Macro Deep Dive - SPX, Initial Claims, Yield Curve and Fed Funds
Charts:
- Top left = SPX
- Bottom left = Initial jobless claims (unemployment metric)
- Top right = US 10 year and US 2 year spread (Yield curve inversion metric)
- Bottom right = Fed funds rate (short-term interest rates)
It is no secret that US equities are grossly overvalued, from Warren Buffet to Stanley Druckenmiller to Ray Dalio, the smart money has made their case for why US stocks simply cannot justify their valuations indefinitely.
Yet Stocks continue higher, largely due to massive CB liquidity, spurred on from fears of a global slowdown and the ensuing economic impact this would have on such indebted nations and consumer, this coupled with the supply chain shock that the Corona-Virus is undoubtedly having on global trade is a recipe for disaster.
So what are the macro/ recession indicators saying?
They are flashing red.
The Initial claims are at record lows, which sounds fantastic, until you realize that most major recessions and even depressions are accompanied with low, not high, unemployment. Recessions strike when everyone is complacent, when they are fat and happy and when they have their blinders on.
I will be watching the initial claims and will look for the the claims to spike and reverse trend, as this is a much stronger indicator of structural weakness within the economy.
Moving over the the US10y/ US02y spread, it is well known that the yield curve briefly inverted in 2019, however, the initial inversion is not the point to sell, this is due to the yield curve inversion being a leading indicator of recession. Historically, from the point of first inversion to the inevitable decline in equities, is roughly 12 months to 18 months.
We are 7 months into the initial inversion and the yield curve looks like it is going to invert yet again.
Finally we have the Fed funds rate, the targeted overnight lending rate for the Federal Reserve.
The trend is clearly down, down, down with rates this has been rocket fuel for bonds which are now traded akin to equities for capital appreciation, rather than the interest bearing assets they were designed as.
Furthermore, and perhaps most interestingly, it is not the point where rates are raised that signal trouble for stocks, but rather once the Fed pivots and reverses course and begins easing and lowering rates, THIS, not the rate hikes is the signal to watch for.
It comes as no surprise then, that interest rate cuts have not only begun, but are in full swing, with further rate cuts this year, already being priced in.
The macro outlook looks bleak, this bubble CANNOT last forever, however i firmly believe that the Banksters will not let this bubble burst without a fight, a global slowdown, coupled with global equity markets crashing would cause widespread panic and in some places, riots.
So keep an eye out for the helicopter drop of money coupled with bail ins, bail outs and of course, more QE.
-TradingEdge
- Top left = SPX
- Bottom left = Initial jobless claims (unemployment metric)
- Top right = US 10 year and US 2 year spread (Yield curve inversion metric)
- Bottom right = Fed funds rate (short-term interest rates)
It is no secret that US equities are grossly overvalued, from Warren Buffet to Stanley Druckenmiller to Ray Dalio, the smart money has made their case for why US stocks simply cannot justify their valuations indefinitely.
Yet Stocks continue higher, largely due to massive CB liquidity, spurred on from fears of a global slowdown and the ensuing economic impact this would have on such indebted nations and consumer, this coupled with the supply chain shock that the Corona-Virus is undoubtedly having on global trade is a recipe for disaster.
So what are the macro/ recession indicators saying?
They are flashing red.
The Initial claims are at record lows, which sounds fantastic, until you realize that most major recessions and even depressions are accompanied with low, not high, unemployment. Recessions strike when everyone is complacent, when they are fat and happy and when they have their blinders on.
I will be watching the initial claims and will look for the the claims to spike and reverse trend, as this is a much stronger indicator of structural weakness within the economy.
Moving over the the US10y/ US02y spread, it is well known that the yield curve briefly inverted in 2019, however, the initial inversion is not the point to sell, this is due to the yield curve inversion being a leading indicator of recession. Historically, from the point of first inversion to the inevitable decline in equities, is roughly 12 months to 18 months.
We are 7 months into the initial inversion and the yield curve looks like it is going to invert yet again.
Finally we have the Fed funds rate, the targeted overnight lending rate for the Federal Reserve.
The trend is clearly down, down, down with rates this has been rocket fuel for bonds which are now traded akin to equities for capital appreciation, rather than the interest bearing assets they were designed as.
Furthermore, and perhaps most interestingly, it is not the point where rates are raised that signal trouble for stocks, but rather once the Fed pivots and reverses course and begins easing and lowering rates, THIS, not the rate hikes is the signal to watch for.
It comes as no surprise then, that interest rate cuts have not only begun, but are in full swing, with further rate cuts this year, already being priced in.
The macro outlook looks bleak, this bubble CANNOT last forever, however i firmly believe that the Banksters will not let this bubble burst without a fight, a global slowdown, coupled with global equity markets crashing would cause widespread panic and in some places, riots.
So keep an eye out for the helicopter drop of money coupled with bail ins, bail outs and of course, more QE.
-TradingEdge
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