Tag Archives: yield curve

The Yield Curve Is The Economy’s Canary In A Coal Mine

The economy has hit a wall and is now sliding down it. I don’t care what bullish propaganda may or may not be bubbling up in the headlines from the financial media and Wall Street, the hard numbers I look at everyday show accelerating economic weakness. The fact that my view is contrary to mainstream consensus and political propaganda reinforces my conviction that my view about the economy is correct.

As an example of the ongoing underlying systemic decay and collapse conveyed by this week’s title, it was announced that General Electric would be removed from the Dow Jones Industrial Average index and replaced by Walgreen’s. GE was an original member of the index starting in 1896 and was a continuous member since  1907.

GE is an original equipment manufacturer and industrial product innovator. It’s products are used in broad array of applications at all levels of the economy globally.  It is considered a “GDP company.” GE was iconic of American innovation and economic dominance. Walgreen’s is a consumer products reseller that sells pharmaceuticals and junk. Emblematic of the entire system, GE has suffocated itself with poor management which guided the company into a cess-pool of financial leverage and hidden derivatives.

As expressed in past issues (the Short Seller’s Journal), I don’t put a lot of stock in the regional Fed economic surveys, which are heavily shaded by “hope” and “expectation” metrics that are used to inflate the overall index level. These are so-called “soft” data reports. But now even the “outlook” and “expectations” measurements are falling quickly (see last week’s Philly Fed report). The Trump “hope premium” that inflated the stock market starting in November 2016 has left the building.

Something wicked this way comes:  Notwithstanding mainstream media rationalizations to the contrary, a flattening of the yield curve always always always precedes a contraction in economic activity (aka “a recession”). Always. Don’t let anyone try to convince you otherwise. An “inverted” yield curve occurs when short term yields exceed long term yields. When the yield curve inverts, it means something wicked is going to hit the financial and economic system.

Prior to the financial crisis in 2008, the yield curve was inverted for short periods of time during 2007. The most simple explanation for why inversion occurs is that performance-driven capital flows from riskier investments into the the longer end of the Treasury curve, driving the yield on the long end below the short end. The expectation is that the Fed will be forced to cut short term rates drastically – thereby driving the short-end lower, which in turn pulls the entire yield curve lower (the yield curve “shifts” down). This gives investors in the long-end a better rate-of-return performance on their capital than holding short term Treasuries for safety. The Fed’s dilemma will be complicated by the fact that it does not have much room to cut rates in order to combat a deep recession.

Studies have shown that curve inversions precede a recession anywhere from 6 months to 2 years. I would argue that, stripping away the affects of inflation and data manipulation, real economic activity has been somewhat recessionary for several years. The massive intervention in the Treasury market by the Fed, ECB and Bank of Japan has muted the true price discovery mechanism of the Treasury curve. The curve has been barely upward sloping for quite some time relative to history.  This could indeed be history’s equivalent of an inverted curve. That being the case, if an inversion occurs despite the Fed’s attempts to prevent it, it means that whatever is going to hit the U.S. and global financial and economic system is going to be worse than what occurred in 2008.

A note on gold and silver: The massive take-down in the price of gold and silver, which is occurring primarily during the trading hours of the LBMA and the Comex – both of which are paper derivative markets – is quite similar to the take-down that occurred in the metals preceding the collapse of Bear and Lehman in 2008. It is imperative that the price of gold’s function as a warning signal is de-fused in order to keep the public wallowing in ignorance – just like in 2008.  But keep an eye on the stock prices of Deutsche Bank, Goldman and Morgan Stanley – as well as the Treasury yield curve…

Are The Wheels Coming Off The System?

The dollar is said to be “soaring,” though I take issue with that characterization for now (see the chart below);  10-yr Treasury yields are also rising, though the yield on the 10-yr is only up about 67 basis points if you measure from January 1, 2017.  What’s really going on?

