This will be a brief but extremely important Critical Signals Report.
With the month nearly over and as we head into a holiday weekend, we wanted you to know that the U.S. 10-year Treasury Yield may be in for its biggest monthly drop since January 2015.
10-year yields are now approaching lows not even seen since the peak danger months of the Great Financial Crisis of 2008… and notably, just before.
So, what does this mean and what can YOU do?
When bond yields compress to the floors of history, this is because bond prices (first supported by central banks and now exacerbated by increasingly scared investors seeking “safety” in government debt) are rising toward the moon.
When scared investors and global money (desperately seeking even a sliver of U.S. yield) flock to U.S. 10-year Treasuries, this pushes their prices up and hence their yields lower – which means our flattening yield curve is flirting with increased inversion disaster – a classic harbinger of trouble ahead.
A Deadly Coiled Spring
To help this sink in, think of compressed government yields as an extremely powerful spring which has been pressed down (coiled to a breaking point) by years of central bank intervention (i.e. trillions in massive yet artificial price support of bonds by drunken, Fed money printing used to buy those bonds).
Years of such dangerous compression have been used to keep Treasury yields, and thus rates, unnaturally low of for an unnaturally long time (10+ years), creating the illusion that both high interest rates and rising inflation were forever a thing of the past.
This, of course, is pure fantasy – but fantasy works to keep market and Fed credibility (and faith) on autopilot until, of course, that faith and credibility is lost.
In the interim, such low yields and rates have led directly to the largest corporate, governmental, and household borrowing/debt binge (and bond bubble) in our history, now tallying in at a combined and staggering $72+ trillion.
Additionally, these dangerously compressed/low rates have encouraged companies to use borrowed money to buy back their own shares at unprecedented levels, thus acting as a debt-soaked tailwind for an equally unnatural rise in our stock markets.
Two Bubbles Waiting for the Pin to Drop
Thanks to these compressed yields, we now stand before the largest stock and bond bubbles in U.S. market history, both of which rely entirely on keeping this dangerously coiled yield “spring” forever coiled/compressed.
In short, everything hinges upon low yields and low rates.
This week’s continued yield compression means we are getting that much closer to an “uh oh” moment – because the spring is nearing a popping/release point.
Unfortunately, the more the Fed and markets compress a coiled spring, the more stored energy it harbors, which means the more powerful that coil will be when it springs into full action and shoots to the sky like a surface-to-air missile. This happens when the Fed no longer has the credibility, faith, or power to keep this unsustainable compression from bursting.
The Physics of Markets Rather Than Fed Forces
But the moment such stored/coiled energy converts to kinetic energy – i.e. the moment it moves into action, the coil pops, the spring shoots, and hence yields and interest rates rip rather than stay down.
And as we’ve said countless times, once the artificial forces of rate-compression surrender to reality rather than fantasy, rates will fatally rise on natural market forces, which are as real to markets as physics is to science. And when those rates so rise, both our stock and bond bubble pop in tandem, which means money bleeds out of these markets with alarming speed and force.
The data above on the 10-year Treasury merely confirms that these compression levels are moving closer and closer to their “uh oh” moment, one which the Fed can desperately seek to postpose with its last few bullets of stimulus, but in no way prevent.
Such massive yield compressions don’t come along very often, but here we are. Like Custer at Little Big Horn, we are slowly running out of both time and Fed ammo.
Stimulus bailed us out in 2011 and 2015, but we may not be so lucky this time around… That’s because we’re running out of bullets on the monetary side and any fiscal relief administered now would not show up until well into 2020.
What YOU Can Do Now
Second, stop worrying about market timing and just listen to common sense.
That is, common sense dictates that interest rates, yields, and inflation have not been rendered extinct by central banks in general or the U.S. Fed in particular. Just because a hubris-driven Fed thinks otherwise means nothing to the humility of our own common sense.
Thus, even if the Fed goes full-on crazy and takes/compresses rates to zero, or even below zero as in Asia and Europe, this only buys time, not miracles.
In other words, rates, yields, and inflation WILL spring at some point from these artificially coiled levels.
Knowing this, it matters not whether this happens tomorrow or a year from tomorrow, or even longer, for the simple fact is it will happen, which means you need to invest now in an asset class that will ultimately rise when the recession hits and interest rates rise, as this is as certain as death and taxes.
Gold, of course, is an obvious asset to acquire in such a backdrop, and we made a lengthy case for that here. To amplify this recommendation, take a look at this chart below on GDX vs. the S&P 500 Index. Back in 2007, gold just ripped before the 2008 recession set in… AND it continued to rip once the recession started.
The spread between gold and the S&P 500 Index is stretched right now, with these markets coiled up for an explosive move up for gold and down for the stocks.
The hard part is the timing and we like gold for that reason… it tends to be sticky BEFORE and INTO a recession, not to mention the inflationary period we are ultimately expecting.
We’ve displayed VanEck Vectors Gold Miners ETF (GDX) that tracks the performance of the NYSE Arca Gold Miners Index. The ETF invests in materials stocks of all sizes across the globe with its largest allocation is in North American companies, principally those domiciled in Canada. Market cap: $12 billion – investors are piling in.
Can You Help Us Out?
We’d like to know if you already own gold or not. In the comment box below, we’d be much obliged if you could tell us “Yes, I own gold” or “No, I don’t own gold.”
Again, we are not gold bugs or affiliated with gold sellers; we just see the common sense value of this asset in the current market backdrop and future. We’d just like to know if others are catching on.
For now, we wish you a wonderful holiday weekend and will keep you posted in the interim on further developments in these increasingly volatile markets.
99 responses to “Treasury Yields Tumble Into Recession Territory: A Dangerous Compression Just Waiting to Uncoil”
August 28 2019