2024 Bear Market in One Chart

A bear market has this chart completing the symmetry.

Does the Yield Curve Matter?

Most Recessions Start a Year After Steepening

Most recessions start at least a year after the yield curve starts reversing higher. There already was recession in Q1 and Q2. Maybe there isn't now, or maybe inflation is being undercounted. Either way, not a good outlook.

I posted some trades over on the Substack.

When Do 100 bps Hikes Enter the Conversation

The past couple of decades have seen increasingly activist central banks intervene in markets. The Federal Reserve helped blow a housing bubble, then an everything bubble that it is now trying to unwind. Previously, they mostly followed the market. A couple of articles worth reading are De-mystifying RBA Setting of Interest Rates by Steve Keen and Here's How to Know When the Fed Might Raise Interest Rates by Vadim Pokhlebkin.

The 3-month Treasury bill rate is a proxy for the Fed funds rate. From the chart below, you can see the Fed funds rate used to fluctuate around the 3-month treasury rate. In the 2000 and 2008 recessions, and again in 2020, the market dropped interest rates faster than the Federal Reserve.

Something different is happening now. The market is raising interest rates faster than the Federal Reserve. If you notice the green line, the market takes rates up in between meetings and the Fed then catches-up by closing the gap to near zero. Notice the gaps widening? Remember Powell saying 75 bps was off the table? Then it wasn’t. The Federal Reserve is following the market and not vice versa. If the market believed the Federal Reserve and was following it, then the gap between the market rates and Fed funds rate would adhere to Fed policy and jawboning, and not the other way around.

The spread between the market and the Federal Reserve is still widening. The 3-month treasury yield is almost 125 basis points ahead of the Fed funds rate heading into this meeting 114 bps according to FRED). This is a wider gap than existed in June when they switched to 75 basis point rate hikes.

The current gap might not enough for a 100 bps rate hike because it would leave less than a quarter point gap. However, a 75 bps hike will leave the gap at around 39 bps. Notice that will be lower than the gap than at all previous rate hikes. The Fed should hike 100 bps if this chart factors into their decision making. The chart is saying the Fed is not only losing its battle, but that it is in a worse position today than it was at the start of its rate hiking.

With the market currently 50/50 on a 50 bps vs 75 bps hike in December, the Fed can push those odds with a hawkish statement, but they’ll still be behind again in December unless the market slows its pace.

In conclusion, the Federal Reserve is chasing the market higher and, key point, the market is accelerating its rate hikes. The Fed’s 75 bps pace falling behind the market’s pace. The speculators on Fed policy are undecided between 50 bps and 75 bps for December. If the bond market doesn’t slow down or worse, continues accelerating, 100 bps hikes might be on the table.

Putting the Bear Market in Perspective

Look at the ratio of SPY to TLT, and SPY to ZN the 10-year treasury futures.

We Have a Ding

ZB hit my measured move target today, based off the non-lockdown peak. On many charts, but not all, I ignore both the March 2020 panic move and also for commodities, the Russian war spike. These can't be wholly discounted, but since they were such brief moves, I treat them as low information unless they fit into a pattern. One way it could fit in would be a mirror spike down in market panic. That would take ZB down to the 113 area.

A similar move in TLT would take it to the $90 area.

I have talked about that target before. Here on August 31:

With the caveat, if bonds continue lower, a breakdown in ZB and breakout in 30-year yield correlates with about 5 percent interest. That isn't a crazy target when considering the Federal Reserve is talking about a 4-percent Fed Funds rate. I do expect deflation and a rally in long bonds, but if I'm wrong, it isn't a wild target. It would take ZB and TLT back to 2007 levels of around 110 and $90 per share. Note that TLT is dividend adjusted, remove that and you will see TLT at $90 when the yield was around 5 percent.

I'll also not that the new buzzword from Fed watchers is a 5 percent Fed funds rate.

High Yield Debt Still in Positive Divergence

Amazing that high-yield is diverging positively from investment grade bonds even as it has been moving lower. Positive divergence the past few days as well.

Lows Beget Lows; Yuan Deval to 8.28 on Deck

I talked about what could be next for markets this weekend. I posted charts on transportation companies, an airline, high yield and chemicals. There is a clear case for a bounce on these charts because they're at major support. If I have to condense the market into one chart, I pick BTC. My long-term support line breaks around $17,800.

The other charts to watch are currencies as I laid out in the "what's next" post. Almost all currency charts are either in "free fall" territory or coming up on major support and resistance. USDCNY is one day (at current volatility) away from breaking out. The target is around 8.10, but I'd wager the market tests the old peg area of 8.28 on a break. A 15 percent rally for USD from here, about 14 percent deval for yuan.

If this sounds crazy to you, consider this: yuan has mostly risen with the USD durign the bull market. Here's the returns for USD vs EUR,JPY, KRW and CNY since September 2018:

A yuan "deval" is not so much a devaluation as catching up with the decline in export currencies. I'm not predicting this will happen now, though I think it is highly likely for this cycle. If the dollar keeps running though, that is where the yuan is headed.

