Yesterday, or probably Monday, I'm not much into days anymore; the Petri Dish of Hate, Sounds Right Economics and Outright Baloney that is Fin Twit erupted in all manner of hyperventilating as the 3 year Treasury yield wimped over the 5 year.
In the words of Obi Won, These are not the inversions you are looking for. There is little if any history to back up recession with the inversion of the belly. What these kinked structures do mean is the Treasury Dept. should issue more Cincos....rapido.
Yield curve inversions that show a strong track record of 6 -9 month lead time of slow downs are linked to the Funding Rate and most importantly - The calibration of Monetary Policy to the Neutral Rate at the time of inversion. As we have shown on multiple occasions, and will again here (for your dining and dancing pleasure) the present calibration of policy is slightly tilted toward accommodation. That is, If the market could set the funding rate, where would it be? And our answer is about 2.87% . Thus, the Fed, in my opinion, remains - BY INTENTION - trailing the concept of neutral as opposed to tightening into and through the rate. (next year -maybe, maybe not - kinda like MBS murder culpability !)
Always remember - a CB can be "too tight" at 1.5% (Are you listening Ben?) and/or "too loose" at 4% (Greenie? Can you here me?) With Year End coming and 41s passing, perhaps the meme machine that market analysis has devolved into can grow a little grey matter and show somw character.
Yesterday solidified my view from our last post - Turn My Life Down - that it is well past time to change the channel on The Trump Show. This post returns my musings with Hooper to its prior form and the topic of rates.
In the past few weeks, the nerd squad previously known as "Fed Watchers" has dumbed down monetary policy discussions to the grilling techniques of a publicity seeking bench player and kow -towing Hannity-esque spin.
Here, and in a smattering of reality based market forums (i.e. NOT Futures Now), the concept of the L.R. Neutral Rate in the 4 to 5% was soundly rebuked. We not only made a historical but also a mathematical case that the LRNR was closer to 2% with the possibility of rising marginally if certain fiscal policies were thrown in as variables.
As this projection has steadily morphed into reality, the stability (zee stabeelity for our EU readers) and consolidation in capital markets has twisted tighter and tighter in over-hyped ranginess but actual somnambulant drift. The FOMC has, correctly in our view, slowly nudged the FF rate to just under our forecasted neutral rate (where policy is neither accommodative or stringent) of 2.10%. The current effective rate is 1.91 and the Fed has elected to fine tune in by 5bps the 1.95 IOER.
This, and the intensity of their balance sheet reduction, remain the ONLY things they can attempt to control. The latter has been isolated to a natural roll down too big and clumsy to play with. Thus, a small set of short rates; not the belly, the 10 year note, the bond or the Ultra, are the steering mechanism of The Fed. Their success has been to reject the popular notion of the 4-5% window as the 70's/80s anomaly and 90's mean reversion that it is.
But every consolidation eventually slops sideways to the point of disruption. (Mark Dow has been tracking similar situations in FX you should be watching) And then, markets get loose. Like a Jaguar in New Orleans, innocents will get mauled. Soon.
Jorma wrote this:
When I see you next time round in sorrow
Will you know what I been going through
My yesterdays have melted with my tomorrow
And the present leaves me with no point of view
When I see you next time round look into my eyes
Where we'd be never could decide
Borrowed moments they cannot fill the moments of our lives
And wishful thinking leaves me no place to hide
No place to hide
No place to hide
I see the shadows softly coming
Taking me into a place
Where they turn my life down
Leaving mourning with myself
And nothing to say
Turn my life down. The S&P pattern REMAINS in the Feb. 2 recalculation as the Strawberry Moon rolls into the night sky. Take a moment and try to digest even an ort of the pedestrian, non-stop, 5 minute chart analysis that has been thrown at you since that day. That day, when closed , we compared to the crisis pattern that took years to clear.
The difference this time is the fabric of American Society is being ripped apart during the long necessary consolidation. It's all so disappointing. Think about that. The Great Debt Depression caused less social destruction than the 2018 consolidation ! The reason? Behind the "Are you listening, Obama?" (Santelli) hate and the "This is our crisis" (Rahm Emmanual Shock Doctrine activism) the Debt Depression hit almost everyone. Not so today.
