The Yield “Curve” Knows

By Craig Hemke – Re-Blogged From Gold Eagle

As global interest plummets to historically negative levels—and as the U.S. bond market reveals a deeply inverted yield curve—it’s time again to assess what all of this means for the precious metals investor.

Just yesterday, a fellow on CNBC remarked that “no one had seen this coming”. By “this”, he meant a sharp rally in both gold and bonds. Oh really? We write these articles for Sprott Money each and every week.

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Market Advances & Declines

[A “BEV” Chart shows the last high as 0% with pullbacks, corrections, and bear mrkets as percntages below the most recent high. -Bob]
By Mark J Lundeen – Re-Blogged From Gold Eagle

This week the Dow Jones saw above average volatility, especially early in the week, but on Friday closed only 3.92% from its last all-time high.

The Dow Jones in the table below (#10) was down 6% at Monday’s close, but recovered as the week progressed to Friday’s close, and that was the story for the rest of the indexes in the table too.

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Falling Yields And Currency Turmoil

By Mike Gleason – Re-Blogged From Gold Eagle

What a wild week it’s been for investors.

The threat of global trade wars and currency wars sparked big swings across all major asset classes. Bond yields dove toward historic lows. Stocks plunged earlier in the week before rebounding sharply by Thursday. And precious metals rode a huge safe-haven wave higher.

Gold prices eclipsed the $1,500 level on Wednesday for the first time in over six years. Meanwhile, silver price pushed above $17 an ounce to record a one-year high. Both metals are up over 4% for the week.

The money metals are becoming increasingly attractive as President Donald Trump ramps up his battles against China abroad and the Federal Reserve at home.

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History Of Yield Curve Inversions

By Arkadiusz Sieroń – Re-Blogged From Gold Eagle

The inversion of the yield curve is of crucial importance as it has historically been one of the most reliable recessionary gauges. Consequently, we invite you to read our today’s article about the history of the yield curve inversions and find out whether the recession is coming, and what does it mean for the gold market.

We keep our promises. In the previous edition of the Market Overview, we promised our Readers to “dig even deeper into the predictive power of the yield curve”. As a refresher, please take a look at the chart below. It shows the U.S. Treasury yield curve, or actually not the whole curve, but the spread between 10-year and 3-month government bonds. As one can see, that difference is still negative (as of July 19). It means that the yield curve remains inverted (on a daily basis) since May 2019 (we abstract from the short-lived dip in March 2019).

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Fed’s Recessionary Indicators

By Arkadiusz Sieroń – Re-Blogged From Gold Eagle

How likely is a recession in the United States? Predicting a recession is difficult, but one can make some nice money with a good forecast. So let’s focus on the most important recessionary models developed by the Fed.

The first model is the smoothed recession probabilities for the United States developed by Marcelle Chauvet and Jeremy Piger based on the research published in the International Economic Review and Journal of Business and Economic Statistics. The odds are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payment enrollment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales.

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What A US Rate Cut Could Mean For Gold Prices

By Frank Holmes – Re-Blogged From Gold Eagle

Stocks surged last Friday following a U.S. jobs report that, to put it mildly, fell far below expectations.  At first this might seem counterintuitive. Shouldn’t signs of a slowing economy act as a wet blanket on Wall Street?

Not necessarily. Investors, it’s believed, are responding to the expectation that the Federal Reserve will have no other choice than to lower interest rates this year in an attempt to keep the economic expansion going. Earlier this month, Fed Chair Jerome Powell himself commented that he was prepared to act “as appropriate” should the global trade war risk further harm. President Donald Trump has also renewed his attacks on Fed policy, calling last December’s rate hike a “big mistake.”

So a rate cut looks more and more likely in 2019, perhaps as soon as this summer. And investors rejoice.

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Fed Running Out Of Time And Conventional Weapons

By Michael Pento -Re-Blogged From PentoPort

The buy and hold mantra from Wall Street Carnival Barkers should have died decades ago. After all, just buying stocks has gotten you absolutely crushed in China for more than a decade. And in Japan, you have been buried under an avalanche of losses for the last three decades. And even in the good old USA, you wouldn’t want to just own stocks if the economy was about to enter another deflationary recession/depression like 2008. Likewise, you wouldn’t want to own any bonds at all in a high-inflation environment as we had during the ’70s.