Finally, long-term government bonds continue their slide.

The 10-year bond futures contract has reversed all gains since 2008.

In conclusion, the market is poised for a bounce or a collapse and that's it. Until there are concerted reversals in currencies, bonds and stocks, then do not expect a sustained rally. Rallies will terminate within hours or days until this happens.

Market Top: Stock Bond Ratio Charts

Bonds Away: 30-Year Mortgage Running to 7pc

The bounce in bonds may happen, but it'll be about 6 percent lower.

I don't know that it will get there, but the path to 7 percent on the 30-year mortgage is opening up. Going by the current ratio of mortgage rates to the 30-year treasury rate, if ZB hits the target it could push mortgage rates towards 8 percent. the X-factor here is the Federal Reserve's QT policy.

The S&P 500 Index bounced of resistance. There isn't much chance of a bounce with bonds sinking and there's not much risk except for the Federal Reserve tomorrow. Most likely the path forward is bearish immediately, but if the Fed front-loads hikes perhaps bad news is good news.

Microsoft and Google both traded at new 52-week lows the past couple of days. Didn't close at new lows.

When the Bubble Stopped

I saw a chart of monetary data that topped out in February 2021 that made me think, "Duh!" It was so obvious that I didn't record it, but now I can't remember it. So here's an attempt at finding it again. I'll post charts that broke in February or March 2021.

Here's the yoy change in the Fed's balance sheet versus BTC.

Here is ARKK and the 10yr2yr yield ratio. The yield spread peaked about a month later.

Adios Inflation

Bust Out 1980s Analogs: Yield Curve Inversion Breaks Post-Volcker Lows

Boom. That is all 2-year plunging (yield rising). The 10-year and 30-year bonds are flat at the open on Sunday night.

Yen Still a Go If Bonds Cooperate

Yen futures with ZB.

Final Run of the Bulls, You Can Hear the Salmon, Let Gold Be Your Guide and Crude Goes

Yesterday was a macro disaster for stocks. It was a bullish day, but damage in commodities and bonds signal this rally is running out of fuel. Going to run through a lot of charts today, all after the jump. 

For myself, I am always early. I closed out the biotech trade when it got into that consolidation range. I had July puts so it wasn't a bad trade, but then I also closed SMH calls and they've run as well. I've done fine with other positions such as short oil, long treasuries, and long yen, but I say to this to be clear: my WAG targets for the rally initially were 25 percent for Nasdaq and around 2000 on the Russell 2000 as my charts show. They might get there and that is a risk for bears. 

That said, I'm buying puts here for September and October. I have a big "crash" trade on FCX and I'm looking for more trades like that. If Apple fills its gap, I'm really not kidding when I say that's a retirement line. I'm going all in at that point as long as nothing has changed to shake my outlook.

On to the charts.

2s10s Ratio Already Near 1980s Low

Since rates are so low, maybe a ratio of 2s10s makes sense. Presently, the chart would be at 0.88 based on where the 2-year and 10-year treasury yields are at this moment. This chart is updated through yesterday's close. The absolute low for the ratio (from available data) was 0.84 in the early 1980s. A couple more days like today will get there. The normal spread has much further to go before it hits the 1980s low of negative 2.41. To put that in perspective, the 10-year would have to plummet to 0.71 percent while the 2-year remains at today's 3.12 percent. If the 2-year drops, the only way to match that early 1980s spread is with a negative yield on the 10-year treasury.

Yield Curve Screaming Recession

The recession started in January 2022, but the bond market is screaming an "actual" recession is coming. As in something much worse than what's happened the past six month. Those protesting about the definition of recession now will look like fools for ignoring the signs.

TLT Reverses Relative Performance

Last Friday, I asked What's Going On With TLT vs ZB? becase TLT was lagging greatly. Today, TLT is way ahead. If TLT reverses the 2022 trend as bonds rise, it could deliver a better-than-expected return in the second half of the year.

It's Not a Recession. It's a Depression.

The ruling class is out in force with redefining a recession. Here's why it's a waste of time.

AP: EXPLAINER: How do we know when a recession has begun?

By one common definition, the U.S. economy is on the cusp of a recession. Yet that definition isn’t the one that counts.

The U.S. isn't on the cusp of recession. By the common definition of negative growth in two consecutive quarters, a recession is already six months-old if BEA reports a negative number on Thursday.

As for definitions, they can be flexible. I don't think a bear market is a 20 percent drop in stocks. Every correction from 2009 to 2021 was a correction, not a bear market, even though stocks fell 20 percent or more at times. What's the quibble with the recession definition?

But economists say that wouldn’t mean that a recession had started. During those same six months when the economy might have contracted, businesses and other employers added a prodigious 2.7 million jobs — more than were gained in most entire years before the pandemic. Wages are also rising at a healthy pace, with many employers still struggling to attract and retain enough workers.

(long string of expletives)

Excuse me FRED, can you drop some tactical nukes for me?

FRED: Sure thing boss!

Great, let's start with rising wages. Adjust those for inflation would ya Freddie?

FRED: Incoming!

Real wages are plummeting. Seems consistent with ye olde recession.

The job market’s strength is a key reason why the Federal Reserve is expected to announce another hefty hike in its short-term interest rate on Wednesday, one day before the GDP report. Several Fed officials have cited the healthy job growth as evidence that the economy should be able to withstand higher rates and avoid a downturn. Many economists, though, are dubious of that assertion.

Shall we drop another tactical nuke on their critical meme infrastructure?

At best, labor is a coincident to lagging indicator. If the recession is already six months old and labor didn't start turning down until April, there could be a lot more pain ahead. As in, this recession isn't going to be some dip in activity, but something that at minimum will be a three to four quarter protracted contraction. Looking back, I see they revised GDP to make the 2008 recession much longer than originally recorded. It had been a mild contraction, barely scoring as a recession. I have contended for months that even if not a recession now, the BEA would eventually revise this year into a recession.

The Fed is also trying to combat raging inflation, which reached a 9.1% annual rate in June, the worst mark in nearly 41 years. Rapid price increases, particularly for such essentials as food, gas and rent, have eroded Americans’ incomes and led to much gloomier views of the economy among consumers.

Inflation creates a price illusion. Only looking at wages, revenues or GDP makes one think there's growth. The number is going up. Adjusting for inflation reveals the more activity you engage in, the more money you lose because it's happening with devalued currency. .

Look at the imploding retail stocks as an example. Retailers bought goods expecting to sell them amid high demand, but demand was fake. It was inflation. Supply chains helped disrupt the timing, but also the economy rapidly shifted as inflation came out of the economy. They should have never ordered the inventory. 

Nobody knows how deep this incoming economic malaise could get because it is still wholly distorted by a CPI still running at above 8 percent over the past 12 months. The CPI is rapidly decelerating though. The Cleveland Fed's Nowcast for July is down to 3.3 percent annualized. I don't annualize to forecast, but merely to show how fast the monthly CPI numbers can collapse. If highly efficient companies such as Wal-Mart report department "growth" that could be more than 100 percent price gains (I don't know that this is true, I've only see reported sales figures for various firms that are below the CPI), it indicates the collapse of inflation could reveal widespread economic losses. Wal-Mart is probably a winner in this environment too, keep that in mind.

It did in the first three months of the year, when GDP contracted 1.6% at an annual rate. Economists have forecast that on Thursday, the government will estimate that the economy managed to grow at an annual rate of just below 1% in the April-June quarter, according to data provider FactSet. If accurate, that forecast would indicate that the economy isn’t technically in recession by any definition.

Even if growth does go negative for a second straight quarter, Fed officials and Biden administration economists point to a lesser-known measure called “gross domestic income.”

GDP calculates the value of the nation’s output of goods and services by adding up spending by consumers, businesses and governments. By contrast, GDI, as the name implies, seeks to measure the same thing by assessing incomes.

Over time, the two measures should track each other. But they often diverge in the short run. In the first quarter, GDI grew 1.8% — much better than the 1.6% decline in GDP.

As part of its judgment of whether an economy is in recession, the NBER considers an average of the two measures. In the first quarter, the average was 0.2%, suggesting that the economy expanded slightly.

This isn't an argument devoid of logic. There have been near-miss recessions in the past. The flaw here is inflation. It assumes these numbers are accurate and won't be revised in the future. Given the high rate of inflation, I'm highly confident future revisions will be negative.

Consider these charts and comments from Jeff Snider:

Inverted curves aren't about what just happened. They've already discounted the (likely) 2 qtrs of negative GDP. IOW, the "technical recession" is already in there.

The deep inversion is about what's still coming. And if what already did is half a year of lower output... pic.twitter.com/QGl8KNiezI

— Jeffrey P. Snider (@JeffSnider_AIP) July 26, 2022

The market can't be discounting something like dot-com recession, because that scenario would mean we've already had the recession (Q1/Q2 '22). Can't be something like H1 '08, either. Inversion *has* to be something like 81-82 or 2d part of 08-09.https://t.co/EH7guxTKpo pic.twitter.com/iwE3bxruVq

— Jeffrey P. Snider (@JeffSnider_AIP) July 26, 2022

In two weeks, the spread between the 30-year and 3-month treasuries has been cut in half. The 3-month is only pricing in a 50 bps hike too. If the Fed goes ahead with 75 bps, my hunch is the curve could invert tomorrow or quickly after the initial chaotic frenzy in markets.

Arguing over the definition of recession is missing the forest for the trees. Something wicked this way comes.