Recently the 2 and 10 year US government treasury yield curve spread became inverted creating all kinds of hysteria and fears about a recession, compounding the negative sentiment created by the trade war fears. Here are some headlines that appeared last Wednesday in the Globe and Mail.
"Inverted yield curve rattles investors wary of dying stock bull market"
"US Treasury bond curve inverts for first time since 2007 in recession warning"
"Countdown to recession: What an inverted yield curve means"
"Buying this dip is a losing proposition at this stage of the market cycle"
These headlines tell you the wall of worry is very much alive and well. If a US recession is immanent it would be the most telegraphed recession of all time! We know that Mr. Market doesn't make things this obvious. As per the motto of this blog which has held true over and over again, Mr. Market makes fools of the majority. The reason why is because the market is all knowing of whatever the consensus expectation is and hence it gets priced in accordingly. All it takes is a little bit of news that goes contrary to the consensus and it will send the market sharply in the opposite direction. Furthermore, whenever there is a such a widely held concern/fear, you can bet that government authorities are well aware of it and will get motivated to take action to counter it in this post 2008 world. We are now hearing talks that European authorities are mulling over increased spending plans which is causing futures to surge as I type this. There is also hopes that Powell will hint at accelerated rate cuts in the Jackson hole meeting this week.
Could these hopes of Stimulus and Jackson hole be premature? Yes, but it just goes to show you that all it takes is a little bit of positive news in this environment of entrenched negative sentiment to trigger a strong upside move in the market.
A good analogy to describe the market would be this. If you know you're going to get punched in the head, you will put your guard up to protect yourself. You would still feel the punch but the force of it will be blunted and you won't get knocked out - that is the equivalent of what's been happening to the market recently with the trade ware and interest rate hysteria. These concerns have been well known and well feared all year which is why the market has only corrected and not cratered every time there is a flare up of these fears. Investors/traders have had their guard up the entire year for the most part. The punches that knock you out are the ones you don't see coming.
Ultimately, I expect a bullish resolution to this but as I've said many times, the ST is always difficult to navigate because you never know what the headlines are going to be when you wake up in the morning or if fickle traders will flip flop from being too negative to too positive. Chasing the market to either the upside or downside has been a disaster for traders during this corrective phase.
Let's talk about bonds again....as I type this, the consensus view is that low US bond yields are not only justified but a bargain because rates are negative in Europe and Japan. This view is coming AFTER when bonds have had one the biggest rallies in years and are extremely overbought on multiple time frames! It reminds me of the global synchronized growth consensus of stocks in early 2018 at a time AFTER the market was extremely overbought on multiple time frames....we all know how that played out. The question I have for the bond bulls is this....where the fuck were you a year ago when bond prices were much lower? Oh wait...you were telling everyone to avoid bonds like the plague because the fed was raising rates! You were telling people that bond prices were overvalued and that the 10 year yield was heading to 4-5%. You were telling people who owned balanced portfolios that they need to look for an alternatives for the traditional fixed income part of their portfolio.
Right now expectations for bonds are very high at a time in which they are very overbought, not to mention having received a ton of inflows, again, just like with stocks coming into 2018. This makes bonds ripe for a classic rug pull from Mr. Market. At the very least, it warrants one to not make any new purchases of bonds. In my view bonds are in a position that is vulnerable to a strong reversal of its primary trend the moment there are signs of economic and inflation upturns. I would expect that a year from now we will see bond prices notably lower and hence yields notably higher than they are now.
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