The Yield Curve Inverteth

Published July 5, 2022

The following is an amended form of the Daily Contrarian briefing from July 5. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.

The yield-curve between the 2-year and 10-year just inverted. What this means is the shorter-dated yield (the 2-year in this instance) is actually higher than the longer-dated one (the 10-year). To be specific, the 2-year yield is currently 2.81% while the 10-year is 2.80%.

So there you have it. It’s not the first time this has happened this cycle. In fact, the 2/10 curve inverted as recently as June 14. Also in March. This is one recession predictor that is deemed to be pretty accurate for reasons that are discussed in this Investopedia article.

This yield curve inversion gives us something to talk about today, as things are still mostly quiet after the long holiday weekend. Most of the action this week is back-loaded, with the June jobs report due on Friday.

Markets got some good news around easing of China tariffs over the weekend, but the mood is mostly pretty dour. CNBC reports the outlook for the second half is “not looking good.” A contrarian indicator? Maybe. Or maybe it just isn’t a good idea to fight the Fed?

Americans have apparently started tapping into their savings to cope with inflation. That’s not good, but there is a ready-made boogey man in the Federal Reserve. Lest we forget: the Fed insisted the inflation we were seeing last year was transitory. They’ve changed their tune on this, but the point is they don’t have political leeway to reverse course again — until inflation is well and truly under control (or they have some data to point to that will allow them to ‘declare victory’).

Whatever your views on all this, the truth is nobody has any idea what is going to happen. There are educated guesses but there are also people with a vested interest in pushing a specific narrative. Do your own research, make your own decisions.

Reflections on a Rough First Half of 2022 for Stocks

Published June 30, 2022

The following is an amended form of the Daily Contrarian briefing from June 30. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.

It’s been a tough six months — worth first half of the year since 1970 — but at least now you know what a bear market looks like.

If this period has showed us anything, it’s how quickly and violently the consensus can shift — and with no real warning, either. At the start of the year very few were predicting a bear market. Now, the bears certainly look vindicated. On the bright side, as annoying as permabears are they are nowhere near as bad as the crypto cult. At least it’s somewhat entertaining watching the bitcoin bros spin their denial.

As for the economy, nobody knows how much more pain is ahead, or indeed if the damage is even contained. What’s clear is we have persistently high inflation for the first time in more than a generation. This has given the Federal Reserve no choice but to stomp on the gas pedal where interest rates are concerned — even if it triggers a recession. Fed Chair Jerome Powell even said as much in public comments yesterday.

Piles of new Notgeld banknotes awaiting distribution at the Reichsbank during Germany hyperinflation, circa 1923 — Piles of new emergency banknotes awaiting distribution at the Reichsbank during German hyperinflation, circa 1923. Source: Bundesarchiv (German Federal Archive)

Fed Will Reverse Course on Rate Hikes, And Soon: Deer Point Macro (Szn 4, Ep 17)

Published June 23, 2022

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Deer Point Macro joins the podcast to discuss his view that the U.S. Federal Reserve will only hike interest rates once more before easing.

Content Highlights

The Fed is not some magical organization that can control all parts of monetary economics (2:50);
The Fed can create demand for credit, but banks have to provide supply. And banks are pushing back (5:03);
What to make of the Fed’s rate hikes this year? How has that affected bank portfolios? (9:37);
The eurodollar market plays a significant role in Fed policy and its implications. An explanation (13:24);
The Fed stands to raise once more, at its next meeting in July, before having to cut rates in September (16:21);
Inflation is stubbornly persistent. Doesn’t this force the Fed to raise rates? (19:57);
Background on the guest (30:14);
Markets don’t really react to ADP employment data, but for economic detective work it can be vitally important (31:48);
How this all translates to asset prices: good for bonds but commercial banks are maybe not as safe as some would think. But regional banks may be a better bet (35:11);
What about cryptocurrencies? (36:34);
Quick discourse on the so-called ‘Fisher effect’ that posits that inflation rises as Fed funds increase — over the long term (39:14).

Tag: inflation

The Yield Curve Inverteth

Reflections on a Rough First Half of 2022 for Stocks

Fed Will Reverse Course on Rate Hikes, And Soon: Deer Point Macro (Szn 4, Ep 17)

Content Highlights