If there is a metaphor for the 2009 Meltup, it’s the yield curve. In the chart below, Andrew Barber and I have outlined one of our most relevant takeaways from last week in global macro: the rolling over of the 3-month moving-average in the Yield Spread (10-year minus 2-year US Treasury Yields).
We’ve been using this Breaking/Burning Buck as a tagline for REFLATION since Q209. It maps this chart and it simply concludes that the best way to understand why everything priced in US Dollars can REFLATE is to follow the money. As the US Dollar is held underwater, everything priced in those Dollars is buoyed. And, as the Buck Burns, the Bankers get paid.
One explicit way that the Bankers of America get paid is via the steepening of the yield curve. Borrow for free on the short end and then lend long at higher rates. Tell the Street you had a great quarter and keep justifying this pig-out on the yield curve by calling it whatever you like – just tell your depositors we are having a Great Depression.
One way to visualize this is to look at the chart below. The lowest point on the chart is 127 basis points (December 26, 2008). The highest point came on June 4th, 2009 – when I’d argue that we heard the peak of Great Depression storytelling out of Washington. That peak, was the mother of all peaks. A Yield Spread of 276 basis points was not only the highest on this chart, but the highest we have EVER seen. Ever, of course, is a long time.
Now what you are seeing is COMPRESSION. Compression, on the margin, is bad. Bad for Bankers that is. Good for the US Dollar. Good for US Consumers…
Mr. Market definitely cares about this. Look at what compression did to the US stock market (Financials in particular) during the last phase where we saw this 3-month moving average rollover (Q408 to Q109). The rest, is history…
Keith R. McCullough
Chief Executive Officer