While Everyone’s Focused On Yield Curve Inversion, This Is Happening

The past couple weeks pundits from all over the financial community have been chiming in on the yield curve inversion.

As a recap: yield curve inversion is kinda this upside down world where the front months of a bond are priced lower (higher yield) than the longer dated maturities. It’s bass-ackward because we’d expect to be paid more for duration risk, not less.

Ok, so what? What does that mean?

In short, the market expects a recession. That’s why it’s inverted. Lower growth means lower rates.

A recession would bring the Fed to the “easing” table and rates would plunge again. This is why further out the duration curve bonds are now being priced at a lower yield than shorter duration. Yield inversion. Got it?

Certainly bond traders are smart. Smarter than equity traders. Disagree all you like, that’s just the way it is so this warrants our attention.

Plus, it’s a truism in the investment world that it’s never different this time.

And just look at how investors have been educated. Most any bond trader still working the tape today has experienced a near linear path which is another reason returning to this thesis is a very easy one to return to. Don’t believe me? Take a look.

It’s been a one way street, and going up against it has proven more painful than stepping on a Lego in the night on the way to the loo. Just ask any bond trader who’s been short in the last couple of decades. Horrible stuff.

Putting a recession aside, I think there is a bigger problem for investors to be chewing their fingernails on. The implications of more easy monetary policy.

Returning to our truism “it’s never different this time”. Something else that’s equally “never different this time” is that governments never pay off unsustainable debt. Nevaaahhh!

Which brings up a question:

How much more debt can the world’s sovereigns add to their balance sheets before something falls over?

To make it easy for you, here’s a visual of a few select countries sovereign debt situations today.

In all honesty, I don’t need to show you the charts. You’ve seen them all before. It’s more than we’ve ever experienced and then some.

I’m sure some more debt can be added. But how much? Obviously, I don’t know and nobody else does either. That’s the problem.

This part of the equation is unknown because it is truly different this time. We’ve never been here before. Literally. So you can throw out all the textbooks on this stuff because there is no precedent.

As I mentioned multiple times before in these pages, the biggest reason for this phenomenal bond bull has been a global political and economic coordination between the world’s major countries and central banks.

The likes of which we’ve never seen before. EVER. And as mentioned when discussing the rise of “strong men”, we’re now in a quite different world than the last time we had a crisis to deal with (2008): Here’s what I promised them.

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Disclaimer: This is not intended to render investment advice. None of the principles of Capex Administrative Ltd or Chris MacIntosh are licensed as financial professionals, brokers, bankers or even ...

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Gary Anderson 10 months ago Contributor's comment

Funny and entertaining. What would be really sad is if the US and China crumble while fighting it out, while the Eurozone stays out of the fray. Can you imagine that place looking like the prettiest pig after all?