Gold Silver Reports (GSR) — The UST yield curve continues to flatten (as it does elsewhere). All sorts of mainstream articles have been published lately about it. Many of them often refer to academic pieces ostensibly trying assuage all fears about the yield curve’s threatening inversion. Fret not the distortion, they say.
And they are right. As I constantly remind people, it’s not inversion that anyone should worry about. All that matters is where the curve has been flattening, and not just recently. For years, it’s been shriveling and shrinking, a poignant likeness for the global economy.
Not so in the mainstream. The economy is booming. To reconcile how the yield curve could behave this way while strong growth is happening all sorts of intellectual byproducts are employed. Here’s another one published today:
Goldman Sachs Group Inc. is telling traders to be wary of reading Federal Reserve Chairman Jerome Powell’s comments last week as dovish for the path of interest rates.
Ten-year Treasury yields fell Friday on Powell’s speech at the Kansas City Fed’s annual policy symposium, when he said “there does not seem to be an elevated risk of overheating.” What’s more, the maturity’s spread over two-year yields is close to the lowest since 2007.
Apologies to Goldman Sachs, that’s not what’s holding rates lower. Long end investors don’t care if Chairman Powell is dovish, hawkish, or whatever position might sit in between. They are betting he’s wrong about whichever position he may take at various times. There is no “strong” economy, a reality that the flat 3% UST curve says will be revealed soon enough.
It starts with decoupling; or, rather, how decoupling isn’t a thing. The word has been used over and over, several times switching positions. In early 2008, the global economy especially EM’s were to decouple from weakness in the US and Europe. It didn’t end up that way, of course, as the Great “Recession” by 2009 hit everyone via the eurodollar system.
Now, as in 2015, decoupling is meant to be US strength in the face of “overseas turmoil.” The 5% US unemployment rate didn’t mean much three years ago, so perhaps a 4% one will this time around – though that’s not very likely with nothing corroborating the number.
Instead, we need only look around and marvel at the mirage bond and funding markets have already sniffed out. Take Brazil, for example. The real is today settled close to the worst level of the prior “rising dollar.” Despite repeated and emphasized assurances just two months ago that central bankers there could manage and defend their currency, they have but tried.
That’s just Brazil, everyone says. The latest polls show leftists in a commanding lead in the upcoming elections, purportedly scaring investors away. That’s not what makes eurodollar lenders upset and uncertain; it’s why the surveys keep showing this sort of major political upheaval. If things are going so well, why aren’t they going so well?
For every Brazil being Brazil there is another example where it isn’t so tidy to dismiss. The most prominent illustration of the more uniform nature of global shifts this year is unfortunately brought to us by India. The Indian rupee is actually setting a new record low today. India is not in any way, shape, or form Brazil.
It doesn’t matter, nor does it count that in relative terms the Indian economy is in pretty good shape. The eurodollar world doesn’t attribute rupees to Jay Powell but to global economic forces way beyond his limited monetary comprehension. The rupee drops along with the real because the global downside is re-emerging in some places very clearly. – Neal Bhai Reports
