Yale University senior fellow Stephen Roach is taking the bond market's recession warning very seriously.
Roach, one of Wall Street's leading authorities on Asia, believes the 10-year Treasury yield breaking below the 2-year Treasury rate is a major sign that the U.S.-China trade war is damaging global growth and confidence as other geopolitical risks grow.
"I'm very worried about the global outlook — especially the intersection between the trade war and the problems in Hong Kong and the weakness in the European economy," the former Morgan Stanley Asia chairman told CNBC's "Trading Nation" on Wednesday, the Dow's worst day of 2019.
The index dropped 800 points, and leaving it 7% off its all-time high. Roach suggests the market reaction wasn't overdone.
"We have the worst of all possible worlds: a policy structure in the U.S. that is lacking in any semblance of confidence and a global economy that is teetering on the brink," said Roach.
He sees a real risk of a contagion that will strike the U.S. economy.
"The U.S. is never an oasis in a weak global economy," he said. "With the budget deficits now exploding, our trade problems are going to go from bad to worse. And, the Trump administration does not appear to understand this at all."
On Wednesday afternoon, President Donald Trump addressed the yield curve inversion and trade issues on Twitter. He contends it's not the trade war exacerbating global troubles — it's the Federal Reserve.
Trump tweet 1: We are winning, big time, against China. Companies & jobs are fleeing. Prices to us have not gone up, and in some cases, have come down. China is not our problem, though Hong Kong is not helping. Our problem is with the Fed. Raised too much & too fast. Now too slow to cut....
Trump tweet 2: ..Spread is way too much as other countries say THANK YOU to clueless Jay Powell and the Federal Reserve. Germany, and many others, are playing the game! CRAZY INVERTED YIELD CURVE! We should easily be reaping big Rewards & Gains, but the Fed is holding us back. We will Win!
At this stage of the cycle, Roach believes the issues are too big for the Federal Reserve to fix.
"A lot of pressures are being put on the Fed, and the Fed can't do it all," Roach said.