Yield curve getting flatter, and flatter

[NW-Bound]

Lao Tzu: "The wise man is one who knows what he does not know."

Your comment, actually, is unintentionally funny. There are thousands, maybe tens of thousands, of people making predictions, each of whom knows exactly as much as you know about the future: zero.

It is the same as waiting for one of that infinite number of monkeys to produce Shakespeare. There are enough predictions extant that at any point some of them will be correct. These monkeys will be promoted by acclimation to "genius monkey" status as economic oracles. They will retain that status until they make some more predictions.

As I read threads like this one with excited comments about what happened yesterday, this quotation from Warren Buffet comes to mind : “The stock market is a device for transferring money from the impatient to the patient.”

Me, too. We'll look at our portfolio during the week between Christmas and New Years, as we always do. Some years we even make a trade.

I try to make opportunistic trades, and if my timing is wrong I hold on to my stocks, and never sell them all.

It's because I tend to believe the monkeys making predictions that my shares will recover.

 

[pb4uski]

Way off topic but "collecting/clipping" coupons always reminds me of a friend who asked how my aged, wealthy, great-aunt was doing. I said: "Oh, she's fine...clipping coupons, hanging in there".

He felt bad. He thought she was broke and clipping supermarket coupons to make ends meet.

That's funny.

 

[bobandsherry]

3-month: 2.40%
10-year: 2.40%

After curve inversion - equity market has experienced peak outperformance of consumer staples vs. S&P 500:

2006-2008: +28.6%
2000-2002: +24.5%

The old what's the cause and what's the effect. Could it then be that an inversion is actually good short term? And that then results in irrationally high level of growth that can't be sustained which causes it to recedes?

Is it then plausible that given a different data point, inversion followed by low returns in the equities, would then result in different outcome?

 

[brewer12345]

I will also point out that the long end of the curve is being leaned on by the fomc in a way that has never happened before. That makes direct comparisons with past cycles a little more challenging.

 

[bobandsherry]

I will also point out that the long end of the curve is being leaned on by the fomc in a way that has never happened before. That makes direct comparisons with past cycles a little more challenging.

Yup, as it's said many times regarding portfolio returns, past performance is no gaurantee a future results. But it is interesting to see how/if there is correlation.

 

[njhowie]

I will also point out that the long end of the curve is being leaned on by the fomc in a way that has never happened before. That makes direct comparisons with past cycles a little more challenging.

How is the FOMC leaning on the long end of the curve?

In my view, the long end of the curve is currently being driven down by investors scrambling and buying up whatever they can get their hands on to lock in current yields. They are doing this because they very afraid/uncertain of what's going to come next for the stock market, the economy, the government, and the rest of the world.

If your contention is that the Fed did a 180, ending rate hikes and putting an end to their balance sheet unwind, turning around on a dime from their previously stated policy approach, and thus created the current atmosphere of fear and uncertainty, then I agree. If you've got something else in mind, please elaborate.

 

[brewer12345]

I am not interested in debating with wild eyed conspiracy theorists, so let's keep this to the realm of the reasonable.

In the past few months, the fomc has ended the Fed funds increases and bluntly signalled that the reduction of the soma account will end in the next 6 months. So long rates got pushed down as they bought bonds, pushed up as the allowed stuff to liquidated, and now it looks like the market is front running the end of the liquidation. At the same time, the ecb reopened the spigot on their qe program. That mashed Euro sovereign rates down near zero, unleashing a tidal wave of cash toward treasuries as everyone chases higher rates. Simple as that.

 

[njhowie]

I am not interested in debating with wild eyed conspiracy theorists, so let's keep this to the realm of the reasonable.

You're way off-base, my friend. I am not a conspiracy theorist at all, so I'm sitting here laughing heartily as I'm reading that intro. Not quite sure how you came to that conclusion.

In the past few months, the fomc has ended the Fed funds increases and bluntly signalled that the reduction of the soma account will end in the next 6 months. So long rates got pushed down as they bought bonds, pushed up as the allowed stuff to liquidated, and now it looks like the market is front running the end of the liquidation. At the same time, the ecb reopened the spigot on their qe program. That mashed Euro sovereign rates down near zero, unleashing a tidal wave of cash toward treasuries as everyone chases higher rates. Simple as that.