Ten years of money printing by the Federal Reserve has removed true price discovery from the markets.  The best evidence is the inexorable rise in the stock market despite the fact that corporate earnings have been driven largely by share buybacks and GAAP accounting gimmicks.  Measuring stock values  on the basis of revenue and revenue growth multiples would reveal the most overvalued stock market in U.S. history.

Now that the Fed has stopped printing money used to buy Treasury issuance and prop up the banks, the system is vulnerable to relatively small increases in interest rates.  20 years ago, when I was trading junk bonds on Wall St, a 60 basis point rise in the 10yr or a 200 basis point rise in the dollar index would have be a non-event.  Now those types of moves permeate the current market and policy narrative.

In fact, the Fed is terrified by the Frankenstein stock market is has created to the extent that, since the sharp decline in August 2015, the Fed steps in to prevent the inevitable crash when a draw-down in the Dow/SPX approaches 10%.

With the dollar moving higher, gold is has been sluggish. Now the price is being attacked aggressively in the paper gold derivatives market.  The propaganda is that a rising dollar and rising rates are negative for gold.  However, gold had one of its best rate or return periods from mid-2005 to mid-2006 while the dollar was spiking higher.  More troubling, the trading pattern in gold and the dollar reminds me of the same pattern in 2008 – just before the de facto financial system collapse hit the hardest (click on image to enlarge):

The economy has been in a recession for most households below the top 1% in wealth and income. This chart is one of many examples showing that most households are not even fortunate enough to be living on the economic gerbil wheel. Instead, they are sliding backwards downhill in their debt/lease-saddled vehicle and the brakes are about to go out:

I would argue that the rising dollar – an concomitantly the obvious official attack on the price of gold – is the signal that the wheels are coming off the system. The Government issued nearly half-a-trillion dollars in Treasuries in Q1, thanks to the soaring defense and entitlement budget  combined with the massive tax cuts. The spending deficit and the flood of Treasury issuance is going to get worse from there and well beyond the CBO’s sanguine projections.

Throw in soaring oil and gasoline prices and rising household debt delinquency/default rates against a backdrop of stagnant wages and an accelerating ratio of household debt service payments to personal income and it’s pretty obvious that the wheels are coming off the system.

The U.S. economic and financial system is an enormously fraudulently Ponzi scheme in which record levels of money printing and credit creation have acted as temporary bandages placed over gaping cancerous economic wounds that are soon going to start hemorrhaging.

The homebuilders are already in a bear market, like the one that started in mid-2005 in the same stocks about 18 months before the stock market started heading south in 2007. My Short Seller’s Journal subscribers and I are raking in a small fortune shorting and buying puts on homebuilder stocks. As an example, I recommended shorting Hovnanian (HOV) at $2.88 in early January. It’s trading at $1.78 as I write this – a 38.2% ROR in 4 months. Anyone get that with AMZN in the last 4 months? You can learn more about the SSJ here: Short Seller’s Journal.

Homebuilder Stocks: Overvalued, Over-Leveraged And Going Lower

I continue to believe that the “lowest hanging fruit” in shorting this stock market is the homebuilders and related stocks. History appears to be repeating, or at least “rhyming” in the housing sector:

Most investors do not realize this, because the majority of traders and “professional” money managers were still in college or b-school during the 2007-early 2009 stock market collapse, but the homebuilding sector actually peaked and began a waterfall decline in mid-2005 (see the chart above).

The propaganda narrative is that this time around the subprime mortgage issuance has been contained by regulation.  This is patently false.  The subprime mortgage game shifted from largely private underwriters to the Federal Government, starting in 2008.  Because the Government is involved, it has been well disguised in a “conforming” mortgage costume based on Federal Housing Finance Agency “requirments.”  Well, more like “guidelines” than requirements.

