Marc Chandler, Managing Partner at Bannockburn Global ForEx joins me for a comprehensive recap of the market moves this week that continued to push US and international market to higher levels. A lot was on the back of trade optimism which Trump is trying to pullback after his comments today. Pay attention to Marc comments regarding markets not always following fundamentals.
Jordan Roy-Byrne joins me for a broad look at the main drivers for gold. Over a year ago Jordan was saying that gold would finally move when the Fed switched course from rate hikes. That happened at the end of last year and helped gold go though a very good 2019 so far. Now it is important to understand what could happen to gold if the Fed stops it’s rate cuts. We cover a lot in the interview but it is all important to understand.
Mike Larson, Editor of The Safe Money Report joins me to outline some historical extremes that we are seeing in the US bond market. As much as people want to dismiss the importance of the yield curve inversion the wide range of lower yields are telling a very important story about how worried investors are right now.
Also I will be traveling today back east for a wedding tomorrow. Posting will be light for the next couple days however please keep in touch by emailing me at Fleck@kereport.com. If you have any suggestions on companies to meet with at the Beaver Creek Conference please include those in your email and I will be sure to set up meetings.
It was another volatile week for US stocks but the real standout was the continued fall in yields and a quick inversion of the 10year/2year yield curve. Recession fears are on the minds of traders which is helping the safe assets garner a buy. We focus a lot on yields in this hour and also get an update from Auryn Resources.
Please keep in touch by emailing me at Fleck@kereport.com.
- Segment 1 and 2 – Axel Merk, President and CIO of Merk Investments kicks off the show with a comprehensive look at the markets. Take note of what Axel says regarding money flows into risk off assets being more a hedge right now.
- Segment 3 – Mike Larson, Editor of The Safe Money Report focuses on the falling yields in the US. We discuss what this means for the Fed and why he continues to like defensive stocks.
- Segment 4 – Ivan Bebek, Executive Chairman of Auryn Resources provides a full update and answers your questions on the status of the properties in Peru. We also discuss the work just completed at Committee Bay and the possibility of an asset.
Exclusive Company Interviews This Week
- Comments on the Uranium sector from the Sprott Conference . – UEC
- Novo Resources – A Closer Look At The First Egina Trench Results
Chris Temple wraps up today with his thoughts on the weakness today in risk on assets. This continues our ongoing discussions today about weakness in the US and the inversion of the yield curve. Investors are worried and rightfully so.
John Rubino, Founder of the Dollar Collapse website shares his thoughts on the falling markets, yield curve situation in the US and how gold is performing through all of this. We also discuss how the gold stocks are lagging and how gold stocks performed when the last recession hit.
Joel Elconin, Co-Host of the Benzinga Pre-Market Prep Show takes a broad look at the US markets and shares what has him worried. These worries range from weakness in oil stocks, yield curve inversions, and the government now attacking the tech stocks. Even though the markets were at all time highs not too long ago the bearish argument is starting to build up steam.
Chris Temple, Founder of The National Investor joins me for some comments on a looming yield curve inversion in the US and how the general Fed’s policy will play out for markets. Even with the delay of some tariffs announced this morning the yield curve and Fed policy remain the major long-term drivers that investors need to take note of.
Yesterday we furrowed our brow against the latest inversion of the “yield curve.”
The 10-year Treasury yield has slipped beneath the 3-month Treasury yield — to its deepest point since the financial crisis, in fact.
Inverted yield curves precede recessions nearly as reliably as days precede nights, horses precede carts… lies precede elections.
The 10-year Treasury yield has dropped beneath the 3-month Treasury yield on six occasions spanning 50 years.
Recession was the invariable consequence — a perfect 1,000% batter’s average.
But an inverted yield curve is no immediate menace.
It may invert one year or more before uncaging its furies.
But today we revise our initial projections — as we account for the “adjusted” yield curve.
The “adjusted” yield curve indicates recession may be far closer to hand than we suggested yesterday.
When then might you expect the blow to land?
Now… you realize we cannot spill the jar of jelly beans straight away. You must first suffer through today’s market update…
Markets plugged the leaking today.
The Dow Jones gained 43 points on the day. The S&P scratched out six. The Nasdaq, meantime, added 20 points.
Gold — safe haven gold — gained nearly $7 today.
But to return to the “adjusted” yield curve… and the onset of the next recession.
The Nominal vs. the Real
We must first recognize the contrast between the nominal and the real.
The world of appearance, that is — and the deeper reality within.
For example… nominal interest rates may differ substantially from real interest rates.
