Over the past few days there’s been lots of chatter about the recent flattening of the yield curve. The rising of short term yields with the opposite move at the longer-end has caused the 2 and 5-year portion of the curve to invert. With any inversion, suddenly everyone is a bond trader and has an opinion about what it means for risk assets and the world in general. Of course, the MacroTourist is no exception, but before I throw my opinion into the sea of sound bites, let’s examine how we got here.
The macro has moved through a time of moderately rising inflationary concerns when economies were cycling up, many commodities were firm and risk was ‘on’. Contrary to the views of inflation-oriented gold bugs, that was not the time to buy gold stocks.
As I have belabored again and again, the right time is when the inflation view is on the outs, gold is rising vs. stock markets, the economy is in question, risks of a steepening yield curve take center stage (the flattening is so mature now that steepening will be a clear and present risk moving forward) and by extension of all of those conditions, confidence declines.
In short, the improving sector and macro fundamentals I’ve been writing about for a few months now continue to slam home as the cyclical world pivots counter-cyclical. And what do you know? Gold stocks are reacting as they should. Well, it’s about time, guys!
Housing sector stocks have been among the worst performers in 2018, and analysts are pointing to lots of different reasons including the newly imposed U.S. tariffs on Canadian softwood lumber. But an easier explanation arises when we look at interest rates.
Mortgage rates are not yet empirically “high”. I bought my first house with a 13% mortgage, so rates that start with the number 4 still seem pretty low, at least to me and my ge-ge-generation. The key insight contained in this week’s chart is that mortgage rates are high compared to 30-year T-Bond rates. Both rates have been rising in 2018, and the 30-year mortgage rate has been more than a full percentage point above the 30-year T-Bond yield for most of 2018.
The SPX could complete a “Death Cross” formation today or tomorrow, in which the 50-day moving average crosses below the 200-day moving average. In the past I have looked back to 1960 when examining Death Crosses. This time I decided to use Amibroker with my Norgate database, which goes back to 1928, and examine Death Crosses back as far as I can. This made for an interesting starting point, because the 1st instance, in 1929, came shortly after the 1929 market crash that was followed by the Great Depression. It was also followed by the most substantial decline – by far. Let’s first look at a list of all the Death Cross formations and how the SPX performed while they were in effect.
Here’s some of the standout economic and markets charts on my radar. I aim to pick a good mix of charts covering key global macro trends, and ones which highlight risks and opportunities across asset classes. Hope you enjoy!
1. Manufacturing PMI – China vs USA: T he November PMI data showed the US economy chugging along at a solid pace, and China’s economy continuing to lose momentum. Perhaps a salient chart given the weekend’s “news” of the trade war ceasefire (my take = constructive skepticism… i.e. we’ll see).
“The Harbinger of Doom”? Of course we (well, the media) are talking about the yield curve AKA Amigo #3 of our 3 happy-go-lucky riders of the macro. I have annoyed you repeatedly with this imagery in order to show that three important macro factors needed to finish riding before situation turns decidedly negative.
Amigo 1: SPX (or stocks in general)/Gold Ratio
Amigo 2: 30 Year Treasury Yield
Amigo 3: Yield Curve
In honor of Amigo 3’s arrival to prime time let’s have a good old fashioned Amigos update (going in reverse order) and see if we can annoy a few more people along the way. :-)
Clicking the headline yields a Bloomberg article all about various yield curves and all the doomed news you can use, including a hyperactive interview with an expert bringing us all up to speed on the situation.
…As Dow Crashes 550 Points And 10Y-2Y Slope Flattens To 10 BPS
It is markets like this that make me wish that I was sitting in the lounge at the Cap Ducal hotel in Valparaiso Chile staring off at the Pacific Ocean.
Except that my Spanish is so bad that a war would probably ensue.
Which is it? The fear that the Trump-Xie tariff truce is a big nothing burger? Or that NY Fed President came out after noon saying that inflation and jobs look good and isn’t worried that markets have dialed back ’19 hikes.
[biiwii comment: Tim posted this video @ Slope of Hope and I think it is fantastic, and so we post it here as well. A great and humble mind explains his successful strategies and challenges. The most interesting stuff to me are his views on the new academically run monetary regimes and Algos/machines, how they’ve distorted the market’s signals and how he’s trying to reconcile it all.]
Or better yet, subscribe to NFTRH Premium for an in-depth weekly market report, interim updates and NFTRH+ chart and trade ideas to get even more bang for your buck. You can also keep up to date with plenty of actionable public content at NFTRH.com by using the email form on the right sidebar. Or follow via Twitter @BiiwiiNFTRH, StockTwits or RSS. Also check out the quality market writers at Biiwii.com.