The Steepening of the Yield Curve is the Beginning of the End (Now)

Oct 12, 2019 | News

Authored by Sven Henrich via,

They sure are trying their best. To do what? To goose markets higher. It’s been quite the spectacle all year, but this Friday sure took the cake. The entire week had been a giant jerk fest of sudden rips and dips as headline chasing algos were ripping through support and resistance levels unleashed like fat kids at the candy shop. But this Friday was something else, almost designed to have markets overdose on an insulin spike.

Ever more hyped up on an impending China deal, every meeting, and movement of negotiators caused market spikes, a Trump tweet about “warm feelings”, a $82.7B repo operation by the Fed to keep things tidy, a sudden out of the blue $60B/month Treasury buying operation announced by the Fed, multiple Fed speakers to boot, what a scene.

10-Year Yields to Move Upward Before Year End: Metlife’s Matus

And really Fed? You are throwing this $60B a month announcement out on a Friday with the $DJIA already up 350 points? What are you thinking here? The Fed knows this kind of announcement juices up markets. The Fed sheepishly claims it’s not QE. Oh piss off already. Expanding the balance sheet by $60B a month is a massive intervention any way you cut it or slice it. How big? Do the math. $60B per month is a run rate of $720B a year. And while they claim they’ll stop it in Q2 next year who really believe anything they say? Did you believe QT was on autopilot last year? Lol. Fool me once.

You know what else is $720B a year or $60B a month? The ENTIRE US MILITARY BUDGET. The largest military budget on the planet. Millions under arms, submarines, aircraft carriers, nuclear arsenal, bombers, fighter jets, military bases across the globe, satellites, drones, laser guided missiles, you name it. All of it runs at $60B per month.
So lest everyone is blind to numbers these days as everything is so monstrous our eyes glaze over I trust this comparison highlights how massive the Fed’s announcement was on Friday. But not QE. Right. Believe it if you so choose.

And yet, despite 2 rate cuts, the liquidity and news spectacle on Friday, no new highs. Everything including the kitchen sink is being thrown at these markets. The hype is palatable. And here we are. One year after rate hikes and balance sheet unwind on autopilot we’re back into crisis management, because that’s what rate cuts and balance sheet expansion is.
The ECB has cut and relaunched QE, the Fed has cut twice and is now running a US military budget size balance sheet expansion program.

Take these actions and place them anywhere else in history (2000, 2007, any time) and this would be called an emergency intervention program.

Why is nobody calling it that now? Because all of our senses and perceptions have been dulled by the constant droning on of central bankers telling us that without their existence the stone age is coming back? Please.

Yes they are all afraid of the consequences of debt/credit monstrosity they have unleashed and their only choice to blow an even bigger bubble.

Whether they will succeed is another question. But know that all this frantic action to manipulate the liquidity and rate equation is in response to one chart, the chart that says we are at the beginning of the end.

First comes the yield curve inversion, then comes the steepening, and that’s exactly what happened this week:

Why are central bankers acting like there is a global crisis? Because they know exactly the history of this chart and hence they are trying everything in their power to avert the inevitable. And if that means they have to lie and not call it QE then that’s what they have to do.

They’re buying treasuries because the US government has an insatiable demand for debt. Spending keeps increasing, courtesy both GOP and Democrats, increased military spending, liability obligations, you name it, revenue is not large enough as growth is slowing, hence trillion dollar deficits are here and debt must be financed and when you have that much debt to sell you need buyers. And now the Fed is back in the game.

It’s all a big game.

Also a big game: That big China deal which is no big deal at all, it’s no deal. Nothing is in writing, nothing’s been signed, but let’s call it a great phase 1 partial whatever that means:

Let me tell you what it doesn’t mean: No company is suddenly going to increase their capex or business investments because in 5 weeks, maybe, something will get signed to buy more soybeans and pork as part of phase 1. They didn’t solve anything, it’s a face saving exercise and gives the Chinese time. Time for what? Time to see how the political situation unfolds in the US.

Impeachment? Here’s an out of field controversial and admittedly entirely speculative take on all this: Who’s says Trump is around for phase 2 or phase 3 as he called it yesterday? Everybody assumes he’ll survive impeachment and may well win the election next year. Who says he actually wants to? As radical as it sounds impeachment may be his best and most desirable option.

He sure is acting like he wants to get impeached, he’s practically daring not only Democrats but increasingly Republicans as well. Think about it. What if he really is trying to get impeached and nobody’s doing it for him? The logical path would be to do ever more outrageous things until they finally caved and impeached him. His sudden and unexpected move with the Kurds/Turkey caused big consternation with his Republican supporters who couldn’t quite fathom what he was doing. If he was trying to get impeached such a move would be consistent with such a move. Sounds too crazy? Consider this:

Why would Trump want to get impeached? It’s actually a win win for him. First off he would not have to risk losing at the ballot box next year. Despite all the claims to the contrary his poll numbers are dreadful, for someone not liking to lose a historical defeat in 2020 would not exactly be ego soothing. His entire narrative has been around fake news, fake polls, fake this and fake that. A defeat at the ballot box next year would be a historic repudiation of such a narrative.

If he and his team know a recession is very possible in 2020, then they also know they would likely lose for that reason alone. But it’s more than that. An impeachment process allows to lose the presidency but keep a deep state conspiracy narrative alive. I didn’t lose, I was pushed out by the evils from within. A much more appealing narrative, especially if it comes with a blank immunity check for everything that may well still be uncovered. See, losing the 2020 election doesn’t come with an immunity deal. It may come with an arrest warrant. But dragging the country through a paralyzing constitutional crisis would likely come with an immunity deal as people from both sides would practically beg him to step down. Sure he says, but gimme and my family a blanket get out of jail free card. Why don’t you President Pence? After all it’s been done before.

The political remains speculative, but the Chinese are well served in waiting and managing to get a tariff delay for October in exchange for buying some soybeans and pork. Who knows that the political landscape will be 2-3 months from now.

But what is clear is this non deal deal is not going to suddenly promote investment or sudden economy growth. It may produce a sugar relief high, but as I outlined before: Bulls need new highs or face a major double top. And so far, despite all this:

No new highs. Yet. Next week Q3 earnings will start rolling in in earnest. Besides the results, look closely at the outlooks, especially hiring, as jobless claims is still the missing link for bears. But this week bears got another checkmark: The steepening of the yield curve has begun. The beginning of the end?


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