{"id":1165282,"date":"2020-02-11T16:17:47","date_gmt":"2020-02-11T22:17:47","guid":{"rendered":"https:\/\/dailyreckoning.com\/?p=108957"},"modified":"2020-02-11T16:17:47","modified_gmt":"2020-02-11T22:17:47","slug":"the-great-war-of-stocks-and-bonds","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1165282","title":{"rendered":"The Great War of Stocks and Bonds"},"content":{"rendered":"

This post The Great War of Stocks and Bonds<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

Two options rise before us this day…<\/p>\n

Option 1: The stock market is right. Option 2: The bond market is right.<\/p>\n

The stock market is cheery and confident. It presently goes at record heights\u2026 and bursts with belief in a superior tomorrow.<\/p>\n

Moreover, it has a decade of nearly unbroken prosperity in back of it.<\/p>\n

The bond market \u2014 meantime \u2014 is dark, dour, down in the mouth.<\/p>\n

Today the 10-year Treasury yields a slender 1.59%.<\/p>\n

But not 1.5 years ago, in October 2018, it yielded 3.16%. In general…<\/p>\n

The 10-year Treasury yield sinks when markets anticipate economic weather ahead, subdued inflation\u2026 and lower animal spirits.<\/p>\n

A lean season is ahead then, the bond market struggles to say above the dinning stock market.<\/p>\n

Two Irreconcilable Views<\/b><\/h2>\n

Pit the one against the other, stock versus bond. No compromise, no truce, can sink their differences. They are too vast.<\/p>\n

As well ask the respective lords of heaven and hell to sign a treaty of peace\u2026<\/p>\n

As well ask Hatfield and McCoy to share a kiss\u2026<\/p>\n

As well ask the two poles of Earth to join at the equator.<\/p>\n

That is, as well request the impossible.<\/p>\n

As economist David Rosenberg styles it:<\/p>\n

\n

Both bonds and stocks can\u2019t be right at this moment in time. We have to choose which asset class has the story right\u2026<\/i><\/p>\n<\/blockquote>\n

Which asset class has the story right \u2014 stock or bond?<\/p>\n

We bring a prejudiced opinion to the proceedings, you say. That is, we bring a prejudiced opinion against the stock market.<\/p>\n

Yet today we blindfold our eyes, hold the scales of justice even… and grant each side an impartial hearing.<\/p>\n

The stock market rises to read its opening statement…<\/p>\n

Why Shouldn\u2019t the Stock Market Be Setting Records?<\/b><\/h2>\n

It insists the facts justify its optimism in full.<\/p>\n

It reminds the court that unemployment scarcely has existence, that real wages are increasing, that January manufacturing jumped, that productivity is on its legs again.<\/p>\n

The stock market is simply a mirror of these fabulous facts, it insists.<\/p>\n

We must concede, the evidence produced has anchors in truth…<\/p>\n

Unemployment hovers near record depths, at 3.6%. And 2019 witnessed America\u2019s greatest productivity gains since 2009.<\/p>\n

What is more, real hourly wages (inflation-adjusted, that is) expanded last year at the greatest rate since 2015.<\/p>\n

Meantime, the Institute for Supply Management claims its January index of American factory activity came in at 50.9 \u2014 up from December\u2019s 47.8.<\/p>\n

Any number above 50 indicates a manufacturing expansion, a blossoming.<\/p>\n

But the bond market thunders to its feet, and files a blistering objection\u2026<\/p>\n

Don\u2019t be Fooled!<\/b><\/h2>\n

Take unemployment, the bond market argues.<\/p>\n

Set aside the fact the United States Bureau of Labor is an agency of torture \u2014 that it twists, contorts, batters and gouges the numbers into false confessions.<\/p>\n

Accept the 3.6% unemployment rate as truth, the bond market allows in generosity.<\/p>\n

Unemployment sagged below 4% in April 2000, it reminds us \u2014 at the peak of the dot-com derangement.<\/p>\n

The economy was in recession by March 2001\u2026 less than one year later.<\/p>\n

And prior to April 2000, unemployment last hung below 4% in December 1969.<\/p>\n

What followed?<\/p>\n

The economy dropped into recession that same month\u2026 where it remained until November 1970.<\/p>\n

Be not deceived then by today\u2019s gaudy unemployment figure. It gives a false confidence, argues the bond market.<\/p>\n

With the serenity of a card sharp with an ace card up its shirtsleeve, this market then summons a certain Nicole Smith to the witness stand\u2026<\/p>\n

Damning Testimony<\/b><\/h2>\n

Ms. Smith is chief economist at Georgetown University\u2019s Center on Education and the Workforce.<\/p>\n

Under examination she reveals:<\/p>\n

\n

If we look historically at other times when the unemployment rate has fallen below 4%, it\u2019s times where it was the boom phase just before recession or just after a major war period\u2026<\/i><\/p>\n

It\u2019s almost a precursor for a recession or a precursor for another slumping economy.<\/i><\/p>\n<\/blockquote>\n

We steal a furtive glance at the stock market. It is sunken in its chair, beads of perspiration forming about its forehead. It reaches for a glass of water.<\/p>\n

