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Inversion, Inversion and More Inversions


Much of why I feel humbled at present is the way the market (perception) is diverging with economic stats (reality).


I woke up this morning and felt...well...stupid.

I really hate to admit that, especially in a public forum. But, hey, that is what the market and my job is all about. Honesty.

Why do I feel stupid? Well, I have been underweight equities since SPX 1365 (not short, just cautious) and the economic fundamentals have played out exactly as I suspected. So I guess I am not really stupid--but Mr. Market is having his way with me.

Much of why I feel humbled at present is the way the market (perception) is diverging with economic stats (reality). And the chasm is widening for those watching. So, while not stubborn, I keep getting more data to support my view. Curve inversion, deflation, slowing housing, credit contraction, etc.

We all know the move up in equities has been coordinated. All countries, all asset classes, sans health care. So I decided to look at yield curves around the world to see if they were also inverted and if so, I probably have company in the stupid category. And lo and behold! Most of the civilized world (ex emerging markets) is inverted as well.

To be honest, I have never in my 27 years seen stocks and bonds and economic statistics and valuations at such odds. So, what to do? We stay the course. It is unpopular and I may need some anti-stupid pills with my iced tea this morning, but hey, that's cool. I have felt stupid before, like in 1999. I am a disciplined guy that is a protector of wealth.

There are four goals at my firm:

  • Protect hard earned capital.
  • Earn a solid income.
  • Low volatility (standard deviation) of returns.
  • Capital gains.

My firm is sticking with our philosophy no matter how unpopular. It has worked for my whole career, just not at every moment.

Below I will show the yield curve inversions around the globe. The one glaring example is Japan, buy hey, how can you have an inverted yield curve when short rates are 0.25%! Note that inversion simply means that short-term rates are higher than long-term rates. MOST of the time, this is a great predictor of slower (recession anyone?) times ahead for the economy.




United Kingdom

United States of America (The Poster Child For Inversion)

Japan (The Poster Child For Steep Yield Curve - Staving Off Deflation…)

In summary, I don't believe that these conditions can last forever. I would also note that the worst performing stock market this year, far and away, of all of these countries, is Japan. This is so counter-intuitive to me that here comes that stupid feeling again. In my experience over 27 years, stocks markets do the best with easy monetary policy (steep curves) and the worst with tight monetary policy. This time it is different. Why? I guess due to all of the money supply growth.

Oh yeah, see that chart below of M3. While the government stopped providing that number to us when Bernanke took office, many folks still calculate it and use it - like my firm. I think this explains it all. A picture tells 1000 words.

Have a great day.

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No positions in stocks mentioned.

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