Wednesday, September 5, 2018

U.S. Notes: Screaming Inversion...Recession

All analysts have different indicators to make their determinations on a stock on the market and on the economy. I believe one of the best indicators for an approaching recession is the spread on the U.S. 10 - 2 yield curve. At the moment the curve is turning flat.

As of the last day in August 2018, the spread on the yield between the U.S. 10 - 2 year note was 25 basis points. What this implies is if you purchase the U.S. 10 year note, you only receive a fraction higher yield for the additional three years or 36 months. C'mon! Get real!

Consider what has transpired in the last three years? Housing costs are up 30 % or more. Mortgage interest rates are a full percentage higher. Understand what that means: all costs are much more expensive and wages have not increased at the same ratio. Citizens are losing and the government, run by the bankers at the Fed, only offer you a measly 25 basis points to cover those costs. How about inflation? How about Obama care? How about auto insurance? Everything is up except the rate to invest in America.

I could argue that we are already in an inverted yield if you use logic and what history has taught us.
First, let's talk logic.
The T-Bill offers you for a one year note the rate of 2.46%. This is fabulous. Consider in Europe they take money from you because they offer negative notes. You have the safety and strength of the US backing your claim. So, at the end of the year you decide to purchase a longer term note, the two year. Currently, it offers a yield of 2.62%. Wait a minute, you say! How could I receive 2.46% yield for one year and not 4.92% for two years? 
Now, you understand why people put their money into stocks because the treasury yields do not make sense. They get worse with the duration of the note. Currently, if you purchase a 10 - year T-Bill, it yields 2.88%. Don't go off on me about the difference of nine years with the one year note and the ten which is only 42 basis points higher for almost a decade. It is basically financial corruption! Anyway, the 30 year offers you a whole 3%. Wow! Hold the presses! This means for 20 additional years, you get a whole 12 more basis points. I say again, financial corruption!

It is no wonder the Fed and the Treasury play financial games. The treasury prints the bond and the Fed buys it. They purchase over 60% of offerings. Now, you see from logic all these notes have no resemblance to life and inflation. The only positive thing I can say is thank God that I'm an American and not in Venezuela, Argentina, Switzerland, Germany or anywhere in Africa.

The other aspect to bonds and notes come from history. When central banks play too many card tricks with our money, the market rises up and bites them in the ass. The only problem with that is the every day man suffers due to it. Recessions come from these financial engineering games. From an historical view whenever the U.S. 10 - 2 year yield becomes inverted, a recession follows. At the moment the yield is the flattest it has been in over a decade. It rests at 24 basis points. It has touched even lower. Whenever the yield becomes inverted a recession is eminent. This indicator has been wrong only once. In 1998 the yield inverted briefly in May. The market had a correction, but no recession. However, just two years later in February of 2000, the market displayed a pattern that it currently is duplicating. The NADAQ hit a record high of 5,000. The S & P 500 peaked at 1,527. Over the following 31 months the S & P 500 lost over 49%. It would be over a decade before NASDAQ would reach 5,000 again. That is a long time to wait to break even...

We are experiencing similar price action in the market. NASDAQ hits new records on a daily basis. The S & P 500 hit a new high as well as the transports, but the Dow's high of January 2018 has not been breached. If it does not reach a new high by January 2019, this is considered a failed market. Let me repeat that: Failed Market!
Pay attention to the U.S. 10 - 2 year yield. It is very important. Hey, on a brighter note, we got football this week, Yay!