The truth is that the mainstream financial media is, for the most part, clueless and our Fed is blatantly feckless.

The Fed has gone from claiming in late 2018 that it would hike rates another four times, to now saying that it is open to actually start cutting rates very soon.

My friend John Rubino who runs the show at recently noted: “bad debts are everywhere, from emerging market dollar-denominated bonds to Italian sovereign debt, Chinese shadow banks, US subprime auto loans, and US student loans. All are teetering on the edge.” I would add that the banking system of Europe is insolvent—look no further than Deutsche Bank with its massive derivatives book, which is the 15th largest bank in the world and 4th biggest in Europe. Its stock was trading at $150 pre-crisis, but it has now crashed to a record low $6.90 today. If this bank fails, look for it to take down multiple banks around the globe.

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Dow Jones Bear’s Eye View

By Mark J Lundeen – Re-Blogged From Gold Eagle

The Dow Jones saw some selling pressure this past week, closing down 4.94% from its last all-time high of October 3rd of last year.

Time to press the panic button?  Not as far as I’m concerned, but then I also have no exposure to the broad stock market.  But speaking as a spectator sitting in the peanut gallery, my key indicator of when the people who do have market exposure to the NYSE and NASDAQ should exit the market was, and still is when the Dow Jones Industrial Average once again begins experiencing days of extreme volatility, (+/-) 2% daily moves from a previous day’s closing price.  Until the Dow Jones once again begins seeing those dreaded 2% days, I’ll be sitting in the cheap seats eating peanuts and cheering on the bulls.

This week I thought I’d use my Bear’s Eye View (BEV) chart of the Dow Jones going back to February 1885, with an in-depth analysis.  It’s an amazing view of the daily ups and downs for the past 134 years in the Dow Jones.  So what are we actually looking at?  We’re looking at each daily close of the Dow Jones since 16 February 1885, Any Dow Jones closing price that IS NOT a new all-time high registers as a negative percentage from the Dow Jones’ last all-time high.  For example, today’s Dow Jones BEV value indicates it has closed -4.94% from its last all-time high of October 3rd 2018.

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Fed Tightening Is Over: Markets Now Expect Cuts In 2019

By John Rubino – Re-Blogged From Dollar Collapse

People who assumed the Fed, along with the rest of the government, would cave the minute the financial markets got a little choppy turned out to be right. A couple of bad months and the “normalization” of both interest rates and the Fed’s balance sheet have stopped cold. Now the markets expect falling rates and (apparently) rising asset purchases. From today’s Wall Street Journal.

Debt Investors Embrace ‘Upside Down’ World After Fed Shift

Signs that the Federal Reserve may be done with its yearslong campaign to raise interest rates are sending ripples through fixed-income markets.

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Federal Reserve’s Balance-Sheet Unwind is Unwinding Recovery

By David Haggith – Re-Blogged From Great Recession Blog

We are in the end time of an unprecedented era of financial expansion — the greatest expansion of the world’s money supply ever attempted, expansion of the Federal Reserve’s vast and unchecked powers far beyond what the Fed could do before the financial crisis, and super-sizing expansion of banks that were already way too big to fail.

I am calling this time in which we are now unwinding this monetary expansion the Great Recovery Rewind because I believe this attempt by the Federal Reserve and other central banks of the world to move us away from crisis banking is taking us right back into economic crisis. That is why this was the top peril listed in my Premier Post, “2019 Economic Headwinds Look Like Storm of the Century.” It is more potent in possible perils than all the trade tariffs in the world.

How “Free Money” Helped Create Sizzling Housing And REIT Gains In Recent Years

By Dan Amerman – Re-Blogged From Silver Phoenix

Housing prices and the associated REIT returns have worked very differently in the United States since the recession of 2001. The increasing financialization of the real estate markets by Wall Street, and the aggressive and unconventional interventions by the Federal Reserve over that time, have combined in multiplicative fashion to produce new and volatile sources of housing profits and losses.

One such change has been the creation of an extremely powerful profit engine for housing, that most real estate investors have not been taking into account. Indeed, there is a strong mathematical case to be made that “yield curve spread compression” has supported and enabled the substantial majority of housing price gains for homeowners and investors on a national average basis since the beginning of 2014.

