US Treasuries - If it is not Confusion, nor Panic, then What’s it?

[vt]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

You may be right DC. Certainly the late 2006 and early 2007 inversions led to the recession that started on December, 2007.

However according to an article in USA Today (and other sources):

"No, an inverted yield curve has sent false positives before. The yield curve inverted in late 1966, for example, and a recession didn't hit until the end of 1969.
Other parts of the yield curve inverted late last year, as when the five-year Treasury's yield dropped below the three-year yield. Those parts of the yield curve, though, aren't as closely watched.
And not every part of the yield curve is inverted. Many traders on Wall Street also pay close attention to the difference between two-year and 10-year Treasurys. That part of the curve is still not inverted. The 10-year yield of 2.43 percent is still above the two-year yield of 2.32 percent."

Other observations

According to conventional wisdom rising debt is inflationary. However ace bond firm Hoisington Management too much debt is deflationary:

http://www.hoisingtonmgt.com/pdf/HIM2018Q4NP.pdf

Another conjecture: When will inflation pick up? It may but remain muted for a long time.

Why? Rapid technological advances are deflationary. Technology is advancing faster each year and the cost on input such as lower energy costs, smaller families, and other conservation factors may keep inflation, and interest rates, tame for a decade or more.

It would be interesting to see EJ's viewpoint on this.

[dcarrigg]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

The question is what they mean by "yield curve inverting." If it inverts far enough that the 3mo yields higher than the 10yr, and that sticks longer than say 10 days, the false positives go away. It's early yet. We'll see what happens over the next week or so. I'll be more confident if it sticks. But I think it's time to think about battening down the hatches. And fwiw, I'm not EJ, but that's my call right now.

To be more speculative, the way I imagine it playing out is equity collapse, especially on large cap tech growth, maybe this autumn, slightly preceded by a rout in junk and near junk corporate debt that gets exacerbated by the market cap pullbacks from the equity downturn. Not sure the depth of the rot, but I suspect that it's worse than people imagine but not quite so bad as the past recession. I could be wildly wrong on the magnitude there. There's a small chance it could be much shallower, but I figure almost an equal chance it could be much worse, both are outside possibilities.

There are good fundamentals in the US economy. Especially at the large cap high end who got the stimulus from the tax cut. But small business is hurting, workers are hurting worse, and growth stocks are still too big for their britches, despite the last pullback.

So I'm going to ride this one out. Might leave a bit in vanilla dividend stocks. Highly regulated value crap people can't do without. But not a lot. When the herd flees an asset class, it's not about fundamentals any more. And the herd could just be one angry billionaire. No way to know. At least none I'm privy to.

[MacroSA]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

In fact, fed cutting rates makes the inversion make more sense, like I said, it's a bet on rate lowering in the future. Equities don't necessarily have to suffer, but equities suffering is what tends to lead to rate cuts. Hence why you don't have to believe the structural arguments to still bet on impending recession and pull out of equities.

Anyways, I'd rather be in low return vanilla stuff from fall of 2019 to fall of 2020 than risk a 35% write off. I'll be happy to plunge back in when there's blood in the water. The game is afoot.

I agree with you Dcarrigg, staying away from the US equity markets would be the smart move right now.
Also, Equity is already starting to suffer. Take a look at the financial sector and the regional banks ETFs (Ticker: XLF & KER). Notice the high volume in the last three trading days.

[vt]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

Financials are going down because interest rates may go down. Plus Fintech companies like Paypal and Square may start to replace a good portion of their business. Not a recommendation for these companies, just that they may make deeper inroads into the banking system.

[jk]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

there are a lot of unicorns lined up to do their ipo's soon. levi-strauss just went out the door. coming soon are uber, lyft, pinterest and god knows what else. i think those ipo's approximately mark the peak.

[dcarrigg]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

there are a lot of unicorns lined up to do their ipo's soon. levi-strauss just went out the door. coming soon are uber, lyft, pinterest and god knows what else. i think those ipo's approximately mark the peak.

Every bag needs a holder. The legal violations involved in just their standard operating procedure alone present unlimited downside risk. It's basically the equivalent of a multinational construction firm using exclusively illegal labor and violating every code in the book every day. How many poor suckers in Arizona have to die to be Silicon Valley's testbed for non-IRB approved or fraudulent experiments?

[vt]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

It's lyft your wallet and take your money.

[dcarrigg]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

It's lyft your wallet and take your money.

Hahaha, I like that one. In fact, the Goog has a heavy hand in every one of these IPOs. Half of Pinterest's audience reach is through Goog's image search, not through members. And surprise, surprise, that's changing going into the IPO. In fact, the timing's almost a joke. Of course, Lyft's IPO is probably Goog's exit stage left, right? And by the way, before they dropped money on Lyft, they were in Uber. Google Ventures, led Uber's $258 million Series C financing round, which valued the startup at $3.46 billion, back in 2013. It also invested in Uber's $1.19 billion Series D round in 2014, which gave Uber a $17 billion valuation. Then they shift to "the competition." But that wasn't enough for the Goog. After they sold Uber and plunged into Lyftyowallet, they sued them Uber for $2.5 billion. Only got a good chunk of that in the settlement. And of course the settlement shows they were paying themselves $120 million bonuses for their work on self-driving cars before the things actually ever worked. Worse than that, which Emirati Prince you figure's getting the vig on this one? Of course, the Goog will get its taste. Careem's app is integrated with Google Maps and Android Devices. Of course, Uber already bought everything from Asia's Grab to the bike renting, err, "sharing" app Ride. These startups now-a-days are more M&A arms for VC that build up public investment hype then pass the bag before it rips than places that actually do any actual work or produce anything. It's all a Barnum and Bailey sucker's game. And to a large extent the story of the 2010s is that game spiraling increasingly out of control. Most people just haven't woken up and realized it yet.

[jk]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

actually, uber and lyft's valuations remind me of when priceline [which sold only airline tickets at the time] was worth more than all the u.s. airlines combined.

[dcarrigg]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

actually, uber and lyft's valuations remind me of when priceline [which sold only airline tickets at the time] was worth more than all the u.s. airlines combined.

They're another one, aren't they? They bought out all the hotel/rental car/airline online business in a duopoly with Expedia. No real competition. And the Goog's there too. Each pay billions in tribute per year. There is a similarity with uber and lyft. High margin middle man apps with low overhead. I get the appeal. One difference is that expedia and pricelines' standard business models aren't reliant on ignoring labor and public utilities law. Then again, who cares? Daily bald-faced violations of the Robinson-Patman Act, the Clayton Act & the Sherman Act have been normalized. It's one of the strangest things about the 21st century in America. Law is increasingly selectively enforced and arbitrary. Nobody big enough bothers to ask permission and lobby for legislation to change laws any more. They just ignore them, pay some folk to look the other way, and beg forgiveness later if and when they must. Or they don't even do that, call the laws stupid, and accuse those who enforce them of having ulterior motives. It's a wild time in which to be a witness.

[dcarrigg]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

In case anyone missed it, NY Fed upped the recession probability based on June data on Monday. 1966 is the only other year in the data series in which the probability crossed 30% without a recession happening in the next 12 months. GDP growth was over 6% in back then.