Why the Yield Curve Changes Direction Ahead of a Recession

By Steve Saville

Conventional wisdom is that an inversion of the yield curve (short-term interest rates moving above long-term interest rates) signals that a recession is coming, but this is only true to the extent that a recession is always coming. A reversal in the yield curve from flattening to steepening is a far more useful signal.

What a yield curve inversion actually means is that the interest-rate situation has become extreme, but there is no telling how extreme it will become before the eventual breaking point is reached. Furthermore, although there was a yield-curve inversion prior to at least the past seven US recessions, Japan’s most recent recessions were not preceded by inverted yield curves and there is no guarantee that short-term interest rates will rise by enough relative to long-term interest rates to cause the yield curve to become inverted prior to the next US recession. In fact, a good argument can be made that due to the extraordinary monetary policy of the past several years the start of the next US recession will NOT be preceded by a yield curve inversion.

Previous US yield curve inversions have happened up to 18 months prior to the start of a recession, and as mentioned above it’s possible that there will be no yield curve inversion before the next recession. Therefore, we wouldn’t want to be depending on a yield curve inversion for a timely warning about the next recession or financial crisis. However, the yield curve can provide us with a much better, albeit still imperfect, recession/crisis warning in the form of a confirmed trend reversal from flattening to steepening. This was discussed in numerous TSI commentaries over the years and was also covered in a blog post last December.

Continue reading Why the Yield Curve Changes Direction Ahead of a Recession

The Great Fallacy

By Doug Noland

Credit Bubble Bulletin

A big week in the world of monetary management: The Federal Reserve raised rates 25 bps, the ECB announced plans to wind down its historic QE program, and the Bank of Japan clung to its “powerful monetary easing” inflationist scheme. A tense People’s Bank of China left rate policy unchanged, too weary to follow the Fed’s path.

The renminbi declined a notable 0.5% versus the dollar this week. More dramatic, the euro was hammered 1.9% on Draghi’s game plan. Also on Thursday’s dollar strength – and even more dramatic – the Argentine peso sank another 6.2% (down 34% y-t-d). The session saw the Brazilian real drop 2.2%, the Hungarian forint 2.6%, the Czech koruna 2.2%, the Polish zloty 2.0%, the Bulgarian lev 1.9%, the Romanian leu 1.9% and the Turkish lira 1.7%.

The FOMC, raising rates and adjusting “dot plots” higher, was viewed more on the hawkish side. The ECB, while announcing plans to conclude asset purchases by the end of the year, was compelled to add dovish guidance on rate policy (“…expects the key ECB interest rate to remain at present levels at least through the summer of 2019…”). Blindsided, the market dumped the euro. The Fed and ECB now operate on disparate playbooks, each focused on respective domestic issues. Anyone these days focused on faltering emerging market Bubbles, global contagion and the rising risk of market illiquidity?

Continue reading The Great Fallacy

Treasury 10Y-2Y Slope Flattens To 35.5 BPS…

By Anthony B. Sanders

…Eurodollar 3M Futures Spread Falls To Lowest Level Since 2000 (Europe’s Troubles In One Chart)

The US Treasury 10Y-2Y slope keeps falling … as The Fed keeps raising their target rate. It has flattened to 35.5 basis points.


Meanwhile, the 3 month Eurodollar spread to  the lowest level since 2000.

Continue reading Treasury 10Y-2Y Slope Flattens To 35.5 BPS…

Trump Approves Tariffs On $50 Billion In Chinese Goods, Escalating Trade War

By Heisenberg

Here we go.

On Wednesday afternoon, as the dollar was surging on the back of a hawkish hike from the Fed, WSJ reported that Donald Trump would in all likelihood make good on his threat to go ahead with tariffs on billions in Chinese goods, with an announcement likely coming on Friday.

That decision (were it to pan out) would confirm reports from a couple of weeks ago when Trump, seemingly swayed by the isolationist/protectionist contingent’s rebuke of a trade truce struck by Steve Mnuchin during a meeting with Chinese Vice Premier Liu He, reversed course on an implicit agreement to hold off on further escalations.

WSJ’s post helped catalyze a reversal in the greenback, which renewed its ascent on Thursday following the dovish spin Draghi put on an otherwise hawkish ECB decision.


Fast forward to Thursday afternoon and these headlines hit:

Continue reading Trump Approves Tariffs On $50 Billion In Chinese Goods, Escalating Trade War

The Nasty Bite of FANG

By Tim Knight

Another day, another NASDAQ lifetime high. And what’s the driver? It used to be QE, but the central banks around the world have already turned off that spigot. The explanation is easier had by one acronym: FANG. Let’s take a look at the four components:

First there is Facebook, which got smacked down hard by the whole privacy scandal earlier this year, but now it just pennies away from its own lifetime high (or double top, depending on which way the wind blows).

Amazon has become almost a joke in how it lines Bezos’ pockets with another $100 million per day. AMZN makes lifetime highs every single day with two notable exceptions: Saturday and Sunday. The P/E is about 216 right now.

Continue reading The Nasty Bite of FANG

Are You Investing or Merely Speculating?

By Charlie Bilello

“Whether you’re excited or nervous when your favorite asset falls in price marks whether you’re investing or merely speculating.” – Naval Ravikant

Are you investing or merely speculating?

Naval Ravikant had an interesting take on this most important of questions (see above quote). The deciding factor: whether you’re “excited” or “nervous” to see your asset going down in price.

Why in the world would anyone be excited to see something they own moving lower?

Because it is giving them the opportunity to reinvest interest/dividends and add new capital at discounted prices. If you have a long enough time horizon and a diversified portfolio, buying at lower prices will increase your long-term returns. Which is why a stock market crash is the best thing that could happen to young investors.

