Monday, December 24, 2018

Merry Christmas you filthy animal

Worst drop on Christmas Eve, EVER. Can Trump and Mnuchin manage to scare markets even more before the new year? Can Trump fire all the Fed presidents? Can he fire Bloomberg for reporting bad news? I can't fathom what is going on in the White House or at the Treasury. All I know is that I am relatively much wealthier than 3 months ago compared to equity owners.

Thursday, December 20, 2018

2s-5s inversion, only 14 basis points separate the 2 and 10

We are inching closer to a 2-10 yield curve inversion. For locking your money up for an extra 8 years, you get rewarded with 14 basis points or an extra $1.40 of interest per year for every $1,000 in 10-year bonds you buy. Not a handsome payoff.

It's also interesting that 5-year I Series savings bonds pay more than the 10-year at 2.83% (with some inflation protection!).

Quantitative Tightening is starting to bite. I am not sure if the delays have been the same with QE vs QT, but it seems QT is having a faster impact as money that used to be rolled as it matured from the Fed balance sheet evaporates into the void. And the process is really just getting started. There is still over $3 trillion that was created during QE that must be burned to get the balance back to where it started in 2008. Somehow, I doubt the Fed will make it all the way back below $1 trillion before something big blows up.

Thursday, December 6, 2018

3s-5s inversion 2s-10s on the watch list

I mentioned a possible inversion this year back in January: "I'll be looking to see if we have any curve inversion as rates move up.".

And here we are with the 3 year note (2.81) yielding more than the 5 year (2.79) . The classic inversion is the 2 year (2.80) and 10 year (2.863). That's pretty close and a reliable recession indicator, although there is usually a long lag time, sometimes up to 2 years. The Fed's December rate decision will be very telling. If they continue to hike and also stay on course with quantitative tightening (not rolling their treasuries and/or MBS), it could be a bumpy ride for stocks in 2019.