Posted on 12/10/2018 8:31:55 AM PST by SeekAndFind
What drove down US stocks this week? The answer may be the US bond market and what the shape of the yield curve is - or isn't - telling us about the state of the economy.
For most of 2018, the US yield curve has been flattening. This happens when the gap between short- and longer-dated yields narrows, historically a sign that economic growth may be slowing.
On Tuesday, a section of the curve briefly inverted, with the yield on the five-year US Treasury note falling slightly below that on the two-year note. That helped spark a 3.2% decline in the S&P 500.
The more closely watched gap between the 2- and 10-year notes was hovering at just 12 basis points, its narrowest gap since 2007. An inversion of that section of the curve, with 10-year yields falling below 2-year yields, has preceded every recession since the mid-1970s. So it's understandable why flattening yield curves cause investors to pay attention.
Current circumstances have only heightened investor concerns. The US is in one of its longest macroeconomic expansions in post-war history, and investors are growing increasingly wary that it may end soon. US growth has probably peaked this year and is expected to slow in 2019.
Meanwhile, increasing labor costs are pushing up inflation, triggering concerns that additional interest-rate hikes from the Federal Reserve could soon put an end to the current economic cycle.
Here's something to keep in mind, though. While the US has never had a recession that wasn't preceded by an inverted yield curve, not every curve inversion has been followed by a recession.
(Excerpt) Read more at seekingalpha.com ...
Buy low, sell high. The market got high, and people are selling.
They didn’t worry about a recession during Obama’s 8 years.
(which SHOULD be called “The Great Recession”)
I owned my own home in Seattle until 1997. I then rented and continued to rent until I left in 2011. The interesting thing is that we paid VERY low rent while people paid sky high mortgages as prices went up.
One of the homes we rented was just two blocks away from Paul Allen on Mercer Island. I nice tri-level on a beautiful lot (on what is called the “scar” because they bulldozed all the trees when it was built several decades ago). $1400 a month.
Eventually we paid $1650 for a five bedroom on a 1/4 acre professionally landscaped yard a few miles east of Renton in the highlands. The house was valued in Zillo for 330k when we first moved in and when we left that one in 2009 it had peaked at around $525k, but the collapse brought it down to less than $300k.
The price of that home is now $1.3 million.
We’re in another bubble and it’s going to hurt more than the last one.
Democrat control of the congress is the issue.
I got into more trouble from reading “Seeking Alpha” than at any other time. I advise against it.
I guess they could be right sometime.
I’m not sure that The Market is actually anything close to rational, but that and the Fed’s Interest Rate Hikes seems like as good a reason as any.
You don’t have to believe Seeking Alpha’s authors, but the inverted yield curve is REAL and needs to be watched closely.
If it persists, it has predicted every single recession in advance.
The Fed increasing the interest rates multiple times! Purposeful sabotage!
The Fed increasing the interest rates multiple times! Purposeful sabotage!
><
In time for the 2020 elections.
Agreed, and when Small Cap Growth leads the Market, that is also a warning sign.
So why is this big bleeping news when we had Porkulus and the Bernake Twist to Seniors got screwed and it made no sense to build a Bond Ladder as they sold Gov't debt with no yield and went long at something just north of 2% and screwed future generations up the ying-yang with putting all the debt long term for starters.
Someone brought this up around five years ago for Phoenix/Tucson. Maybe around three years after the 2008 bubble burst....some middle-folks were showing up and buying several houses at a time, which the local markets were still 40-to-50 percent below what the market of housing was in 2007. It didn’t make a lot of sense, but if you had cash in your hand and just wanted to wait this out....then maybe it made sense.
Well....these were Chinese parties, and they had cash which they didn’t want to bring back into China or admit that they had. In some ways, it was money laundering. No one said the number of houses in this gimmick but I got the impression that at least twenty houses a month were being structured like this and rented out later.
In the rural regions (like Mississippi or Arkansas)....I don’t think there is a bubble existing. But I’d agree...in San Francisco, Seattle, and various metropolitan locations....it’s probably true.
One of the best stories I ever heard was a co-worker who walked into the Orlando market in 1990, and bought a property on some canal area...3-car garage, big pool in the back, and the price was in the 180k range. When he left in 2003....adding a dock and a big upgraded patio area...it was almost 900k that they paid. But it dropped like a rock after 2008.
Wait until Maxie Pad Waters starts to run her mouth.
As soon as the Muller madness comes to an end, market will recover.
This curve is NOT inverted, and i wish the press and inexperienced analysts would stop feeding on a naive and crass oversimpification. The T bill rate relative to the long T bond is far from inverted. Forget about 2 or 3 vs 5, and focus on 1 vs 10 or 20. And not “yell fire” or sound alarms until Fed Funds come closer to that level
What we have now (or at least in the works) is a HUMPED yield curve, which is not unusual in late cycle markets. Any student of interest rates will confirm this. Its predictive value is far less ominous. If anything it tells us that a recession is possible in several years.
Humped yield curves have been “transitional” to inverted curves, so it’s not unrealistic to put out the yellow flags. But it’s equally important to remember what Lalso Beryini’s historical research clearly shows about the run-up in risk asset prices during this phase of a long cycle.
Institutional investors (e.g. pensions and insurance companies) will buy the 30 year bond to lock in duration if they smell a serious recession risk, so the 10 vs 30 T-bond segment will have far more predictive value if it inverts more than something like 25-35 bps.That will signal that the big money has moved to a Crisis Risk Offset strategy at which point I’d also head for the hills.
And for students of history, see Sidney Homer’s classic work on the History of Interest Rates. Treasury curves in the 1800s were flat, humped and backwardated during many business expansions. That was before the Federal Reserve, historians note, but the point is that a disinflationary world (technology disruption) with relatively low rates of wage inflation can have very different market signals than what we all learned the hard way by our experiences in 2H of the last century.
None of this makes yield curve analysis useless. Schumpeter’s work established the conceptual framework which stands to this day. But let’s use the tool correctly, folks.
Also this past sell off was triggered by program trading which was signaled by a preset factor of an inversion no matter how small. I think it was .2 % not quite sure. That triggers an auto sell of of industrial and financials and again triggering more automate mayhem.
Div and Cap gains to be reinvested at the end of the month.
Revisiting all on 1/1/19
It has also predicted a few that didn’t happen.
It will predict correctly eventually, there’s always a recession coming and that’s a good thing.
The alternative is a steady state economy, which is bad all the time.
As booms mature, there is more capital available but less good opportunities as they’ve all been exploited. So too much investment goes into things that aren’t so good, eventually causing a recession. The stock market does a similar dance.
Time To Worry About a Recession?
Of course. Trump has to beput down for good before the election.
What else would you use to try to curb inflation? Wage and prices controls?
The Fed increasing the interest rates multiple times! Purposeful sabotage!
><
In time for the 2020 elections.
....
Yes, and the billionaires want Clinton and can take temporary pain...this is on purpose and in time for Christmas...even the hedge fund managers are willing to tank a bit and their clients will blame Trump...
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