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A guaranteed recession

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By Michael O’Connor

The bond market has shot back into focus in recent weeks.

For the last 40 years, it has been home to one of the most impressive bull runs in history.

The disinflationary period from the early 1980s saw the structural decline of interest rates. Bizarrely, US Treasury Bonds were offering 16% a year back in 1980, a far cry from the pennies on offer today.

Over the intervening years, continuous interest rate cuts were needed to facilitate GDP growth, but as rates approached zero, the central banks' weapon of choice ran out of ammo. Interest rates are now rising again as inflation persists.

The 10-year treasury has gone from a low of 0.5% in the summer of 2020 to 2.4% as of the end of March.

As the four-decade bull run comes to an end, what's next?

Is the negative correlation between equities and bonds, the cornerstone of a diversified portfolio, now officially dead?

Is a recession imminent?

Recession Rumours

If historical indicators are to be believed, then a recession is on the horizon. At the end of Q1, we saw multiple yield curve inversion, reigniting debates about an imminent recession.

Yield curve inversions between 2- and 10-year bonds have long been regarded as a solid indicator of a recession in the next 12 to 24 months.

In simple terms, a yield curve inversion occurs when the interest rate paid on short-term debt is higher than the interest rate paid on long-term debt of the same quality.

In a healthy economy, the yield curve should be upward sloping (longer-term rates higher than short-term rates). Logically this makes sense as investors seek higher returns as a reward for the greater uncertainty that comes with investing over longer periods.

When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor, and the yields offered by long-term fixed income will continue to fall.

But like everything, it's not quite that simple.

Since 1978 there have been six inversions of the yield curve.

While the above data shows yield curve inversions have accurately predicted recessions in the past, not all instances of yield curve inversions have resulted in recessions.

The 2- and 10-year yield curve has inverted 28 times since 1900, and in 22 of those instances, a recession has followed.

While an indicator that accurately predicts a recession over 75% of the time shouldn't be ignored, some material changes in recent years need to be considered.

Firstly, the Fed's manipulation of the yield curve has been well documented. I will stop short of saying this time is different, but the Feds intervention in the bond market over the prior decade suggests that a yield curve inversion may not be as valuable an indicator as it once was.

For example, we saw a yield curve inversion in August 2019, yet US stocks are up almost 70% since then. A switch to cash over this period would have meant missing out on the fastest bull run in history.

Another issue with inferring asset allocation decisions following a yield curve inversion is, even with this predictive information to hand, the alternative investment options are not as obvious as you might think. At least not across traditional asset classes.

While US stock returns for the one-year period following a yield curve inversion are lower (4.7% vs. 9.0% during all other one-year periods), the data also suggests that US Treasury Bonds will underperform US stocks over this period.

A paper from Eugene Fama and Kenneth French concluded:

"We find no evidence that inverted yield curves predict stocks will underperform Treasury bills for forecast periods of one, two, three and five years"

So, while recent data may suggest that equity markets will experience slowing growth, switching to bonds or cash is not the answer.

Stay the course.

"Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves" - Peter Lynch.

To learn how to protect your portfolio in a recession, go to theislandinvestor.com.

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Marie Meets: Marie Murphy

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Pedalling kindness and serving smiles

For more than twenty-two years, Marie has been the warm heart of the canteen at Killarney Community College. Every weekday from 9am until 2pm she prepared fresh food from scratch, served generations of students and staff and somehow managed to nourish far more than empty bellies.

“There was never a day that I hated getting up out of bed to go to school,” Marie told me.

Now there’s a sentence you don’t hear every day. I couldn’t help thinking there were probably quite a few students over the years who might not have shared that same enthusiasm for early mornings.

When the school’s Breakfast Club became part of her day, it meant an earlier start, but she never saw it as another job to do. She saw it as another opportunity to be there for the young people walking through the school gates.

Schools are remarkable places because every child arrives carrying a story that nobody else can see. Some bounce through the gates full of excitement while others quietly carry worries far bigger than their school bags. You never truly know what kind of morning a child has had before they arrive. Sometimes all it takes is one familiar smile, one cheerful greeting or one person noticing they’re a little quieter than usual to make the day feel just that little bit lighter.