Thanks for the elaboration...we pretty much agree, so I'll accept your implied apology for how you started off that reply.

 

[brewer12345]

Sorry, Howie, I have just ended up unwittingly in too many discussions about this stuff where things rapidly go from economic discourse to tinfoil hattery. Glad you are not one of the eye twitchers.

 

[Sunset]

I'm considering it. But I'm at 93% now and have been intending to move slowly and opportunistically to 95%, so that's not really worth writing about.

I'm going to try to wait until I feel a pit of despair and worry that maybe I was too heavily weighted in stocks first, though.

I may also be [-]paralyzed by fear[/-]lazy and not do anything too.

Ditto, but if it does go 15% or more from here, I'll sell 10% as my conversion process from 90+ stock allocation.

Of course if it later drops by 30% or more, I'll just buy it all back and be stuck again over 90%

 

[joeea]

OK, so the Yield Curve actually inverted today...… what now?

Sell!

No, buy!

No, dry powder!

Meh.

 

[joeea]

I am a firm believer in that recessions are also somewhat of a self fulfilling prophecy. If you think things are going to slow down, you decrease your spending which in turn....

You mean if I decrease my spending I could cause a recession?
I feel so powerful now!

 

[NW-Bound]

You mean if I decrease my spending I could cause a recession?
I feel so powerful now!

A single joeea does not matter. But if one million joeea's cut back, yes, it will cause a recession.

The GDP can go down because supply is constrained, such as what happened in the 70's due to the oil embargo. Or it can be caused by a decline in demand, when the joeea's collectively tighten their belts.

John Keynes brought to light the Paradox of Thrift during the Great Depression. Frugality may be good for an individual, but when the entire society practices it, all sorts of undesirable things happen.

 

[marko]

I'm holding and going to do nothing, when you don't which way to go, standing pat is my choice. .

There's a cute ad on TV now for some investment house.
There's a swimming pool and a wiener dog slowly floats by, lounging on a blowup raft. The caption says "Sometimes, doing nothing is a good investment strategy"

Generally, that is also my strategy at least in times of a downdraft.

 

[bobandsherry]

There's a cute ad on TV now for some investment house.
There's a swimming pool and a wiener dog slowly floats by, lounging on a blowup raft. The caption says "Sometimes, doing nothing is a good investment strategy"

Generally, that is also my strategy at least in times of a downdraft.

That's no wiener dog, but I guess they got their message across.

Oppenheimer Funds TV Commercial, 'Challenge Impulse'

 

[street]

^ Lol! That is good, thanks for sharing that.

Sometimes I wonder how I got to where I am at today financially, because I know so little about it. The only thing I knew how to do, was to save and all turned out great for me. If only I had found a site like this one 35 years ago who knows how much I would have today. With the knowledge I have learned here I would have had a lot more and that is a fact. Lol

 

[marko]

That's no wiener dog,

My bad.
Thanks for taking the time to point that out!

 

[Helen]

https://www.npr.org/2019/06/30/7374...lj0UNd3frkAFAhwxrGQyXwR--GpSCTideNXTwS42NJIiA

But on Sunday, an inauspicious milestone was achieved: The yield curve remained inverted for three months, or an entire quarter, which has for half a century been a clear signal that the economy is heading for recession in the next nine to 18 months

 

[SecondCor521]

https://www.npr.org/2019/06/30/7374...lj0UNd3frkAFAhwxrGQyXwR--GpSCTideNXTwS42NJIiA

I wonder to which part of the yield curve the article intends to refer.

My understanding is that the typical spread is the "10 minus 2", which is the 10 year minus the 2 year, which is still slightly positive and has been positive every time I've looked over the past several months.

https://www.treasury.gov/resource-c...interest-rates/Pages/TextView.aspx?data=yield

The "5 minus 2" has been ever so slightly negative for a while now.

I am suspicious when market commentators change the statistic which has been historically used to make a point. Another example of this phenomenon is "earnings recession" which is a newly defined thing but seems to imply "hey, you should start worrying".

I do think it's possible that we'll have a recession "soon". But people have been saying that for several years now. Eventually they'll be right.

 

[Dtail]

I wonder to which part of the yield curve the article intends to refer.

