Meaning Of the Bond Mkt Inversion..

[tabs]

10 yr Treasury is at 3.42%
3 Mo Treasury is at 4.27%
FED Funds is at 3.82%

The inversion of the FED funds and 10 yr Treasury has never happened before.

Which means people are putting money into the long term bond because they have no confidence in the economy going forward..This is also to be seen in Equities, equities will rally but before long the wall of worry stalls out the rally.

The Animal Spirits have dun spoken..they have no belief nor hope that the economy is going to get better. The spirits are worried about dark days ahead..from Dimon to Munger and every body in between.

There are ill winds blowing..people do not tend to notice things until the package has been delivered.. So Amazon Prime has already dun delivered this package it is here and is on the doorstep.

[pwd72s]

But-But...our fearless President says all is peachy-keen with the economy.
Shouldn't we believe him?

Seriously...I was wondering when you'd post about the inversion...but the mixing in of the fed funds rate is a new twist.

Actually, we've (Cindy & I) been nervous since the first of the QE's...

[LWJ]

I get it. Investors think that the Fed will reduce rates in the future (and we may have a recession).

Better question is this: where to put cash now?

[pwd72s]

Seems to me the game now is to try to hang on to what you've got. (edit) And..."may" have a recession??? Can you name a time when there was an inverted yield curve and a recession didn't follow? Then toss in the Feds rate thing...well, scary stuff.

[jyl]

There are various yield curve inversions to watch. I tend to watch the 2Y/10Y. Some people watch current vs forward yields.

Regardless of your preferred measure, the message from these inversions is that a recession is very likely to start in the coming year.

I’ve been expecting a recession for most of the past year. I’m thinking starting mid to late 2023. But the exact timing isn’t that important.

By now I think a 2023 recession is consensus, or nearly so.

The question now, in my opinion, is whether it is a mild recession (like 1990, 2001) or a severe recession (like 2008). Because the implications for earnings are different.

Consensus S&P 500 EPS is currently about $220 for 2022, $230 for 2023. Both have been dropping, about -5% over the past couple months. That implies +5% EPS growth in 2023 (from $220 to $230).

S&P 500 EPS never goes up in recessions. In the very mildest of recessions, so mild they might be called mid-cycle slowdowns, EPS may be flat. In a typical recession, -10% or so. A severe recession produces -20% or worse.

So, the yield curve inversions predict a recession, a recession means EPS flat to -20% year over year, so 2023 S&P 500 EPS should be more like $180-$220 if 2022 actually comes in at $220. Midpoint of that range is $200.

Stock valuations go down into recessions. The very bottom in price/earnings may come a little before the recession starts, or during it.

Currently S&P 500 NTM (next twelve months) P/E is in a 15-17X range (low end in October, high end now in December). If that P/E goes back to 15x, on $200, that implies S&P 500 at $3,000. Which is about -25% from here.

That is probably toward the worser end of reasonable scenarios. The more cautious Street strategists are saying a 3,000-3,500 range. A very mild recession could means something like 17x $220, or $3,740. That is probably toward the bester end of scenarios.

Anyways, the scenarios, at least the ones I feel are reasonably plausible, all point to something below where we are now.

[McLovin]

Interesting. For a variety of reasons, 2023 is certainly shaping up to be grim.

(It does seem like the inversion has happened before, no?)

[LWJ]

Yes, MAY.

one thing I have learned with certainty is this: when the whole world thinks something is an absolute, it often isn’t.

I saw huge evidence of this pre2008. I ignored my instincts. That, was a big mistake.

I listen to the contrarian opinions.

[Aurel]

Originally Posted by LWJ

Yes, MAY.

one thing I have learned with certainty is this: when the whole world thinks something is an absolute, it often isn’t.

I saw huge evidence of this pre2008. I ignored my instincts. That, was a big mistake.

I listen to the contrarian opinions.

Contrarian opinions now are describing a much grimmer scenario than just a stock market crash: implosion of the debt market, compete lock up of the financial system, no more cash available, no more electronic transactions…
They also say to buy silver…

[nota]

raising rates just aids to inflation making it be stronger and last longer
and causes more harm to the people who have the least
while adding to the gains of the 1%

TAX THE 1% TO LIMIT INFLATION

TAX THE CORP-RATS WHO RAISE PRICES

at least the taxes can pay down the debts of the nation
by hiking bond rates they just add debt to no gain for the nation

[jyl]

I do spend a lot of time worrying about what was the consensus view but has now become a contrarian view: inflation recedes quickly, the US economy has a "soft landing", Fed stops raising sooner or starts cutting rates. This would be good for 99% of Americans, of course, but I'm not positioned for it.

I don't spend much time worrying about what Aurel describes.

[fintstone]

You (America) just got what you voted for...enjoy.

[3rd_gear_Ted]

Capitalism and the accumulation of wealth in all forms will always trump politics.
The greatest transfer of wealth and real property to the next generation is underway from the 2nd generation of those that arrived & thrived in this country decades ago.

[jyl]

We didn't fall into a Global Depression, had a ripping bull market in practically everything - equities, houses, vintage cars - for almost two years there, and recessions are a normal and necessary part of the economic cycle.

[tabs]

Originally Posted by LWJ

Yes, MAY.

one thing I have learned with certainty is this: when the whole world thinks something is an absolute, it often isn’t.

I saw huge evidence of this pre2008. I ignored my instincts. That, was a big mistake.

I listen to the contrarian opinions.

FINALLY SOMEBODY GOT IT>>WE HAVE A WINNER>

Where to invest money...the place with the least risk is in..........

3 Month Treasuries...at 4.27%....you only have a 3 month horizon of risk then you get paid back you money plus interest. Break you investment into 4 parts, keeping one part always in cash, and each month put in one part for the next three months. When the first part comes due roll it over..repeat

Treasuries are the high ground in the flood and are the last to go...and with only 3 months of risk attached.


Everything else is very volatile and has huge downside risk.

[cockerpunk]

Originally Posted by LWJ

Yes, MAY.

one thing I have learned with certainty is this: when the whole world thinks something is an absolute, it often isn’t.

I saw huge evidence of this pre2008. I ignored my instincts. That, was a big mistake.

I listen to the contrarian opinions.

the contrarian opinion is that the economy is doing fine.

i dont think it is, but the consensus is that we are currently, already in a recession, and have been since spring 2022.

[McLovin]

Originally Posted by jyl

had a ripping bull market in practically everything - equities, houses, vintage cars - for almost two years there.

Printing needless trillions and trillion of dollars will do that every time.
But math says it can’t be “free.”
The question is what is the cost going to be?

[tabs]

Originally Posted by Aurel

Contrarian opinions now are describing a much grimmer scenario than just a stock market crash: implosion of the debt market, compete lock up of the financial system, no more cash available, no more electronic transactions…
They also say to buy silver…

Now we are talking..

I saw the direction the USA was headed in 1980, and where it was going to lead to.

In 08 it had come to fruition..and since it has been all on life support..so I have been contrarian all along..

Now if ya told somebody that the USA was going to go under in 80 they wouldn't be able to stop laughing at you and if they did they would lock you up in the puzzle factory. In 08 99.9% thought it was fixable...they could not conceive that the unspeakable had happened...now it is here and people are waking up...

Truth is that you already have nothing, except for a Bernie Madoff sheet of paper with a whole bunch of zeros after the number...and RE will be greatly diminished and ill-liquid because no one will have the money nor credit to purchase or pay rent.

If the debt mkt crashes, there is no reset...there will be no structure to reboot...only once the chaos subsides and the dust settles will you be able to start over from scratch...you will be at ground zero..


PS: I have never been a joiner, a believer nor a follower...I have always thought for myself and acted in my own best interest.

[tabs]

Originally Posted by McLovin

Interesting. For a variety of reasons, 2023 is certainly shaping up to be grim.

(It does seem like the inversion has happened before, no?)

I WAS WRONG ABOUT IT BEING NEVER. But delightedly so in that every time there has been an inversion of FED funds and 10 yr note the economy has fallen off a cliff.

Note what was happening to the 10 yr after 2020..it was climbing rather precipitously....investors were pulling out or had no buyers...so the FED had to step in to support the USD particularly in the foreign mkts by raising interest rates..the low rate environment is no more they have printed and borrowed too many USD

Now the intrinsic value of the currency has hit the asphalt and the American peoples free low interest rate and inflation rate ride is over...now the FED is unable to dot hat ..and the American people are going to have to start paying retail for their std of living.

The pinch for the American people has just begun..you already have nothing and you ain't gona be happy.

[Black968]

The Financial markets are so complicated and intertwined it can make your head explode. Some will look at it as an opportunity, some will cash out and run for the hills. Generally it is best to look at someone who has been there and done that, Warren B is an example, if you have cash, there is an opportunity coming. If you are over extended and in debt up to your eye balls, it's going to get rough. If you have loans on shat you don't need or cannot afford , liquidate.

The Gubment put the Fed in this mess with Covid lock downs, but the FED should never have dropped the rates to .25%. It was a double whammy, free money times 2. If you have cash, make sure it is secure and insured, if you own stock, make sure the companies you own are not over leveraged because they will take a hit also.

As far as the curve, it only indicates that the market is thinking this blow over or we won't be around in two years.

[tabs]

Originally Posted by Black968

The Financial markets are so complicated and intertwined it can make your head explode. Some will look at it as an opportunity, some will cash out and run for the hills. Generally it is best to look at someone who has been there and done that, Warren B is an example, if you have cash, there is an opportunity coming. If you are over extended and in debt up to your eye balls, it's going to get rough. If you have loans on shat you don't need or cannot afford , liquidate.

The Gubment put the Fed in this mess with Covid lock downs, but the FED should never have dropped the rates to .25%. It was a double whammy, free money times 2. If you have cash, make sure it is secure and insured, if you own stock, make sure the companies you own are not over leveraged because they will take a hit also.

As far as the curve, it only indicates that the market is thinking this blow over or we won't be around in two years.

Not for me...

I disagree with most of this...it is missing parts... You have to take into account when Buffet and under what circumstances he was investing... in a time of unprecedented prosperity...that dynamic and circumstance no longer exists..which skews your analysis.

The American people via their government and credit cards...over spent for decades culminating is a shyte hits the fan moment in 08..the response was to switch to the credit tank of the public treasury and intrinsic value of the nations currency..to create the MOTHER OF ALL BUBBLES a SOVEREIGN DEBT BUBBLE. That string has about played it self out..they can not kick the can down the road no mo.

The FED thinking in 2020 was to throw everything they had including the kitchen sink into the fire to stabilize a seized economy. THERE WAS NO TOMORROW, if they couldnt' stabilize...they would gone to 10T or more if they needed to...they were going all in.

After the fact the consequences are that the USD and Bonds are on shaky ground. Where the FED had to support the USD particularly in foreign markets and against a nascent inflation.. The FED is in CHECKMATE because any which way that they move there are negative consequences. Which all lead to DEMAND DESTRUCTION.

So the crisis that you asked about in 2017 is here..look at the number of things that have went south this year at all levels.