Fiscal and Monetary policies - derided for budget busting and Weimar inducing consequences - [both critiques seriously wrong, ]saved the economy and divided the nation. The Piketty Moment has arrived. Why would anyone want to align with the "losers" on the wrong side of the divide? Far easier, to side with the capital holders and watch Fast Money.
It's just so disappointing.
The somewhat late but always delivered 2018 Commencement Address from the Dog:
Congraduations Graduates ! My classmates and I stepped out into an economy with 9.6% Unemployment and 3.25% inflation (the real stuff not the pro-cyclical, exclude everything going up stuff). You are taking the great leap into about 2.8% inflation and 3.8% unemployment. If you want to work, you can. Not true for us, and I was interviewed by the Cleveland Plain Dealer about what I called "optimistic under-employment" with my shiny new Economics degree.
What "we" proceeded to do was deliver the largest and longest economic advance in history and the promulgation of free democracies around the world. No pressure. I'm sure that Women's Latino Communications Studies degree is worth every 4% student loan you have against it.
Cycles are cycles; and you - nor us - had any input on when we dropped on the Blue Marble. But I would caution that the gloaming of 1983 may well have been a better timed real world entry point than the joyous present. Here's the unasked for advice of one former interest rate practitioner turned grape stomper:
The rest of your life will be distilled down to 2 things: Work and Love (your interaction with people around you). Everything else is drama. Get on a team and try and bring it home for the big win. Stop tattooing and piercing and altering your bodies, its just The Mullet without an out. Get out of your phone. If your closest relationship is with a 2 inch by 4 inch device, you picked the wrong device.
Bring something to the table. As an employer, I can tell you I want candidates that can buy into the Mission and Execute. Your time for strategic thinking is years away. So, welcome graduates of 2018. We may have created the financial bombs that destroyed the world, but at least a few of us stuck around to try and fix it. What world will you be passing on 35 years hence?
I take back what I said about, "No pressure." The pressure is ON and it's not going away.
From the Dog 2016 Debates:
Last night the would-be Republican nominee for President referred to the economy with the same adjectives he used to describe entertainment footnote Rosie O'Donnell. "Big, fat, ugly bubble, " was how Mr. Trump analyzed the state of the US economy, throwing in a few innuendo laden half sentences about Fed Chair Janet Yellen. Nothing unifies the populist movement like Fed bashing.
Always short on details, Mr. Trump then let the armchair conspiracy theorists (having already outed the obese, bedridden, hacker crowd) fill in the gaps by chastising both low interest rates and the consequences of raising them. Surprisingly, neither candidate laid out even a HS sophomore's argument on the optically creepy and monetarily sketchy practices of IOER and QE bond buying regimes.
Hey, tariffs ! let's do that too.
There was an old X-Files episode where a dude who could really see the future would kill the TV fortune tellers and right before he offed them would say, "You should have seen it coming."
Classic stuff and always reminded me of traders. So the Admin elected to mix up a big pot of tax cuts and trade tariffs into the Fed's rising rates and the self proclaimed "Rosie O'Donnell Economy." It's all so painfully obvious, you really should see it coming.
PTJ spoke with ARS today in a pretty rare interview. No real shocker headline but I did notice a nuance in his answers.
Paul Jones once famously said, "Don't tell me why tell me when." As close as he got to that today was "after the midterms." If you haven't seen the 1987 PBS documentary Trader 1) why are you in this business? 2) Go DO Now.
Anyway, We obviously feel the same way PTJ does about rates and believe its already on. No need to wait for election results. We also have posted here that the tax cut will put the onus on the FOMC and PTJ seems to agree.
He said his exposure was abnormally low right now confirming his belief that the "when" is "not yet." Based on his statements I would venture he does have a decent amount of Reds and Greens on the short side.
An old mentor of mine - Gary Bialis - used to say to me, "Kevin, in a bull market EVERYTHING goes right, and the opposite."
A quick recap: The soul of conservative movement - free markets and free men - is sold out for a tax cut during a well established up cycle. 12 years of deeply flawed "deficit hawk, balanced budget, Tea Party, sequester, wealth chasm inducing vitriol" is thrown overboard. An obviously dangerously inept President sends his entire spineless Party leadership into hiding. Foreign leaders (and domestic ) are publicly bullied by said Moron in Chief. The G-7 is essentially gutted. Our allies are insulted and confused, not just by our Jethro Bodeen without the kindness POTUS but by the voting American decision. And to top it off, we legitimize one of the most dangerous and cruel leaders in the world!