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Are US Bonds Overvalued?

By Arkadiusz Sieron – Re-Blogged From Gold Eagle

“We are in a bond market bubble that’s beginning to unwind.” This is the statement of Alan Greenspan. Is he right? We invite you to read today’s article about the US bond market and find out whether it is in bubble or not – and what does it all mean for the precious metals market.

Bond yields are in an upward trend since 2016/2017. And they hit the accelerator again last month. The 10-year Treasury yield topped 3.2 percent, the highest level since May 2011. Other yields have also increased recently: on 30-year Treasuries hit 3.40 in October, while on 5-year US government bonds jumped above 3 percent, as one can see in the chart below.

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The Dollar is Central to the Next Crisis

By Alasdair Macleod – Re-Blogged From GoldMoney

Introduction And Summary

It is now possible to pencil in how the next credit crisis is likely to develop. At its centre is an overvalued dollar over-owned by foreigners, puffed up on speculative flows driven by interest rate differentials.  These must be urgently corrected by the European Central Bank and the Bank of Japan if the distortion is to be prevented from becoming much worse.

The problem is compounded because the next crisis is likely to be triggered by this normalisation. It can be expected to commence in the coming months, even by the year-end. When flows into the dollar subside and reverse, bond yields can be expected to rise sharply in all the major currencies. There will also be a number of other unhelpful factors, particularly rising commodity prices, the timing of the Trump stimulus and trade tariffs pushing up price inflation. Coupled with a declining dollar, price inflation and therefore interest rates are bound to rise significantly.

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Don’t Count On Yield Curve

By Arkadiusz Sieroń – Re-Blogged From Gold Eagle

Are we going to fall into the trap of a self-fulfilling prophecy? Could investors trigger recession only because they are so worried about inversion of the yield curve? We invite you to read our today’s article about the yield curve and find out whether the popularity of the yield curve as an indicator of recession will bring on the recession that everyone is so afraid of.

In the last edition of the Market Overview, we have discussed whether gold investors should worry about the yield curve. Or should they keep their fingers crossed for its inversion? We concluded that not necessarily, as its predictive power has weakened and it doesn’t say anything about the timing of recession.

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Economy Beholden to Fed Interest Rate Policy

By Mike Gleason – Re-Blogged From Gold Eagle

Mike Gleason: It is my privilege now to welcome in Dr. Lucas Engelhardt associate professor of economics at Kent State University. Dr. Engelhardt is an Austrian economist who has been a guest lecturer at the Mises Institute and in his teaching specializes in macro-economics in the examination of the business cycle, and it’s certainly a real pleasure to have him on with us today. Lucas, thanks so much for taking the time and welcome.

Dr. Lucas Engelhardt: Well thank you for having me on.

Mike Gleason: Well, I’m excited to have you on today because there is a lot to discuss with you. For starters I think a good place to begin is the business cycle. Now, but before we get into the misunderstandings that the Keynesians seems to have about this, explain the business cycle if you would and why it’s important in order to have a proper understanding of monetary policy.

Dr. Lucas Engelhardt: Sure. Now, as you mentioned, I come from the Austrian economic framework. And Austrian economics describes the business cycle as the consequence of manipulations happening in the money supply, specifically in credit markets. So, starting from that point, so how the business cycle happens is that we have somebody in the banking system. We know in modern America it would be the Federal Reserve is generally responsible for this. Decides to push down interest rates, normally to stimulate the economy.

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Trade War To Continue, Global Debt Default And Higher Interest Rates Unavoidable

By Mike Gleason – Re-Blogged From Silver Phoenix

Mike Gleason: It is my privilege now to welcome back Michael Pento, president and founder of Pento Portfolio Strategies, and author of the book The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market. Michael is a well-known money manager and a fantastic market commentator, and it’s always great to have him here on the Money Metals podcast.

Well, Michael, you have recently written about why current problems in Turkey are definitely worth paying attention to. There are some similarities with the Asian crisis of the late 1990s which had ripple effects around the globe. The entire developing world is drowning in dollar denominated debt. If there are defaults, lenders in the first world, including major banks in Europe and the United States will have a real problem. Now, there have been a number of brief panics in recent years over the potential for default in places like Greece, Italy, Argentina. Officials seemed to have been able to kick the can and avoid a full-blown crisis, but one of these days people are going to be surprised and find out the reckoning for all the borrowing and debt has finally arrived. Turkey’s economy dwarfs that of Greece, so what do you make of the current events there, Michael? How serious are things really?

