Macro Digest: New lows in US yield indicate rising recession risk
Chief Investment Officer
Summary: Low in 30Y US yield & 2Y US yield > 30Y yield = Global recession risk
Updated August 15 for clarity and minor text edits
The probability of the Fed cutting rates, even inter-meeting, is rising significantly as a recession is more and more likely and recessions mean an average sell-off in equities of at least 25%.
- The Fed needs to cut 50 bps and soon – maybe even inter-meeting
- The Fed is behind and has been since last September – to get ahead the Fed needs to cut more than the Fed near-term premium (3 month expected Fed rate less the 18 month expected Fed rate indicates: - 60 bps presently – this needs to shift back higher, meaning the Fed will need to cut more now rather than later - perhaps 100 bps through the December FOMC meeting to start getting there - now only around 70 bps of cuts priced
- An active weaker US Dollar policy is only week away – watch very closely as FX war starts its big engines
What to do?
- Long GOLD – negative yield feeds both “official buying” and hedge buying: 1600 $ and then 1700 $ target
- Underweight equity
- Hedge long risk with long JPY, gold, short-term bonds
- Keep a close eye on credit spreads which should widen (fall in price) : EUR High Yield & US High Yield
On the day that German GDP went negative, the world biggest exporter - The world biggest importer: The US saw new all time lows in long-term yield – Random? Hardly
The Fed is behind the curve and has been since last September – their speed reduced by their fundamental belief in inflation targeting (and that the present weakness is transitory) – and now into a macro context they call: Regret Analysis. Sad state of affairs, but the main point being G-7 central bank lost their ability to change direction of growth – end of story.
Despite this they will give it another try – i.e. force rates down again. The only way to “move” market now in my opinion being a rate cut between scheduled meetings to force the front end lower, faster. Rip off the band aid rather than taking it slowly!
Also note that everything is unfolding in the context of falling international cooperation – read: G7 – the odds of a full foreign exchange war as an extension to trade policy spats is more than 50/50 now. The main policy choice will likely be a very aggressive rhetoric talking down the US Dollar followed by Fed cuts.
Trend is clear: by Q4-2020 the entire US yield curve will be negative?
Yield curves screaming recession! 2yr-10yr and Fed near-term premium (3 month Fed policy rate less versus 18 month policy rate)
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.