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…
I wish I had more knowledge/background to better understand what you are saying here. Reading a couple more times & looking up a couple things should help.
Thanks Dave. Keep up the good work – it is much appreciated.
“But keep an eye on the stock prices of Deutsche Bank, Goldman and Morgan Stanley – as well as the Treasury yield curve…”
Blah, blah, blah…
We are doing this for years now. Nothing happened and probably never will!!!
Then why do you waste time reading sites like mine and following the markets. Just go buy and FAANG fund and do something better with your time. You sound like an entitled pussy with your ranting
These banks mentioned failed the Fed stress test yet there stock went up! This shows me the games rigged and it’s only a matter of time before they lose control. Even The Fool Ben Bernanke says things most likely blow up by 2020!
Well it is not surprising that Deutsche Bank’s stock went up because it was very oversold according to many indicators and was due for at least a bounce. The failing of the stress test was pretty much expected so that bad news was already priced in the stock. Too many people were shorting the stock and had to cover their position so we had what is called a short-covering rally which still may have some room to run as the chart still looks short-term positive. Nothing unusual about it.
Patience my Friends, gravity will pull them down
Dave, if everyone knows about the correlation of an inversion of the yield curve with recessions and the Fed et al (Exchange Stabilization Fund?) have great power to manipulate treasury interest rates, why would they let it happen?
They can influence Treasury yields but they can’t control them. Market is too big
They have to offer higher interest rates short term to attract buyers of the debt [bonds]; am I understanding this right? Or is another dynamic in play here?