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Tariffs “Trump” Tax Cuts

By Michael Pento – Re-Blogged From Pento Portfolio Strategies

China appears to have more to lose from a trade war with the US simply because the math behind surpluses and deficits renders the Bubble Blowers in Beijing at a big disadvantage. When you get right down to the nuclear option in a trade war, Trump could impose tariffs on all of the $505 billion worth of Chinese exported goods, while Premier Xi can only impose a duty on $129 billion worth of US exported goods–judging by the announcement on July 10thh of additional tariffs on $200 billion more of China’s exports to the US we are well underway towards that end. However, this doesn’t mean China completely runs out of ammunition to fight the battle once it hits that limit.

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Is this the Most Hawkish Fed Ever?

By Michael Pento – Re-Blogged From Pento Portfolio Strategy

My research shows that this is one of the most hawkish Fed rate-hiking regimes ever. It has raised rates seven times during this current cycle and is on pace to raise the Fed Funds Rate(FFR) four times this year and three times in 2019.

But what makes its monetary policy extraordinarily restrictive is that for the first time in history the Fed is also selling $40 billion per month of Mortgage Backed Securities (MBS) and Treasuries starting in Q3 and $600 billion per year come October. Because the Fed is destroying money at a record pace while the rest of the world’s major central banks are still engaged in money printing (QE) and zero interest rate policies (ZIRP), Jerome Powell’s trenchant and unilateral tightening policy is now causing chaos in emerging markets.

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Interest Rates Walking on Narrow Ledge

By Michael Pento – Re-Blogged From PentoPort

There is a huge shock in store for those who have been lulled to sleep by a stock market that has become accustomed to no volatility and only an upward direction. And that alarm bell can be found in the price action of Bitcoin, which recently tumbled over 40% is less than a week. For the implosion within the cryptocurrency world foreshadows what will happen with the major averages as the Federal Reserve futilely attempts to stop monetizing the exploding mountain of U.S. debt.

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Japan’s New Framework Of Hyperinflationary Failure

By Andrew Hoffman – Re-Blogged From

Am I allowed to start with Deutsche Bank?  Or do I have to defer to the Bank of Japan’s Keystone Kops; who once again laid a giant goose egg?  Who, beyond a shadow of a doubt, proved they have not a clue what they are doing – in dramatically accelerating the pace at which the “Land of the Setting Sun” plunges to “second world” status, en route to becoming the first “Western Power” to experience 21st Century hyperinflation.

Hmmm, what to do?  As sadly, I could easily write entire articles on countless other topics as well – such as the Bank of International Settlements issuing a dire warning about the massively over leveraged Chinese banking sector; Donald Trump’s surging popularity; Wells Fargo’s “crime of a lifetime”; the exploding worldwide pension crisis;  OPEC’s Secretary General all but confirming “no deal” at next week’s “all-important” crude oil producers meeting; and the U.S. national debt – and budget deficit – expanding at the fastest rate since the 2008-09 financial crisis.  And the answer is, I’m starting with Deutsche Bank – as unquestionably, it poses the greatest near-term risk to global political, economic, social, and monetary stability.

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Three Big Stories NOT Being Covered #2 – The Yield Curve

By Andy Sutton & Graham Mehl – Re-Blogged From

It occurred to us as we were laying out the contents of this article that we should probably not assume certain things. This publication has a wide readership, from corporate CEOs to high school students. The former are looking for analysis, the latter to become educated. The topic we are going to tackle in this second installment is a complex one, so some introduction is in order. Therefore, this piece will consist of two parts: an opening introduction, a primer if you will, followed by the analysis. If you are well-versed in interest rates, bonds, bond yields, and debt, you can probably skip the primer, although we’ve been surprised at the number of people who have subscribed to the misconceptions stated therein.

The topic we are going to tackle is the negative US yield curve. It is being talked about a little in the media, but not nearly enough and without anything in the way of background. If you have taken finance classes you can understand it, but if you haven’t, then you’re out of luck. We reject that out of hand. This is a topic that affects everyone, so understanding will not be limited to the Wharton MBA types. Without further delay, we begin.

