“Our pleasance here is all vain glory – the false world is but transitory.”
After listening to Janet Yellen yesterday, I finally realized that the difference between our economic forecasts boils down to the difference in one word. What we call cyclical, she calls “transitory.”
To give her some air time on this, the Miriam Webster Dictionary defines “transitory” as “ephemeral, momentary, fugitive, fleeting, evanescent, meaning only lasting or staying a short time.”
Sounds like yesterday’s US stock market move, not the consistently slowing US economic and corporate profit data!
Back to the Global Macro Grind…
You see, even if you aren’t paid to see, this all became very clear yesterday. Despite both the data and market signals we’ve seen develop since July, the Federal Reserve had to maintain a bullish growth and inflation “forecast” that corroborated its political action.
Now that we have that out of the way, we can get back to measuring the non-transitory economic cycle.
The best part about the “rate hike” is that rates fell on that. Yep. The long-end of the curve is falling again this morning too. With the 10yr US Treasury yield down 7 basis points to 2.23%, that’s also flattening the curve.
So, forget the transitory spike you saw in most things equities for a minute and consider the causal factor that has driven long-term interest rates Lower-For-Longer, well, for a long time – both long-term inflation and growth expectations slowing. #Demographics eh.
Instead of having an un-elected-linear-economist characterize #LateCycle indicators like employment as non-transitory and everything she didn’t forecast as transitory, what does Mr. Bond Market think about this?
- Long-term rates are falling, despite a transitory rate hike
- The Yield Spread (10yr minus 2yr) just flattened to a YTD low of 123bps
- Credit Spreads continue to signal a classic cyclical breakout
Yes, we get that people are in the business of seeing stock prices rise into year-end. There are only 2 weeks left to get the Russell 2000 back to break-even. So you’ll need to get the sell-side to make up a narrative for a transitory +5% rally (from here) to get there.
They can be very creative.
But can they find a way to call today’s Chart of The Day (US Industrial Production) slowing indefeasibly into a recession “transitory”? Or shall we agree to agree that this rate of change dropping to its lowest level (-1.2% year-over-year) since 2009 is called cyclical?
If we’re going to call everything cyclical “transitory”, then we’ll probably get to what most economic ideologues actually believe - that they can bend gravity – and that there is no economic cycle to concern yourself with anymore because they can smooth that too.
But, if gravity fans just call cycles what they are – we won’t blow up our net wealth at every turn of every #LateCycle slow-down. Since the Federal Reserve has NEVER proactively predicted a recession, I’m thinking we stay with mother nature.
Back to tightening into a cyclical (and secular/demographic) slowdown…
- That’s US Dollar bullish
- That’s Bond Yield bearish
- When USD is RISING and UST Rates are FALLING, that’s deflationary
Mr. Macro Market nailed that yesterday too. It appears that he believes the inaccuracy of Janet’s forecasting process is inherent and unchallengeable. How else can you explain yesterday’s market reaction?
- Utilities (XLU) led gainers, closing up +2.5%
- Housing Stocks (ITB) came in 2nd place on the day, +2.4%
- Oil & Gas Stocks (XOP) led losers, deflating another -2.2%
As the legendary Herb Brooks would have said to Janet, “Again!”
On a historic day where the Fed “raised” into a both an industrial recession and corporate profit slow-down (hasn’t happened since 1967), Lower-For-Longer rate proxies rallied, credit did nothing, and commodities continued to crash.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.13-2.33%
Oil (WTI) 34.09-37.26
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer