Stocks Dive - Do We Blame The Flattening Yield Curve Or Trump's "I Am Tariff Man" Jabber?

Yield curve behavior since 1977  (from T. Rowe Price Investor Bulletin)

Oldster Stock trader in a near fit on the NY stock exchange yesterday after stocks tank - when Dotard bragged: "I am Tariff Man!"

The Financial Times lead article yesterday was blunt in accounting for the major stock market selloff, traced to the yield curve dipping more than 10 basis points below its historical low since June, 2007.  As the FT report noted:

 "A swift turn in bank stocks saw Wall Street fall sharply after noon on Tuesday, while further falls for the tech names dragged the Nasdaq Composite back into correction territory. That comes against a backdrop of falling yields, as government bonds rally, and one key indicator - the yield curve - again started to signal low-growth or possibly recessionary economic conditions. "

Meanwhile, the WSJ take ('U.S. Bonds Gain As Stocks Sink', p. A1)  on yesterday's stock dive read as follows:

"U.S. government bond prices rose Tuesday, pushing the yield on 10-year Treasury notes further below 3%, as investors sought safer investments during the stock-market selloff.

The yield on the benchmark 10-year Treasury note fell for a sixth consecutive trading session, settling at 2.921%, from 2.990% Monday. The yield has fallen to its lowest level in almost three months after reaching a seven-year high of 3.232% on Nov. 8.

Yields, which fall when bond prices rise, declined along with stock prices as investors—including pensions, individuals and mutual funds—turned to less risky assets amid unsettled markets, analysts said. The rally in bonds intensified as major stock indexes extended losses during the trading session.

The fall in stocks—which sent the Dow Jones Industrial Average down nearly 800 points—erased Monday’s gains as skepticism grew about whether the trade truce between the U.S. and China will do more than temporarily stall the escalating rhetoric and tariffs from both sides.

---   The gap between yields on the two- and 10-year Treasury note yields narrowed to 0.110 percentage point Tuesday, the smallest difference since 2007. Investors closely watch the distance between the shorter- and longer-term yields because short-term rates have exceeded long-term ones before every recession since 1975, a phenomenon known as an inverted yield curve.

What is the yield curve and why does it matter? Why does its flattening strike fear into the investor's heart?  First, let's clear the air that one large component of the stock dive yesterday was simply that investors don't trust Trump to behave in relation to the artificial "90 day truce" on tariffs he set up with China's President Xi at the G 20 summit.  They aren't buying it because most are pretty sure Dotard will find some lame excuse to trash it and go back to his 25 % promised tariffs on another $200b worth of Chinese goods.  Hell, just before stocks started tanking yesterday it was Drumpf who took to Twitter and barked:

"President Xi and I want this deal to happen. But it probably will. But if not remember I am 'Tariff Man'"

Translated for  Wall Street: "I don't give a flying fudge stick about this deal, and I am just itching for a way to quash hit and hit 'em with more tariffs."

And look, by now President Xi Jinping has to know he is dealing with a dyspeptic toddler in a stage of  severe arrested development, who's also so unstable that no genuine deal is feasible. This is on account of the very nature of the man: a two-bit, lowlife Queens real estate crook and con man grifter.  A  thug at heart, whose folks had to dispatch him to a NY military school after cops caught him using his  'designer' switchblades on alley cats.  This is the loose cannon mutt we now have as resident.

Thus, I  believe the trade truce is merely a pause in ongoing trade hostilities and the main casualties will remain the Trumpie base,  who can't seem to slaver enough at Dotard's feet.  That's the nature of the beast, or at least this beast.

As regards the flattening yield curve - that also is a big worry.  As observed in the WSJ piece (see bottom of this post) :

"The gap two- and five-year yields inverted Tuesday, following Monday’s inversion of the spread between three- and five-year yields."