Part I – The Primer

Andy will handle this portion because he’s got the knack for making this stuff understandable in less than ten thousand words. We’ll both handle the second portion of the piece. As most of you realize, there is a debt problem in the world. It’s why many of you started reading this column and others like it. The debt problem exists at all levels – global, federal, state, municipal, and personal. While these are all separate in nature, they are linked as well, which makes it complicated. What I’m going to describe to you is how this situation is, minus any manipulation, just so you can get a sense of what is going on. Let’s begin with interest rates.

Interest rates are set basically in two ways – by policy fiat and by various financial markets. For example, when you hear about the not-so-USFed raising interest rates, they are mostly talking about what is known as the Fed Funds Rate, which is the rate banks charge each other for overnight loans. When you hear the term ‘interest rates’ on the news along with the ‘fed’, this is most commonly what is being referred to. There are some other lesser interest rates that are set by the not-so-USFed, but they don’t fall within the scope of this article.

Next we have interest rates that consumers deal with such as credit card rates, the Prime Rate, mortgage rates, auto loan rates, and so forth. Of these, the Prime Rate, credit card rates, and auto loan rates are set by the banks. For example, the Prime Rate has historically been 3% higher than the target for the aforementioned Fed Funds Rate. Mortgage rates have traditionally been different in that they have been determined by the bond market, specifically, the 10-Year USTreasury Note. I’ll get to that in a bit.

So when we talk about interest rates, we’re talking about the cost of borrowing money (debt). If you borrow for a car, a house, a yacht, or an iPhone, it costs money to borrow money. Let’s say you purchase $5000 worth of merchandise on your credit card. Your interest rate is equivalent to the national average of 15.07%. If you don’t pay your $5000 in purchases off before the due date on the card, the interest will start piling up. The cost of borrowing that $5000 will be $753.50 per year as long as the balance remains at $5000. As you pay down the balance, the cost of borrowing in dollars falls even though your rate remains the same because the balance is dropping.

Now, let’s take what we’ve learned above and apply it to the USGovt, which has a voracious appetite for debt because it loves to spend more than it takes in. In many ways, the government is no different than the USConsumer. Both spend more than they bring in and both must borrow the difference. The only difference is that the government gets a better deal on interest rates than you do. The USGovt issues debt instruments called ‘Bills’, ‘Notes’, or ‘Bonds’. Bills are debt instruments that mature in less than one year, Notes mature in 1-10 years, and Bonds mature in greater than 10 years. It sells these instruments to raise the money to fund its deficit spending. And, much like your credit card, the government has to pay interest on the bonds it issues.

So in concept, the government doesn’t have a credit card like the consumer, but the end result is the same. Both parties end up owing a bunch of money to creditors – at interest. The government sells notes and bonds of various durations – periods of time. These durations run from 1 month to 30 years. If you purchase a 1-month T-bill you’ll receive a certain rate of interest. As of 7/29/2016, that rate is calculated to be .19%. While T-Bills are handled differently than other types of Treasury Notes and Bonds insofar as interest is determined, those differences lie outside the scope of the article. If you are curious how T-Bill rates are determined, here is a good place to start. It is important to note, however, that the .19% interest rate published for 30-day T-Bills is the annualized rate. In other words, if you bought 12 30-day T-Bills and held them until maturity, you’d end up with .19% interest. A common misconception is that the published rate is for a single 30-day T-Bill.

Oddly, and I’ll take a walk down a short rabbit trail here, the concept of annualization is one that is used elsewhere and has led to a great misunderstanding by many. If you’ve been paying attention the past few days there has been talk of the recent GDP report for the United States. It was reported as 1.2% for the most recent quarter. That would lead many to think that means the economy grew at a 4.8% annualized rate during the last quarter. It’s actually the opposite. The rate of growth that is stated is already annualized. So, put another way, the USEconomy grew .3% in the last quarter. They multiplied it by 4 to get the annualized rate, which is what is published. The quick lesson here is that it is always good to understand the terms of magnitude that you’re dealing with when presented with numeric data.