The FHA began offering 3.5% down payment Federally guaranteed mortgages in 2008.  Its underwriting market share went from 2% to 20%.  Not to be outdone, Fannie and Freddie began to offer 3% down payment, reduced PMI mortgages a few years later.  Not to be outdone by themselves, and after Fannie reported a $6 billion Q4 loss and required  a $3.7 billion cash infusion from the Taxpayers, Fannie and Freddie raised the DTI limit on conforming mortgages to 50%.  If the housing market is healthy, why is Fannie Mae receiving cash infusions?  A 50% DTI means that the mortgage applicant requires 50% of its gross monthly income to service its monthly debt payments (mortgage, credit car, auto, etc).

A 3% down payment, 50% DTI mortgage is subprime garbage.  It also implies that the FICO score is a farce.  Some who requires a 3% (in many cases less) downpayment with a 50% DTI  does not have prime credit rating.   After the DTI ceiling was raised in December, new  mortgages with DTI’s in excess of 45% jumped from 5% to 20%  of all mortgage issuance in January and February.  This subprime mania in its essence – though not name – and will lead to another massive Fannie/Freddie/FHA/VHA bailout.

All of the signs of the top of the last bubble are re-emerging. Home equity “cash out” loans are soaring again at what is likely peak home prices. According to Freddie Mac, cash-out “refis” are at their highest level since 2008.

We saw how this movie ended the last time around. If you forgot, rent “The Big Short.”  A private investment management company in California, Carrington Holding Company, has a mortgage lending facility that will now underwrite and fund mortgages to borrowers with credit scores as low as 500. Carrington will do loans up $1.5 million on homes/condos and home equity cash outs up to $500k. Recent credit events like foreclosure, bankruptcy or a history of late payments are acceptable. This business plan will not end well.

I recently saw a “for sale” in an upper-middle class neighborhood in Denver which advertised, “no money down, lender on site.” If the market is “hot,” why is this house being marketed as “no money down” and why is a lender at the open house? Is this a Volkswagon “sign and drive” transaction or this is a several $100k  home “purchase”  at what is likely the market peak?

This is in an area in which the average home sells for over $600k, which means unless the buyer puts down at least $70k, it can’t be backed by one of the Government mortgage agencies (the max loan limit for a conventional mortgage in Denver County $530k – in most areas of the country, the maximum loan size for a conventional Govt mortgage is $453k – Denver County is considered a “high price” area and thus the Government will underwrite a larger mortgage – “guidelines,” not “rules”).

This is the type of home borrowing that occurred in the last couple years of the mid-2000’s housing bubble. That “open house” sign also tells me that the market for homes that can’t be funded without Government assistance is deteriorating.

This housing market is unfolding in an eerily similar manner as the mid-2000’s bubble. Sales volume, prices and rental rates are starting to literally crash in New York City, as I’ve detailed in the last couple of issues. I read an article that said, based on the current sales rate, Miami has a built up a 6-year supply of condominiums. Again, the last time around the bubble began to pop first in NYC and south Florida. Phoenix and Vegas followed those two cities. As I presented last week, the move by Zillow Group to get into house-flipping is the signal for me that those two cities have peaked.

The Short Seller’s Journal provides unique insight to the economic data and corporate earnings – insight you’ll never get from so-called financial “experts.”  SSJ then offers ideas every week for making money on this insight.   To learn more, click here:  Short Seller’s Journal subscription information


Stocks Dump Today – WTF Just Happened?

The stock market (per the Dow), after an initial spike up at the open, has sold off continuously today. The sell-off began to accelerate just before 2 p.m. EST on no specific news or event catalysts.  So what the heck happened?  To begin with, the stock market jumps at the open almost everyday no matter what type of news hits the tape overnight.  It’s clear that the Fed’s “unspoken” policy is to support asset prices.  But it’s the events developing behind the thick veil of propaganda that is starting to become obvious.

