One Ear to the Ground, One Eye to the Future

Treasury yields are attempting to say something.  But what it is exactly is open to interpretation.  What’s more, only the most curious care to ponder it. Like Southern California’s obligatory June Gloom, what Treasury yields may appear to be foreshadowing can be somewhat misleading.

 

Behold, the risk-free tide…

 

Are investors anticipating deflation or inflation?  Are yields adjusting to some other market or external phenomenon, perhaps central bank intervention?

So far this year, and in the face of the much-ballyhooed prospect of Trumpflation, the yield on the 10-Year note has gone down.  Not up.  On January 1st, the 10-Year note yielded 2.44 percent.  As of market close Thursday, the yield was 2.22 percent.

At first glance, it appears there’s nary a care in the world about inflation.  Conjecture, says there’s an expectation that Trump will be unsuccessful at getting his spending bill through Congress.  Without Trump’s fiscal stimulus, goes the thinking, the potential for inflation becomes muted.

 

10-year treasury note yield and 30 year t-bond yield – going the non-flationary way. In case you are wondering what the “but” is about: it’s current net speculative positioning in t-note futures, which has gone from record net short to record net long in a heartbeat – click to enlarge.

 

In reality, does this have anything to do with anything?  What are Treasury yields really trying to say?

To be clear, contemplating Treasury yields is like a baker contemplating the microbiology of bread yeast.  The proper technique is imprecise, and best garnered over time through learned experience.

We’ve found the best results for drawing an inkling from Treasury yields are obtained by putting one ear to the ground and one eye to the future.  Here’s what we mean…

 

A Flattening Yield Curve

If you plot the interest rates of Treasuries with different maturity dates you get a graph showing something that economist and banker types call a ‘yield curve.’

For example, if you plotted three-month, two-year, five-year, and 30-year Treasury debt you’d have a yield curve that is often used as a benchmark for establishing various lending rates.  More importantly, you can use the shape of the yield curve to forecast changes in economic growth.

 

Bad curve behavior returns – there isn’t much left of the “reflation” party – click to enlarge.

 

When everything’s just great with the economy, a normal yield curve, showing longer maturity Treasuries with a higher yield than shorter-term Treasuries, will appear.  This reflects the potential for greater market risk, and inflation, further out into the future.

However, prior to a recession the yield curve often becomes inverted, with shorter-term yields higher than longer-term yields. Presently, the Treasury yield curve is flattening.  Could it be transitioning to an inverted curve?  Here we turn to FXSTREET for instruction:

 

“Five years ago, long-term interest rates were just about where they are now, and short-term rates were nearly as low as the overnight federal funds rate (that is to say, at zero).

“At the end of 2014, when the Fed ended QE, short-term rates didn’t move much. But the middle of the yield curve moved higher.  Again, long-term yields are nearly the same today as they were in 2014.

“Finally, the current yield curve looks much flatter.  Short-term yields moved higher, mirroring the Fed’s rate hikes, and the middle of the curve has drifted higher.  But long-term rates are about where they were five years ago!

“That’s not encouraging.  Markets don’t believe there’s much risk of inflation or economic growth.”

 

We have shown this chart of 3 month and 10 year Japanese govt. debt previously, and is a bit of a warning: since 1989, there were five recessions in Japan that were not preceded by an inversion of the yield curve. The final stage of the big bubble in the Nikkei in 1989 was the last time the curve inverted in Japan. In a ZIRP regime a flattening of the curve is apparently all it takes sometimes – click to enlarge.

 

Recession Watch Fall 2017

Hence, according to the Treasury market, economic growth may be stalling out.  The Great Recession officially ended in June 2009.  Yet the recovery has not been equally great.  In fact, the recovery has been greatly feeble; it has hardly been discernible to the broad population.

The unemployment rate may have come down.  GDP may have inched up.  Incomes may have even returned to where they were at the turn of the new millennium.  But the wealth has generally concentrated with a small few, while everyone else has been left to fight over bread crumbs.

 When your stagnating income makes you feel blue, always remember that some species have a particularly complicated relationship with bread crumbs…

 

Moreover, unemployment, GDP, and incomes have all been blown about by the Fed’s odorous monetary gas.  Specifically, this is the same monetary gas that huffed and puffed up stock market and real estate prices, and suppressed interest rates.  So, too, this is the same monetary gas that the Fed has been incapable of weaning the economy from.

Could it be that we’re facing the prospects of another recession prior to the completion of Fed ‘normalization’ policies?  From our one ear to the ground one eye to the future vantage point you can already count on it.

Of course, many of the conditions that presaged the last recession – high levels of public and private debt, and asset bubbles – still exist today.  Only in many instances they’re even larger.  Naturally, the foolish attempt to solve a debt problem with more debt has now set us up for a much larger crisis and recession.

At the moment, this forthcoming recession is popping up like dark storm clouds just above the horizon.  By fall, it may be bearing down upon us in full force.