Getting back to government debt, let’s take a look at the various durations available. In addition to the 30-day T-Bill, there are 13-week (3-month), 26-week (6-month), and 52-week (1-Year) T-Bills. The next several durations are called ‘notes’ since their maturities lie between 1 and 10 years. In this group are the 2-year, 3-year, 5-year, and 10-year Notes. Then there are 20-year and 30-year Bonds. They are called Bonds because their maturities are greater than 10 years. As one would expect, when you invest (pledge) your money to a borrower for a longer period of time, a greater amount of interest is generally expected – to compensate the buyer for time-risk. Whereas 30 days is a very short period of time (although these days a lot can change in a month), 30 years is so long that everything – including the maps – can change in that duration. So it would make sense that if you’re asking someone to lend you money for that long, that you’d compensate them appropriately.

Consequently, on any given day, Treasury debt instruments (Bills, Notes, and Bonds) are bought and sold and as such, the yield or interest rate changes. The concatenation of the yields for debt instruments across all maturities can be charted, resulting in what is called the yield curve. The yield curve changes daily as rates change due to bond prices. A general rule of thumb is that bond prices are inverse to bond yields (interest rates). So as bond prices go up, rates go down and vice versa.

Part II – The Analysis

Looking at our example rate of a 30-day T-Bill from above, we see that as of 7/29/16, the calculated interest rate on such instruments is .19% per year. This rate is similar in nature to what a credit union or ‘premium’ checking account would pay. It is a joke. When you consider the government’s admitted level of price inflation is around 2%, you’re losing money on T-Bills. When you look at your own rate of price inflation (most people we talk to report around 4% since the first of 2016), you’re even further in the hole. The problem is not the T-Bills. If it were, we’d just advise that people think strongly before buying T-Bills. No, the problem here is that the negative interest rates stretch across MOST maturities when using the CPI and ALL maturities when using the rate of price inflation reported by most consumers, at least the ones we talk to. We’ll admit we have not conducted a scientific sampling as should be done; we’re just going by what the average Joe is reporting back. That has proven more than sufficient for illustrative purposes in the past. We’re not generating mathematical models here; we’re making a point.

Take the rate for the 30-year bond as of 7/29/2016. It is 2.18%. This rate is annualized. You get payments every six months for 30 years. Now, a caveat. If you happened to buy this 30-year bond when prices were a lot lower, your yield is higher. The 2.18% represents the yield for someone who bought the bond on 7/29/16. For example, if you bought the same bond on 1/4/16, your yield would be 2.98%. That’s a .80% difference. You’ll also hear the term ‘basis points’. A basis point or a ‘bp’ is simply .01%. So .80% would be 80 basis points and so forth. So you might hear someone say “Yields on the 30-year bond have dropped 80 bps (basis points) since the first of the year.”

If we take a look at the various Consumer Price Index measurements, it becomes quite confusing very quickly. There are pages of different series depending on urban vs. rural, the size of the city, type of good, etc. Here’s an example. At any rate, the Bureau of Labor Statistics, which is responsible for compiling these figures states that the headline rate of inflation (CPI-U, all items) has risen 1.0% in the past year, but .2% in the past month. The ‘core’ rate, which is the CPI-U rate minus food and energy, because these are deemed to be more volatile, is up 2.3% in the past year. Since the media and government insist on using the core, so will we.

The World Has Changed

It doesn’t take a mathematician to figure out that while the 30-year bond has flirted with positive territory, the rest of the yield curve is firmly negative when core price inflation is deducted from the yield. There has been an old adage in the investment community for many decades now – buy stocks when you’re young, then sell the stocks to purchase bonds when you get closer to retirement and live off the interest. Given that the interest is eaten up by price inflation, one of the main pillars of traditional ‘flat earth’ investing is destroyed. But nobody is admitting it! Investment advisors and brokers are STILL pushing seniors to buy bonds; instead they are now hoping to make money by the price of the bonds going up rather than just sitting on the bond and collecting interest. Obviously, this subtle change can have enormous consequences for the investor without the investor even realizing it. The investor has been exposed to a whole new risk spectrum and little in the way of disclosure is taking place whether it is the advisor, the media, or the government.