But to proceed\u2026<\/p>\n

Next we come to the alleged productivity surge.<\/p>\n

Less Than Meets the Eye<\/b><\/h2>\n

The bond market will allow that United States productivity expanded 1.8% last year. Yet it is eager to remind the court\u2026<\/p>\n

That productivity still runs substantially beneath the 2.1% average prevailing since the Second World War.<\/p>\n

And that the current expansion\u2019s annual productivity gains average a marginally productive 1.3%.<\/p>\n

The bond market demands to see more before budging from its skepticism.<\/p>\n

And manufacturing?<\/p>\n

It concedes the January index broke above the critical 50 threshold.<\/p>\n

But it reminds us that manufacturing was in actual recession for all 2019 \u2014 all of it, January\u2013December.<\/p>\n

It will not permit a random lurch in the chart to fox it, to trick it. Once again, the bond market insists upon further evidence.<\/p>\n

The Bond Market\u2019s Star Witness<\/b><\/h2>\n

Finally the bond market calls upon its star witness: the yield curve.<\/p>\n

As we have explained before\u2026<\/p>\n

The yield curve is simply the difference between short-term and long-term interest rates.<\/p>\n

Long-term rates normally run higher than short-term rates. That is because the long-term future holds less certainty than the short-term future.<\/p>\n

Investors, as a result, demand greater compensation to hold a 10-year Treasury than a 3-month Treasury.<\/p>\n

The 10-year yield should therefore run substantially higher.<\/p>\n

But when the 3-month yield and the 10-year yield begin to converge\u2026 the yield curve flattens.<\/p>\n

And a flattening yield curve is a possible omen of lean times.<\/p>\n

But the true menace is when the yield curve inverts \u2014 when long-term yields actually slip beneath short-term yields..<\/p>\n

An inverted yield curve is a nearly perfect fortune teller of recession. An inverted yield curve has preceded recession on seven out of seven occasions<\/i> 50 years running.<\/p>\n

Only once did it yell wolf \u2014 in the mid-1960s. And the yield curve is giving off another alarm.<\/p>\n

\u201cThe U.S. Yield Curve Is Flirting with Another Broad-based Inversion\u201d<\/b><\/h2>\n

Reports Bloomberg:<\/p>\n

\n

The U.S. yield curve is flirting with another broad-based inversion, reigniting Wall Street fears over the fate of the American economy\u2026 After a respite early last week, the curve is once again flattening, with the spread between yields on 3-month and 10-year Treasuries inverting once more on Monday. This followed an earlier inversion starting Jan. 30 that was caused by growing angst about the coronavirus and an equity sell-off.<\/i><\/p>\n<\/blockquote>\n

Yet an inverted yield curve is not necessarily an immediate scourge. History reveals its dire effects may not manifest for 12\u201318 months \u2014 or longer.<\/p>\n

The curve has inverted at various periods over the past two years, incidentally.<\/p>\n

But the bond market rests its case. In summation, it argues the stock market gives a dreadfully inaccurate reading of economic health.<\/p>\n

\u201cNever Before Has There Been such a Loose Relationship to Economic Growth\u201d<\/b><\/h2>\n

It cites the aforesaid David Rosenberg:<\/p>\n

\n

Never before has there been such a loose relationship to economic growth\u2026 this is a stock market that is being driven by flows rather than by economic fundamentals.<\/i><\/p>\n<\/blockquote>\n

At this point we recall Mr. Rosenberg\u2019s previous statement:<\/p>\n

\n

Both bonds and stocks can\u2019t be right at this moment in time. We have to choose which asset class has the story right\u2026<\/i><\/p>\n<\/blockquote>\n

And which asset class has the story right, in his estimate?<\/p>\n

\u201cHistory sides with the Treasury market.\u201d<\/p>\n

A Ruling<\/b><\/h2>\n

We are forced to agree.<\/p>\n

The bond market will let you know where the economy is heading, say the veterans.<\/p>\n

New York Times<\/i> economics reporter Neil Irwin:<\/p>\n

\n

Savvy economic analysts have always known the bond market is the place to look for a real sense of where the economy is going, or at least where the smart money thinks it is going.<\/i><\/p>\n<\/blockquote>\n

We must rule, therefore, in favor of the bond market. The coronavirus only reinforces our judgment.<\/p>\n

The stock market will naturally appeal its case to a higher court.<\/p>\n

And yes \u2014 we freely concede \u2014 it may even win…<\/p>\n

Regards,<\/p>\n

Brian Maher
\nManaging editor, The Daily Reckoning<\/i><\/p>\n

The post The Great War of Stocks and Bonds<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

This post The Great War of Stocks and Bonds<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

Stocks and bonds: two incompatible views…<\/p>\n

The post The Great War of Stocks and Bonds<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n","protected":false},"author":16,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[1412,3724,366,398,463],"tags":[],"_links":{"self":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1165282"}],"collection":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/users\/16"}],"replies":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1165282"}],"version-history":[{"count":1,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1165282\/revisions"}],"predecessor-version":[{"id":1165283,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1165282\/revisions\/1165283"}],"wp:attachment":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1165282"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1165282"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1165282"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}