My understanding is that the typical spread is the "10 minus 2", which is the 10 year minus the 2 year, which is still slightly positive and has been positive every time I've looked over the past several months.

https://www.treasury.gov/resource-c...interest-rates/Pages/TextView.aspx?data=yield

The "5 minus 2" has been ever so slightly negative for a while now.

I am suspicious when market commentators change the statistic which has been historically used to make a point. Another example of this phenomenon is "earnings recession" which is a newly defined thing but seems to imply "hey, you should start worrying".

I do think it's possible that we'll have a recession "soon". But people have been saying that for several years now. Eventually they'll be right.

Good post.

 

[Lsbcal]

I wonder to which part of the yield curve the article intends to refer.

My understanding is that the typical spread is the "10 minus 2", which is the 10 year minus the 2 year, which is still slightly positive and has been positive every time I've looked over the past several months.

https://www.treasury.gov/resource-c...interest-rates/Pages/TextView.aspx?data=yield

The "5 minus 2" has been ever so slightly negative for a while now.

I am suspicious when market commentators change the statistic which has been historically used to make a point. Another example of this phenomenon is "earnings recession" which is a newly defined thing but seems to imply "hey, you should start worrying".

I do think it's possible that we'll have a recession "soon". But people have been saying that for several years now. Eventually they'll be right.

The Fed uses 10yr, 3months in its leading indicators series. There was also a Fed paper discussing the correlation to stocks using this.

FWIW my research spreadsheet uses the 10yr-3mo too. But the yield curve inversion alone is not a sufficient predictor.

 

[imoldernu]

I don't usually get involved in this stuff, but haven't been able to figure out how 2 1/2 Trillion in added debt can forever stay ahead of devaluation of US bonds.

See what, if anything, you can make out of this article from Peak Prosperity. It seems to be asking the same question.

https://www.peakprosperity.com/bizarro-world-the-herd-has-truly-gone-mad/

Underlying it all is their position that you can't print your way to prosperity.

 

[ExFlyBoy5]

But on Sunday, an inauspicious milestone was achieved: The yield curve remained inverted for three months, or an entire quarter, which has for half a century been a clear signal that the economy is heading for recession in the next nine to 18 months

An "entire" quarter?!? SELL!!! SELL!!! SELL!!! NOW!!! What is Jim Cramer saying about it?!? OH GAWD....WHY IS THE MARKET CLOSED?!?!?!??!?! I HAVE TO SEEEEEELLLLLL!!!!

OK, what I actually meant to say was, "meh."

 

[OldShooter]

I don't usually get involved in this stuff, but haven't been able to figure out how 2 1/2 Trillion in added debt can forever stay ahead of devaluation of US bonds. ...

Quite a few years ago now, Megacorp sent me to a mini-MBA program that involved week-long lock-in sessions with really top academics. IIRC Harvard's David Yoffe was one. In the module on international finance they pointed out basically the same thing. The issue is not exactly that the bonds "devalue". It is that the exchange value of the dollar declines as people decide they don't want to hold dollars, raising the yield on the debt and (not incidentally) kicking off US inflation that can't be controlled by conventional means. On the flip side of this coin, you can read "US inflates its way out of its debt." That's another way of saying the same thing. Bond holders will still get the promised number of dollars; they just won't be worth as much.

This is one of the reason we are in total world market funds like VTWSX, where about 55% of the assets are non-US/not dollar denominated. Those assets will skyrocket in dollar terms when/if the dollar declines in value

It's been a long time since that class, though, and the dollar has not collapsed yet. I also remember the classic: "The market can remain irrational longer than you can remain solvent." So I'm not placing specific bets on the dollar's decline. Just waiting and watching.

 

[corn18]

I don't usually get involved in this stuff, but haven't been able to figure out how 2 1/2 Trillion in added debt can forever stay ahead of devaluation of US bonds.

See what, if anything, you can make out of this article from Peak Prosperity. It seems to be asking the same question.

https://www.peakprosperity.com/bizarro-world-the-herd-has-truly-gone-mad/

Underlying it all is their position that you can't print your way to prosperity.

I agree that this is what is different these days. A LOT of USG debt. While they can't print their way to prosperity, they can print their way out of debt. Then we can all re-learn what it means to live in a world with 10% inflation and 23% mortgage rates.