Secondly, for those investors who do realize what is going on, they are forced to make a tough decision: buy bonds and hope to make money via arbitrage or abandon the bond strategy, if even partially, in favor of staying in the equity markets where there is historically more risk. Reducing risk was the whole point of moving from stocks to bonds as one progressed into retirement in the first place. Now these same people are basically being forced back into the equity markets in search of returns. If you look back at the beginning of 2008, the 30-year bond was paying 4.35% interest; nearly double what it is right now. Our point is simple; before the last major financial blowout, most seniors were still in their traditional risk profile – fewer stocks and more bonds and fixed income to mitigate risk. When the fall of 2008 came around, money poured from stocks into bonds, driving up the price of bonds and the yields down. So our seniors had a little of their cake and got to eat it as well. They had purchased their bonds at comparatively lower prices and got decent yields. Then as money poured into bonds after Lehman and through the end of 2008, they maintained their yields AND had the option of selling their bonds at a profit as well if they desired the safety of cash.

Fast forward to today where many seniors are hunting returns in the stock market. Another 2008 type event would have dramatically different results this time around just because of the way investors are positioned. The ones who are in bonds would have (and have had) the opportunity of selling their bonds at higher prices. Bonds spiked after the Brexit vote back at the end of June and haven’t really given all that much back.

The bottom line here is the negative yield curve punishes savers and enables the USGovt to continue its profligate spending by providing it with better than prime rates when it should in fact be paying much higher rates due to its lack of spending control, the absolute enormity of the debt that must be repaid, and a complete and total lack of willingness on the part of ANYONE to give up anything. The American people want their freebies and the USGovt is more than happy to oblige in order to buy support. We have seen where this lack of responsibility and stewardship has gotten Europe, but hey, this is America and nothing bad can happen to us, right? This false reality is supported by the fact that when anything bad happens financially, there is a knee-jerk and immediate flight to the USDollar and USGovt debt. So much so that rates have been driven down to the point where USBond investors are actually paying Uncle Sam for the ‘privilege’ of owning government debt.

Some other Miscellanea Regarding the Yield Curve

Another characteristic of the yield curve that has been the subject of much study over the years is the shape of the curve. Is it flat, steep, inverted, humped, etc.? A great deal of research has been done over the decades relating to the shape of the yield curve, certain spreads, and how they portend the future for the USEconomy. What you’ll see from the charts below is that the yield curve is flattening and that generally means a great deal of uncertainty regarding the direction of the USEconomy, which isn’t surprising. The fact that anyone is willing to loan the USGovt money for 30 days let alone 30 years at a negative rate ought to say enough about what is going on and how out of kilter things really are.

Below is the yield curve as of 7/29/2016:

Also, the 20-year Bond generally yields around 200 bps (2%) more than the 30-day T-Bill. Today that is most definitely NOT the case with the spread being closer to 1.5%.

What we’re seeing above is a fairly ‘normal’ yield curve in terms of shape, but one that is completely negative. We’ve placed the horizontal line representing the Core CPI to illustrate this point. You can also see that the curve has flattened considerably, especially from 1-year and out when comparing the 7/1/2015 and 7/29/2016 curves.

This begs the question, why would investors, knowing what they do about the global state of affairs, tie up money at the longer durations? We don’t believe these are buy and hold folks, unless you’re talking about the not-so-USFed’s trading desk. Their role in all this hasn’t been discussed and is a topic for another day, but we’ll remind you again of their primary role – management of expectations, and basically holding this broken mess together as much as possible. Getting back to reasons for holding the longer maturities, speculation likely tops the list. Market actors expect crises to occur fairly regularly now, as has been the case. These same actors know that when a crisis hits, money flies into USTreasury debt, even the long end. Brexit is the most recent example of this. Money absolutely poured into the 10 and 30-year portions of the curve.

Frankly, gold is a much safer haven, but runs into the old argument that it doesn’t pay interest. Well people, neither do USTreasuries. They pay negative interest. So the question becomes would you rather own the debt instrument of an economically, financially, intellectually, and morally bankrupt entity intent on its own demise or own something that owes nobody, has been recognized as money for thousands of years and pays peace of mind as its ‘interest’? We happen to think this one is a no-brainer.


Last Time We Were Here Recession Started

By David Stockman – Re-Bloged From Stockman’s Contra Corner

The US Treasury yield curve has collapsed to its flattest since Nov 2007… just before the US economy officially slumped into recession…

 “There can’t be a recession… the yield curve is not inverted…”

Perhaps US banks are starting to realize the inevitable also?