10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant MaturityFRED
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A lot of market participants are falling for the Fed's illusion that a soft landing has been achieved. However, the charts are still warning that a recession is coming.
The chart below shows the extreme degree of inversion between the 10-year Treasury bond and the 3-month Treasury bill. The current inversion is the worst in over 40 years.
A yield curve inversion reduces bank lending for various reasons, one of which is the removal of the incentive for banks to borrow at lower short-term rates and lend at higher long-term rates. Since bank credit is how most money comes into creation, a yield curve inversion is, therefore, a sign that monetary conditions are deteriorating. Indeed, manipulating the interest rate is how the central bank controls the money supply and induces a recession.
The impact of rate hikes always occurs on a lagging basis. The lag can last anywhere from several quarters to several years. As the infographic below shows, an economic recession will likely begin in the U.S. between Q4 2023 and Q4 2024.
The warning signs of the coming liquidity crisis are everywhere.
In a prior post (shown below), @SquishTrade and I pointed out that a major disparity between the volatility of bond prices and the volatility of equity prices is occurring. This extreme disparity could be a warning that much greater volatility for equity markets has yet to come.
Even for stocks that have experienced a strong rally in 2023, the basis of their surge is largely unsupported by dollar liquidity levels. In the chart below, the price of NASDAQ:NVDA is compared against the dollar liquidity index.
This is further confirmed by the below chart, which shows how extreme the price of NASDAQ:NVDA as a ratio to the price of a risk-free 10-year Treasury bond has become. Never before have investors been willing to pay so high of a risk premium to hold Nvidia's stock.
While anything is possible, the charts suggest that there isn't enough money in the economy to support the payment of debt at current yields. The below chart shows the price of long-term government Treasurys (adjusted for interest payments) as a ratio to the M2 money supply.
There is simply not enough money in the M2 money stock for market participants to be able to pay all newly issued debt at the current high rates. When the liquidity issues begin to mount, the Fed will quickly pivot back to new money creation, as it did in March 2023 when it abruptly created the Bank Term Funding Program (BTFP), which is the latest of the many tools that the Fed uses to create new money.
However, when the economy begins to slow, this time around central banks will get trapped because of commodity price inflation. Although commodity prices are generally disinflating at the present time, this slow disinflation is merely forming a bull flag on the higher timeframes.
With unemployment also bull flagging on the higher timeframes, when commodity prices and unemployment concurrently break out, the result will definitionally be stagflation.
Important Disclaimer Nothing in this post should be considered financial advice. Trading and investing always involve risks and one should carefully review all such risks before making a trade or investment decision. Do not buy or sell any security based on anything in this post. Please consult with a financial advisor before making any financial decisions. This post is for educational purposes only.
A few things I will like to point out from my perspective if you don't mind about the current 10/3
1. We have never had on going Q Normalizing with inverted yield curve. 2.We never helicopter money prior an inverted yield curve 3. We never had rising rates from zero/negetive 4. We never had debt to GDP 125% ($33 trillion) and rising rates. 5. We never had annual deficits to GDP of 7% with rising rates (especially from 0/- to 5% plus) 6. We never had reverse REPOs unwinding before 7. We never had on going BTFP before. 8. We never had M2 jump 42% in such a short period of time. 9. We never had US in a "soft landing" Europe in Stagflation and Asia with private debt problem while growth is collapsing. Meaning 3 regions of the world with different 3 macro economic problems.
All of these factors have skewed the previous traditional way of understanding the economic conditions via price discovery.
This is not to say I disagree with what you said. I am just reluctant to forecast a time period and use the word crash. Especially when it comes to banks. Of anything 2008 proved banking crisis can be dealt with very effectively. SVB proved that again. What we won't be able to deal with is nonbanks (Zombie companies) starting to blow up. For decades now Gov't has enabled zombies to continue on barely servicing debt to survive, rather than maximizing profits and growth. Hence we have been witnessing slower and slower rconomic growth as a result.
In short I don't believe this time around insolvency will be fixed with Liquidity. Even though they'll try. 10/3 is not a light switch as I like to say it takes time.
As MinskI said "stability in destabilizing" true.
Keep an eye on Nonbanks blowing up. I think that will be the key this time around.
Thx for your post again. Very useful to many in our community here at TV.