As I noted in previous posts on the issue, the U.S. Treasury yield curve - the spread between 2- and 10-year Treasury bond yields- has flattened sharply this year  but has not yet "inverted" - which most investors take as a sign of a looming recession. Specifically, recessions tend to occur once the "flat" yield curve becomes "inverted" - with short term (e.g. 2 -year)  bond rates higher than long term (e.g. 10 year) rates. As a recent T. Rowe Price Investor Bulletin notes (p. 4) this condition has transpired before each of the past nine recessions dating back to 1955.  Hence, while it isn't a 100% absolute predictor, it is a significant historical marker..

The T. Rowe warning - assuming one can take it as such - is (ibid.):

"The yield curve is not flat yet ...but it could be by next March if the Fed maintains its 0.25 percent per quarter pace of rate hikes and the 10-year Treasury continues to meet resistance above the 3.0 percent level.  Starting the historical average 16-month clock from the spring of 2019 would raise the specter of a major downturn by 2020."

Interestingly, this take also conforms with the one of Matt O'Brien writing in the WaPo ('Reasons There Really  Might Be A Recession In 2020').    O'Brien tags the "two big risks" today as: 1) the rising interest rates (which ought to also include the Fed cutting back on its QE policy, and 2) the difference between the government's 10-year and 2-year borrowing costs are beginning to flash yellow.

In other words, the yield curve is flattening . In O'Brien's explanation:

"When long term rates are lower than short term ones - what's known as an inverted yield curve- it's telling us that that markets think the Federal Reserve is going to have to stop raising rates and start cutting them in the near future."

Maybe O'Brien saw ahead to the NY Federal Reserve Chief's (John Williams)  comment yesterday that he "supports further rate hikes" - which unnerved the Street.  Anyway, O'Brien goes on to write that the ''good news is this hasn't happened yet, but the bad news is that it probably won't be long before it does."   But I am not so sure. If a recession is in the offing, the Fed would also know that if it leaves the existing rate too low (say relative to what is regarded by most Fed heads as the "neutral rate" - say 2.75%)  then there would be too little latitude left to lower rates when an actual recession hits. As I believe it will before the end of 2019. Why? Because all the Trumpies' borrowing  and debt will come home to roost- not to mention the upheaval from Dotard's trade war with President Xi.

What can savvy investors do? Stay tuned and keep monitoring the financial pages for signs of the inverted yield curve.  (Also watch out if a gov't shutdown occurs, again thanks to Dotard Donnie's imbecility and belligerence.)

See also:

http://brane-space.blogspot.com/2017/11/has-stock-market-dodged-bullet-in.html

Trump's Mar-a-Lago Getaway Goes South This Time - Thanks To His Lack Of Impulse Control

"I'm firing cruise missiles from Mar-a Lago  tonight and when I'm done President Xi is gonna believe I'm one tough hombre!"

For his regular Mar-a-Lago getaway this week, Trump believed he'd play the big man in front of China's President Xi Jinping.  No one told this moron, aka 'The Donald', that you don't entertain a powerful head of state at a weekend hacienda, you do it at the White House, usually preceded by a state dinner. But Trump , uneducated baboon that he is,  would hardly be able to process that.

He's become too accustomed to these "business" and golf vacays - this now the sixth weekend in a row (and the 10th weekend in a row on a Trump property according to the WaPo's Philip Bump).  In all, Trump has now spent time on one or more Trump properties on 28 percent of the days he's been president - or nearly 3 out of 10.

This Mar-a-Lago stay was different from the preceding ones in that he did what he believed was a "presidential" thing - ordering a cruise missile attack on Syria. The word was that he was "emotionally upset" by the images he saw of the effects of the nerve gas attack on Syrians (who might have been spared had he allowed them to immigrate to the U.S.)  even blabbing in indignat

"No child of God should ever suffer such horror,"

So seized by his volatile and reactive emotions, as we've seen multiple times before (e.g. with his deranged March 5  tweet about Obama "wiretapping" him),  Trump acted on impulse and phoned in the missile attack. . Never mind that days earlier he was solidly convinced this was all "Syria's problem". We've seen this inchoate behavior time and again, especially how the man's often discordant emotions have him changing on a dime. That's his nature: impulsive, emotionally primitive, lacking reflective pause and temperance. That is part of how he got elected by the hoi polloi that get off on that sort of unthinking, reactive dynamic. 