Marie was that person.

She had an ear to the ground without ever making a fuss about it. She knew when to chat, when to encourage and, just as importantly, when to quietly step back.

By lunchtime, however, there was no mistaking who was in charge.

“I’m sure you could hear me over in the Sem telling the children I’d close the canteen if I didn’t see two clear lines,” she laughed.

Among the many treasured retirement cards she received were messages that read, “Marie, you never did close the canteen,” and another that admitted, “Marie, I think I owe you about €30.”

“There was no backchat from the students,” she said. “I find a ‘Hello, how are you?’ costs a person nothing.”

As a testament to just how much Marie meant to school life, a group of students approached members of the teaching staff looking for photographs of her. They carefully put together a scrapbook filled with memories and presented it to her before she left. It was a gift made not because they had to, but because they wanted to.

Outside school, Marie is almost as well known around Killarney for her bicycle as she is for her sandwiches. She has never driven and happily pedals her way around town in every season. Her trusty basket even sports a homemade rain cover fashioned from a plastic tablecloth because, as any seasoned cyclist knows, you have to be prepared for every forecast.

When she is not cycling, she is creating.

Crochet, knitting, sewing, cooking, Marie simply cannot sit still.

“I always need a project,” she smiled.

During the years she worked evening classes in the school canteen, she longed to join the sewing class herself but could never leave the canteen unattended. Instead, she listened while she worked, picked up what she could, bought herself a sewing machine in Lidl and went home and made herself a skirt. That one skirt was only the beginning.

Family, of course, will now take centre stage.

Marie and her husband Donie have three children, Colm, Alan and Aoife, along with five adored grandchildren. Little Gracie is just six weeks old, while Theo, Noah, Ori and Ailbhe ensure there is never a shortage of fun.

This August promises to be one big family celebration. Aoife will be home from the United States with her family, Alan will travel from Alicante, where he teaches, to celebrate his fortieth birthday, and Colm and his family will make the journey from Cork. Add in Donie’s seventieth birthday and there will be plenty to celebrate.

“We’ll do something small as a family,” Marie smiled, “but I’d love us all to go away together for a night or two.”

Marie may have parked her apron, but don’t expect her to put the brakes on.

Deirdre, one of her colleagues, smiled as she remembered that Marie’s favourite word was “Nowso.”

Karen said the echo of Marie’s infectious laugh will be missed throughout the school.

Marie Keane wished her “a retirement as wonderful as you are.”

Friend and colleague Brian O’Reilly perhaps summed it up best when he said, “Retirement is not the end of the road for Marie. It’s the beginning of a new adventure.”

Retirement may mean the end of Marie’s daily cycle to Killarney Community College, but the kindness she quietly pedalled into the lives of generations of young people over the past twenty two years will continue long after the school bell rings. Every morning she offered far more than breakfast. She offered familiarity, encouragement and the reassuring feeling that someone had noticed them. In a busy school, and in an even busier world, that is a gift beyond measure.

Knowing Marie, retirement won’t slow her down. There will be sewing projects to finish, grandchildren to spoil, bicycles to pedal and plenty of new adventures to enjoy. The bicycle will still be rolling through the streets of Killarney. It will just have a little more time to enjoy the journey.

Photo & Story by Marie Carroll O’Sullivan

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West End House presents ‘By the Bog of Cats’

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The West End House School of Arts will present an upcoming adaptation of Marina Carr’s acclaimed play, By the Bog of Cats, later this month.


The production is directed by Charlie Hughes and will run on July 29 and July 30 at the Great Southern Hotel.

Set in the landscape of the rural Irish bogs, Carr’s play follows the story of Hester Swane, a woman with a deep connection to her land.

Tormented by the memory of her mother who abandoned her, Hester faces further betrayal by the father of her child, leading her on a path of vengeance as her history is revealed.


Tickets for the performances are priced at €20. Bookings can be made online via Eventbrite or by calling 087 13 77 196.

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