 

Charts by: StockCharts, St. Louis Fed

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Biggest Stock Market Crashes Tend to Happen in October
      October is the Most Dangerous Month The prospect of steep market declines worries investors – and the month of October has a particularly bad reputation in this respect.   Bad juju month: Statistically, October is actually not the worst month on average – but it is home to several of history's most memorable crashes, including the largest ever one-day decline on Wall Street. A few things worth noting about 1987: 1. the crash did not presage a recession. 2. its...
  • Canada: Risks of a Parliamentary Democracy
      A Vulnerable System Parliamentary democracy is vulnerable to the extremely dangerous possibility that someone with very little voter support can rise to the top layer of government. All one apparently has to do is to be enough of a populist to get elected by ghetto dwellers.   Economist and philosopher Hans-Hermann Hoppe dissects democracy in his book Democracy, the God that Failed, which shines a light on the system's grave deficiencies with respect to guarding liberty. As...
  • Federal Reserve President Kashkari’s Masterful Distractions
      The True Believer How is it that seemingly intelligent people, of apparent sound mind and rational thought, can stray so far off the beam?  How come there are certain professions that reward their practitioners for their failures? The central banking and monetary policy vocation rings the bell on both accounts.  Today we offer a brief case study in this regard.   Minneapolis Fed president Neel Kashkari attacking a block of wood with great zeal. [PT] Photo credit: Linda Davidson...
  • Thoughtful Disagreement with Ted Butler
      Too Big to Fail?   Dear Mr. Butler, in your article of 2 October, entitled Thoughtful Disagreement, you say:   “Someone will come up with the thoughtful disagreement that makes the body of my premise invalid or the price of silver will validate the premise by exploding.”   Ted Butler – we first became aware of Mr. Butler in 1998, and as far as we know, he has been making the bullish case for silver ever since. Back in the late 90s this was actually a...
  • Donald Trump: Warmonger-in-Chief
      Cryptic Pronouncements If a world conflagration, God forbid, should break out during the Trump Administration, its genesis will not be too hard to discover: the thin-skinned, immature, shallow, doofus who currently resides in the Oval Office!   The commander-in-chief - a potential source of radiation?   This past week, the Donald has continued his bellicose talk with both veiled and explicit threats against purported American adversaries throughout the world.  In...
  • Precious Metals Supply and Demand Report
      Fat-Boy Waves The prices of the metals dropped $17 and $0.35, and the gold-silver ratio rose to 77.  A look at the chart of either metal shows that a downtrend in prices (i.e. uptrend in the dollar) that began in mid-April reversed in mid-July. Then the prices began rising (i.e. dollar began falling). But that move ended September 8.   Stars of the most popular global market sitcoms, widely suspected of being “gold wave-makers”. From left to right: Auntie Janet...
  • The Donald Can’t Stop It
      Divine Powers The Dow’s march onward and upward toward 30,000 continues without a pause.  New all-time highs are notched practically every day.  Despite Thursday’s 31-point pullback, the Dow is up over 15.5 percent year-to-date.  What a remarkable time to be alive.   The DJIA keeps surging... but it is running on fumes (US money supply growth is disappearing rapidly). The president loves this and has decided to “own” the market by gushing about its record run. During...
  • 1987, 1997, 2007... Just How Crash-Prone are Years Ending in 7?
      Bad Reputation Years ending in 7, such as the current year 2017, have a bad reputation among stock market participants. Large price declines tend to occur quite frequently in these years.   Sliding down the steep slope of the cursed year. [PT]   Just think of 1987, the year in which the largest one-day decline in the US stock market in history took place:  the Dow Jones Industrial Average plunged by 22.61 percent in a single trading day. Or recall the year 2007,...
  • Stocks Up and Yields Down – Precious Metals Supply & Demand
      Where the Good Things Go Many gold bugs make an implicit assumption. Gold is good, therefore it will go up. This is tempting but wrong (ignoring that gold does not go anywhere, it’s the dollar that goes down). One error is in thinking that now you have discovered a truth, everyone else will see it quickly. And there is a subtler error. The error is to think good things must go up. Sometimes they do, but why?   Since putting in a secular low at the turn of the millennium,...
  • The 2017 Incrementum Gold Chart Book
      A Big Reference Chart Collection Our friends at Incrementum have created a special treat for gold aficionados, based on the 2017 “In Gold We Trust Report”. Not everybody has the time to read a 160 page report, even if it would be quite worthwhile to do so. As we always mention when it is published, it is a highly useful reference work, even if one doesn't get around to reading all of it (and selective reading is always possible, aided by the table of contents at the...
  • The Falling Productivity of Debt
      Discounting the Present Value of Future Income Last week, we discussed the ongoing fall of dividend, and especially earnings, yields. This Report is not a stock letter, and we make no stock market predictions. We talk about this phenomenon to make a different point. The discount rate has fallen to a very low level indeed.   We add this chart to provide a slightly different perspective to the discussion that follows below (and the question raised at the end of the article)....
  • Precious Metals Supply and Demand
      Fundamental Developments The prices of the metals shot up last week, by $28 and $0.57.   Heavy metals became pricier last week, but we should point out that the stocks of gold and silver miners barely responded to this rally in the metals, which very often (not always, but a very large percentage of the time) is a sign that the rally is unlikely to continue or hold in the short term. [PT]   Last week, we said:   “One way to think of these moves is...

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com