Besides, in his febrile brain Trump could also envision a big PR payoff:  a firm, though impulsively driven action, could earn him bigger job approval ratings, especially from an American public (and politicos) that feed on bombs or missile action. So never mind it was driven by his gut, his command to launch 60 Tomahawks (which ended up being 59) would accomplish something that eluded him in his congressional address: presidential timbre!  He'd be seen as a "decisive leader", plus the media - which often has the attention span of a gnat  - would take its focus off the Russian probe.

In addition, given he was entertaining President Xi at Mar-a-Lago Trump saw another payoff, in showing Xi he was a guy who meant business and didn't take shit from some little asshole like Bashar Assad.  

But for anyone of sentience and intelligence the optics made no sense, and in fact, detracted from whatever this ignorant ape was trying to pull off.

First, as I noted, Mar-a-Lago was the wrong venue, including for the location of the "situation room" within which the launch order would be dispatched to two U.S. naval craft in the Mediterranean.  Instead of the proper situation room - such as Obama used with his staff when Osama bin Laden was taken out, Trump used a makeshift wedding reception room at his Florida hacienda. Any sensible person watching the images would find them jarring, out of place.  Most unpresidential! Followed by "What was this asswit thinking?"

Then there were the persons in attendance. As opposed to the security and intel staff Obama had summoned back in 2010, Trump allowed individuals with no connection to military isues. These included: Steven Mnuchin, the Treasury Secretary, Jared Kushner - Trump's son -in -law and Wilbur Ross, the Commerce Secretary who had once been head of a Cyprus bank that helped Russian oligarchs launder money e.g.

https://boingboing.net/2017/02/28/new-secretary-of-commerce-wil.html


What were ANY of these guys doing sitting in on a situation room meet to launch an attack on  a sovereign state?  Again, their presence, far from dignifying the optics, detracted mightily and plus it disclosed an inability to understand the appropriateness of staff to be present at such confabs. It also showed Trump's total amateurish orientation, not to mention a lack of understanding of the departments of government..

But nowhere was that amateur profile more apparent than launching those damned cruise missiles at the same time President Xi was at Mar-a-Lago. As the WSJ pointed out today ('Attack Intrudes on China -U.S. Summit', p. A9):  "The U.S. Missile strikes on Syria overshadowed Chinese President Xi Jinping's first summit with President Trump"

Indeed, it was an immense faux pas given the Chinese, as the piece noted, "are hugely sensitive to protocol and media coverage during presidential visits". In other words, they would not have taken kindly to Xi's visit being trumped in optics by a cruise missile attack on Syria. 

An expert on Chinese foreign and security policies at MIT (M. Taylor Fravel) , quoted in the article - said:

"For China, the optics of the attack during the visit, most likely during the dinner itself, would be viewed as a sign of disrespect. Everyone is going to be talking about the Syria strike and not Xi's visit, thereby undercutting the symbolic value of being feted at Mar-a-Lago"

And oh, by the way, Trump would now be seen by Xi and most Chinese as the uncouth, barbaric buffoon he is.

So in effect, Trump  -dumbass amateur "resident" that he is -  gained nothing by this week's Mar-a-Lago rendezvous. And what about President Xi? He likely learned that in any future face off vs. the U.S. - say over the Spratley Islands - if bases there are facing a 'Tomahawk' attack,  it might be a good idea to preemptively fire China's Dongfeng 21D missiles before the attacking fleet gets into firing range.


See also:

http://www.smirkingchimp.com/thread/marjorie-cohn/72071/donald-trumps-war-crimes