Nominal rates do not account for inflation.
Real interest rates (the nominal rate minus inflation) do.
That is why a nominal rate near zero may in fact exceed a nominal rate of 12.5%…
Nominal interest rates averaged 12.5% in 1979. Yet inflation ran to 13.3%.
To arrive at the real interest rate…
We take 1979’s average nominal interest rate (12.5%) and subtract the inflation rate (13.3%).
We then come to the arresting conclusion that the real interest rate was not 12.5%… but negative 0.8% (12.5 – 13.3 = -0.8).
Today’s nominal rate is between 2.25% and 2.50%. Meantime, (official) consumer price inflation goes at about 2%.
Thus we find that today’s real interest rate lies somewhere between 0.25% and 0.50%.
That is, despite today’s vastly lower nominal rate (12.5% versus 2.50%)… today’s real interest rate is actually higher than 1979’s negative 0.8%.
The Standard Yield Curve vs. The “Adjusted” Yield Curve
After this fashion, the standard yield curve may differ substantially from the “adjusted” yield curve.
Michael Wilson is chief investment officer for Morgan Stanley.
He has applied a similar treatment to distinguish the adjusted yield curve from the standard yield curve.
The standard yield curve — Wilson insists — does not take in enough territory.
It fails to account for the effects of quantitative easing (QE) and subsequent quantitative tightening (QT).
The adjusted yield curve does.
It reveals that QE loosened financial conditions far more than standard models indicated.
It further reveals that QT tightened conditions vastly more than officially recognized.
The adjusted curve takes aboard the Federal Reserve’s estimate that every $200 billion of QT equals an additional rate hike… for example.
The standard yield curve does not.
Thus the adjusted yield curve reveals a sharply more negative yield curve than the standard.
Here, in graphic detail, the adjusted yield curve plotted against the standard yield curve:
The red line represents the standard 10-year/3-month yield curve.
The dark-blue line represents the adjusted yield curve — that is, adjusted for QE and QT.
The adjusted yield curve rose steepest in 2013, when QE was in full roar.
But then it began a flattening process…
QT Drastically Flattened the Adjusted Curve
The Federal Reserve announced the end of quantitative easing in late 2014.
And Ms. Yellen began jawboning rates higher with “forward guidance” — insinuating that higher rates were on the way in 2015.
Thus financial conditions began to bite… and the adjusted yield curve began to even out.
By the time QT was in full swing, the adjusted curve flattened drastically. The standard curve — which did not account for QT’s constraining effects — failed to match its intensity.
Explains Zero Hedge:
The adjusted curve shows record steepness in 2013 as the QE program peaked, which makes sense as it took record monetary support to get the economy going again after the great recession. The amount of flattening thereafter is commensurate with a significant amount of monetary tightening that is perhaps underappreciated by the average investor.
Now our tale acquires pace — and mercifully — its point.
The Adjusted Yield Curve Inverted Long Before the Standard
After years of flattening out, the standard yield curve finally inverted in March.
Prior to March, it last inverted since 2007 — when it presented an omen of crisis.
But since March, the standard curve bounced in and out of negative territory.
The recession warning it flashed was therefore dimmed and faint — until veering steeply negative this week.
But the adjusted yield curve did not invert in March…
It inverted last November — four months prior. And it has remained negative to this day.
Adjusting the yield curve for QE and QT shows an inversion began at the end of last year and persisted ever since.
Thus it gives no false or fleeting alarm — as the standard March inversion may have represented.
We refer you once again to the above chart.
Note how deeply the adjusted yield curve runs beneath the standard curve.
A “Far More Immediate Menace”
Meantime, evidence reveals recession ensues 311 days — on average — after the 3-month/10-year yield curve inverts.
But if the adjusted curve inverted last November… we are presented with a far more immediate menace.
Here Wilson sharpens the business to a painful point, sharp as any thorn:
Economic risk is greater than most investors may think… The adjusted yield curve inverted last November and has remained in negative territory ever since, surpassing the minimum time required for a valid meaningful economic slowdown signal. It also suggests the “shot clock” started six months ago, putting us “in the zone” for a recession watch.
If recession commences 311 days after the curve inverts — on average — some 180 days have already lapsed.
And so the countdown calendar must be rolled forward.
Perhaps four–five months remain… until the fearful threshold is crossed.
If the present expansion can peg along until July, it will become the longest expansion on record.
But if the adjusted yield curve tells an accurate tale, celebration will be brief…
Managing editor, The Daily Reckoning