Weekly Market Update:
Over the last few weeks, bond price have spiked even as yields have plunged. Investors are waking up to a coming recession. Their knee-jerk reaction has been to pour their money into safe haven Treasuries, thinking this will save them. The 10 year Treasury yield dropped to 2.26 percent last week on May 29th. This graph reveals the trend:
This has led to a yield curve inversion, which has historically (and very accurately) indicated a recession looming on the horizon.
Economist Peter Schiff has been warning about the end of the stock market’s recent bear market rally. He explained that it was constructed on the idea that the Federal Reserve would begin shifting into an easing cycle. Chairman Jerome Powell crushed this idea recently, which led Schiff to believe it would kill the market’s rally. He put this cleverly as:
“What the Fed giveth by being more dovish than the markets expected, the Fed had finally taken away by being more hawkish.”
Now looking at the markets several weeks later, both the Dow Jones and S&P 500 have fallen a significant 5.5 percent off of their highs of early May. Economists like Peter were taken aback by how long the bear market rally managed to continue to the highs it reached. Yet now it is apparent that the pendulum is again swinging the opposite direction. He now expects the markets to test their lows from earlier this year.
This would lead the Fed to ride to the market’s rescue at that point. Even now, the various markets have priced in rate cuts, though the Fed had verbally taken this option off of the table. The million dollar question is: when will the U.S. central bank act, or how long will they wait? Schiff has a strong opinion on this issue:
“If the Fed waits until we’re officially in a recession, well, then they’re just going to go straight to zero. They’re not going to pass go. But if they started cutting rates sooner, like maybe next week or something, then maybe its possible they only go a quarter point or a half point. But that’s not going to be enough. That is going to do nothing. That is going to be like waving a scarf at a bull. Because the minute the Fed cuts the markets are going to push them to cut more.”
Schiff does not even believe another vaunted go round of Quantitative Easing will be sufficient to stave off the crisis this time. With each popping bubble, it needs a lot more air to reflate it. The quantity of QE that the Fed would need to blow back up a bubble after the “everything bubble” pops would destroy the dollar as a currency.
Markets may not completely understand this yet, but they are beginning to fear a coming recession. They are correct in their assessment that a recession is in the cards, but this is bearish for bonds, not bullish. Bond markets are placing bets on an upcoming recession which they believe will prompt the Federal Reserve to slash interest rates. Schiff explains the problem with this remedy:
“But if the next time the Fed slashes the short term interest rates inflation spikes up, and that means long term interest rated don’t go down, they go up and they follow the inflation rate higher, then that is going to exacerbate the pain of the next recession.”
Is Your Retirement Portfolio Protected from the Bear Market Rally and Coming Recession?
You can picture in your mind how disastrous this result would be for corporations, consumers, and governments which are all saddled with unprecedented amounts of debt. The federal government debt alone is now over $22 trillion and counting.
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