My father fired the first shot in the Korean War. He's spinning in his grave.
Warren Rudman once dressed down Ollie North about Iran-Contra (GIK) saying, "The Constitution gives the people of America the RIGHT to be incredibly WRONG about things."
What he didn't have to say was that means there are incredible CONSEQUENCES to that freedom. The Bull Market lets/makes everything go/seem right -- and the opposite ! When the market turns down a lot more than your Fidelity statement is going bad.
It was difficult to muster a caring market focus on Friday, when woken to the news about Anthony Bourdain. The NASDAQ tagged a downside pattern and recalculates Sunday. I first got into Tony's writing on a plane to St John with my family. They had given me copy of A Cook's Tour for the trip. I knew of Kitchen Confidential but never read it. I've re-watched the documentary version of A Cook's Tour many times since and the constant development of Tony's voice into this season's Parts Unknown is remarkable. It's hard to change, it's even harder to get better doing it.
Trading pushes a person to follow a similar arc. You can be arrogant and lucky young (box checked), you can see how your passions effect others as you mature (check) and you can try and be a better person from the knowledge (workin' on it). My musings here and my periodic "Merc Stories" are inspired by Tony's ability to connect to something bigger than the food in front of you or the trade just initiated. My move into wine is a consequence of spending most of my adult life messing around with ethereal things like fixed for floating. Grapes are tactile, soil is real, wine is magic.
My take away from this tragedy is knowing Tony at 61 - dark demons and all - was a better version of himself than 30 years ago. It's hard to change. It's even harder to change for the better. Sometimes, it fails. You have to keep trying. Sound like trading?
Friday's great news on the employment front now needs to be looked at in the broad context of the Trump Presidency and future fiscal initiatives.
Every POTUS gets to claim accountability for good economic news (and they eat the bad) whatever arc of the cycle the find themselves in. This Administration, at the urging of a before fringe group of Alt-Right Tea Partiers and faux deficit hawks (my deficit is ok, its your deficit that destructive) elected to push through a strong tax policy revision 9 years into a firm advance.
The rallying cry of the partisans was the speed of the advance, not fast enough. The reality was/is the moderate steady advance (and choppy cycles abroad) was key to the long aggressive easy monetary policy of the other hand clapping, the Fed. Away from the pedestrian spin of Trump carnival barkers like Steve Cortes, the fiscal push is difficult to isolate variable-wise.
Worse, what are the unintended consequences of adding fiscal adjustments onto a stable advancing system? The Fed is, and will be forced to continue, widening the global interest rate differentials. This increases turbulence by design. A moderate economic hic-cup could have had the tax policy card safety net.
The undeniable good news is - contrary to the high decibel hate spewed by the opposition - the innovative and aggressive flexibility of the Central Bank halted, reversed and promulgated an amazing retreat from a financial system black hole. The present tilt of the administration is accelerating the need to reverse those very successful structures.
Officials disagreed on whether the flattening of the yield curve was a reliable signal of a recession. The yield curve is the plot of government bonds of different maturities, and an inverted yield curve has often preceded recession.
Several officials said it would be important to monitor the slope of the curve. A few others thought that central bank asset purchases and other factors made it less important.
Fed minutes today showed the FOMC is willing to downgrade one of the most reliable economic indicators of the past 40 years.
Most pundits discussing the curve structure do not do so in the historically significant way.
Here's a Hooper Primer on the curve:
For cocktail party guests: Steep = good. Flat = bad
For the "long term equity holder": Reduce exposure between 3-6 months after inversion between 2 and 10. The heavier the twist the more you run.
For the trading addict : Don't worry about the long end so much. If 2/10 or 2/5 track gradually inward, monitor if its because short rates rising or belly rates holding steady, falling. If the money curve inverts rapidly, run. Watch 1 year rates (money and Ts) relative to 5 year. And evaluate the 5 year yield relative to the growth rate. Finally, if the Fed hikes the funding rate to a level where 12 month money less 60bp is lower than FF- short everything.