and tamp down inflation. Thus, an inverted yield curve serves as an omen that future economic conditions may worsen.
Once the Fed Reserve moved assertively to normalize short term interest rates in 2018, bond investors became worried it was moving them too high too fast and could push the US economy into recession. As a result, the ten-year Treasury yield has decreased materially over the past several months creating the current inversion anxiety.
Looking back to the 1960s, yield curve inversions have occurred nine times, only two did not precede a recession; that’s a good track record. The average time from inversion date to the start of the next recession ranged from eighteen-to-twenty-four months hence.
Note that, over the same time period, US stocks did not reach a market top for another twelve-months (on average) following the yield curve inversion. Before the great crash of 2008, for instance, the time span from inversion to stock market top was seventeen months.
I respect the predictive power of the inverted yield curve, but there’s been so much bizarre monetary policy since the last inversion that a crack may have formed in the yield curve’s crystal ball. A large amount of the trillions of printed money by the world’s central banks has worked its way into the US Treasury debt market, which may have created an unnatural lid on longer-term Treasury debt yields.
Furthermore, other current leading indicators are not signaling a recession, not even close.
Effective investing is not as simple as watching a single bond yield statistic and this is no time to go running out of the investment theatre yelling “fire”.
What to do next? Stay invested but on heightened alert for more signs of a change in direction of the US economy. My best guess is the next recession will arrive around the time of the next presidential election in late 2020 – what fun!
Until next time, be well….Tim