How do you know if your time horizon is “long enough”? Examine the odds…

Holding stocks for a day or a week is not much better than a coin flip. In that time frame, you don’t have the luxury of waiting for stocks to come back and any decline should make you nervous. In contrast, holding stocks for 20-30 years has never yielded a negative return, even for investors who bought at the peak in 1929 and held throughout the Great Depression. If that is your time frame you want stocks to go on sale – the earlier, the better.

Data Source for all Charts herein: Bloomberg, YCharts.

Continue reading Are You Investing or Merely Speculating?

A Down Fed Day After SPX Closed At A 10-Day High

By Rob Hanna

Reaction to the Fed ended up being negative on Wednesday. The study below is an old one I had not examined in a few years. It looked at other times SPX closed down on a Fed after closing at a 10-day high the day before.


This is a setup that has changed over the years. Prior to 2009, this setup often saw the market move higher the next day. But the recent tendency has been decidedly downward. Below is a look at the profit curve.


With a low sample size, and this only being a recent tendency, I do not consider it a strong edge. But this may be something traders want to consider, especially if the tendency persists over the next several instances.

A large number of more substantial edges related to Fed Day activity can be found in the Quantifiable Edges Guide to Fed Days, which is available now if you make any size donation to the Multiple Sclerosis Society. More details on that promotion are available here.

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ECB Announces September Taper, Will End QE In December…

By Heisenberg

…Rates To Remain On Hold Until Summer 2019

And for this week’s second headline event, here comes Draghi.

On Sunday, we brought you “Rome May Be Burning, But Draghi Is No Longer Your Fireman: What To Expect From The ECB“, which, as the title suggests, was a post about what to expect from the ECB (no false advertising here).

To be clear, they need to start taking big steps down the road to normalization. They’ve tapered, but the balance sheet is still growing and they’re still mired in NIRP.

Importantly, the eurozone economy looks like it’s starting to rollover or, if that’s too dour for you, Q1 at least marked a notable deceleration in growth which raises the specter of “quantitative failure“, a worry that topped the list when BofAML asked € IG credit investors what they are most concerned about in April:


As a reminder, if they run up against a downturn without having sufficiently rebuilt their ammo, well then they’re going to be in a real bind. Recall this assessment from BNP:

Continue reading ECB Announces September Taper, Will End QE In December…

Uncertainty, Or You Had One Job To Do (And It Wasn’t Dots)

By Jeffrey Snider

As anticipated, the FOMC voted on both proposals in front of it. There should only be the one, but even routine monetary policy no longer is. Alan Greenspan’s Fed charged ahead with seventeen consecutive moves (the last few completed under Ben Bernanke) with little discussion about uncertainty in the economy (though there was, conundrums and all) let alone in the very place the central bank is supposed to operate with impunity.

The result of today’s action is the first of what is almost certainly going to be asymmetry moving forward. Dating back all the way to December 2008 when policymakers mercifully scrapped the singular federal funds target, the FOMC object had been to maintain a 25bps band or corridor in which they would accept actual trading. As of now, that band has been reduced to 20bps; RRP was increased +25bps; IOER only +20bps.

It immediately brings to mind not just IOER’s failure, as noted before, but also the ECB’s. The European central bank had tried narrowing its corridor starting in May 2013, though with everything reversed. It is a topic that deserves greater devotion at a future date (was it Bernanke’s uttering the word “taper” that ignited the big storm that spring and summer or was it the ECB’s narrowed corridor announced the same day?), so for now I’ll just summarize their experience as the same as it was for the Fed in 2007 forward – losing control.

Continue reading Uncertainty, Or You Had One Job To Do (And It Wasn’t Dots)

Ivanka And Jared Made $82 Million Last Year, Just Like All Public Servants Do

By Stephen Robinson

When Ivanka Trump and her first husband Jared Kushner agreed to work for her father’s already pretty damn corrupt administration, concerns were raised about potential conflicts of interest.

Ivanka allayed those concerns with some pleasant-sounding gibberish. Ivanka and Jared agreed to not accept a salary as senior advisers to the president, because that was totally the only way they could materially profit from this arrangement.
Continue reading Ivanka And Jared Made $82 Million Last Year, Just Like All Public Servants Do

Why You Should Brace Yourself for Big Financial Changes

By Elliott Wave International

Extrapolating current trends into the future leave many people unprepared for major societal shifts

The one thing you can count on in financial markets, and society at large, is change.

I was reminded of this when I read this May 18 New York Times’ headline and subheadline:

The Last Days of Time Inc.

… how the pre-eminent media organization of the 20th century ended up on the scrap heap.

Time Inc. has been purchased by the Meredith Corporation, which plans to spin off Time magazine, Sports Illustrated, Fortune and Money. All four magazines have suffered from declining ad revenue and declining circulation. There are other details, but the bottom line is that an established media empire, which had a long history of reporting on change, has now been swept up by change.

A generation ago, many observers would not have imagined that a company as iconic as Time Inc. would find itself “on the scrap heap.”

But linear trend extrapolation has always had its pitfalls, and on changes that have been on a much bigger scale than one media company, which brings to mind what the 2017 book, The Socionomic Theory of Finance, said:

(1) It is 1975. Project the future of China.

(2) It is 1963. Project the cost of medical care in the U.S.

(3) It is 100 A.D. Project the future of Roman civilization.

In 1975, the Communist party was entrenched in China. … Would anyone have imagined that China’s economic production, in just over a single generation, would rival that of the United States?

In 1963, medical care was cheap and accessible. … Would anyone have guessed that [today] pills would sell for $2, $20, $200 and even $1,000 apiece?

Continue reading Why You Should Brace Yourself for Big Financial Changes