I for one continue to be concerned about the yield curve. I saw visibility for inversion going back a long way and we have been living with more than a slight inversion for a long stretch now. The ten year is yielding 4.66%, the 30 year is at 4.78% and you know the Fed Funds are at 5.25%.
The historical implication is that this will cause a recession. It works most of the time and this go around will either fall into line or not but I think at least it should be a concern. Some are saying that this is the bond market building in a slow down and that Fed Funds will be lowered soon to adhere to what the market is saying.
I don't think there is any way (excluding external shocks) that the Fed will lower rates this year or in the first quarter on next year. I am not trying to predict when they will cut I am just saying it won't be soon.
The lower rates could push back whatever the fallout might be in the housing market which would be a plus but being dismissive of the potential for recession is a mistake, IMO.
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10 comments:
It is fun to talk stocks. But the real money is in the bond market. Clearly it is sending us a signal. But, remember the stocks sold off in May, and the equity market is very forward looking.
The markets are telling us a few things. First, the bond markets are telling us the probability of a recession is increasing.
Second, the stock market (with its correction in May and diminishing volume and breadth over the past few months), is telling us "this is about as good as it gets" for this cycle.
I think the bigger issue is that there is a finer and finer line between "inflationary environments" and "deflationary environments" than any time in the past...it's amazing that we can go from one extreme to the other within a period of months, but that is what's happening.
The result is much more volatility within at the sector level - witness commodities, housing selloffs.
This is the "new, new thing". Take advantage of it.
great insight
I am going to have to disagree.
The markets are signalling very little. We had a sell off. We ar e essentially back to the highs. we will move around a little and then the market will make a big move again.
My best guess is we go higher from here, hopefully a significant move until year end. Then I have no guess as to if we go back down or higher still.
The markets are not signalling very much significant to me. Of course I am sure we will all say it was clear after the fact.
Interesting dichotomy in the two commentors, Roger. And that is why the market has been acting the way it has been. It is hard to get a firm concensus. And, I agree. Interesting insight on both the later two comments.
Enough! with the big words.
The Fed is/will print money.
That is inflationary----or-----as I see it, a devaluation of the dollar, which IS inflation. Get it?
I think they would like to raise rates to stem some of this inflation, and to help protect the dollar ( everybody knows we are printing fast ).
But, they can't raise rates. Because the "economy really is slowing".
Cause for concern? Yes. Because the long bond was up almost a point at one time today. That mean't the big money thought that a return of 4.7% was a good return. They thought it was a good bet. That is what concerns me. Just ask yourself why would the money pile into bonds at this time? Especially if it is so obvious we have this monetary inflation.....
Roger,
What do you think about the new currency etf: DBV
http://www.indexuniverse.com/index.php?section=70&id=1618
I did not know DBV finally listed. I wrote about it a long time ago, maybe when they filed?
Generally I like the idea. The drawback, as I see it, is that it will not capture low yielders that have started to tighten. Not to beat a dead horse but this would include Sweden and also the Swissi.
The back test of the results look impressive but shorting either of those two is tough as they are raising their rates.
Thanks for pointing out its tading now. I will check it out and post further.
I agree with you Roger, the yield curve is the big black cloud hanging over our heads. Whether we're in for a full blown recession or just a soft landing, I'm having a hard time seeing stocks move a lot higher than we are right now.
George, my guess it the bond market is getting far too giddy about the prospect of an about-face by the Fed. Imo the Fed won't begin cutting rates until next Spring at the very earliest.
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