The real economy sucks.  The average household is sinking slowly under  the weight of debt that grows continuously and will soon become unbearable.  The fraud and corruption at all levels of Government and Corporate America has become glaringly blatant.   The Federal Government is going to issue well over $1 trillion in new Treasury debt this year – debt that not only will never be repaid but will continue to grow exponentially until the system collapses.

Gold has spiked up in response to the stock market turmoil.  Physically deliverable gold is running low in NY and London.  The clearest sign of this is persistent backwardation on the LBMA.  Eric Dubin and I discuss the ticking time bomb of rising interest rates and what it will take for gold and silver to finally break out and up in our “WTF Just Happened” podcast hosted by Jason Burack’s  Wall St For Main St:

Has The Fed Actually Raised Rates This Year?

The answer is debatable but it depends on, exactly, to which rates you are referring.  The Fed has “raised,” more like “nudged,” the Fed Funds target rate about 50 basis points (one-half of one percent) this year.  That is, the Fed’s “target rate” for the Fed Funds rate was raised slightly at the end of two of the four FOMC meetings this year from 50 to 75 basis points up to 1 – 1.25%.  Wow.

But this is just one out of many interest rate benchmarks in the financial system.  The 10-yr Treasury yield – which is a key funding benchmark for a wide range of credit instruments including mortgages, municipal and corporate bonds, has declined 30 basis points this year.  Thus, for certain borrowers, the Fed has effectively lowered the cost of borrowing (I’m ignoring the “credit spread” effect, which is issuer-specific).

Moreover, the spread between the 1-month Treasury Bill and the 10-yr Treasury has declined this year from 193 basis points to 125 basis points – a 68 basis point drop in the cost funding for borrowers who have access to the highly “engineered” derivative products that enable these borrowers to take advantage the shape of the yield curve in order to lower their cost of borrowing:

In the graph above, the top blue line is the yield on the 10-yr Treasury bond and the bottom line is the rate on the 1-month T-bill.  As you can see the spread between the two has narrowed considerably.

Thus, I would place the news reports that the Fed has “raised in rates” in the category of “Propaganda,” if not outright “Fake News.”

One has to wonder if the Fed’s motives in orchestrating that graph above are intentional. On the one hand it can make the superficial claim that it is raising rates for all the reasons stated in the vomit that is mistaken for words coming from Janet Yellen’s mouth;  but on the other hand, effectively, the Fed has managed to lower interest rates for a widespread cohort of longer term borrowers.

Furthermore, this illusion of “tighter” monetary policy serves the purpose of supporting the idea of a strong dollar and enabling a highly orchestrated – albeit temporary – manipulated hit on the gold price using paper gold derivatives.

To borrow a term from Jim Sinclair, the idea that the Fed has “raised rates” is nothing more than propaganda for the primary purpose of “MOPE” – Management Of Perception Economics.  On that count, I give the Fed an A+.

30-yr Treasury Yield: “The Economy Is Collapsing”


We know that inflation is running a lot higher this year – true inflation, that is, and not the phony Government CPI.  Thus, low inflation would not explain the 80 basis point drop in long bond yields since January 1st.   “Flight to safety” would flow either into the very short end of the yield curve or into gold or under the mattress.   Therefore, it is apparent to me that the Treasury bond market is starting to price in economic armegeddon.   This will mean deflation of asset prices (stocks, homes, crappy Wall Street concoctions) but not necessarily deflation of necessities.

With retail sales, auto sales,  and home sales all collapsing, the only explanation left is that the Treasury bond market is pricing in a severe economic downturn.    This would explain also why high yield bond spreads have widened considerably over the past month.  The big drop in oil prices this week would further affirm this.

For anyone who is reading this and has invested in my Easy Trade Idea from the end of July, I used to today’s low volume pullback in the stock to add to our position in the fund by shorting slightly in the money puts that expire tomorrow.  If the price closes below the strike tomorrow, we will take delivery of more shares with a cost-basis reduced by the amount of put premium we collected today.