2019 Mar 28, 10:56am
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Trump's tax cut is spent too. Sugar high.
This situation is nearly unfixable, so when the house of cards comes down it will blow out spectacularly.
Appendix A: In 7 out of 9 past times this indicator fell to 0, recession ensued.
I dislike "technical analysis" but this is one chart is fucking ugly:
If anything, the bottom on this graph would indicate that there’s six months until the recovery.
As most readers of this article are probably aware, the 10-year minus 3-month US Treasury yield curve has recently "inverted." There has been a flood of commentary in the financial media (including over 20 articles on Seeking Alpha) with pundits claiming that this inversion "signal" portends an imminent recession in the US and that this forthcoming recession portends an associated major decline in the stock market.At the very outset of this article, I want to make it clear that my detailed research suggests that the 10Y-3M yield curve is not a good predictor of recessions. Nor is it a good indicator of draw-down risk in an investment portfolio.
This signal extracted from this particular yield curve, based on inversion, generated some false positives in the mid-1960s, many false positives all throughout the 1980s and 1990s, and a false positive around 2005. Furthermore, using inversions of this yield curve as a "sell" signal in an asset allocation model would have produced many trading "whipsaws" and poor investment performance.So which, if any, yield curve should be used for purposes of recession forecasting? Many different yield curves - there are hundreds of possible maturity combinations that can be used - could be used to extract a recession signal that is derived from inversion of that particular curve. As it turns out, researchers have discovered that inversion of the 10Y-3M yield curve has apparently been - and I use this term intentionally - a pretty good lead indicator of recessions.
Proponents of the 10Y-3M yield curve inversion signal frequently claim that this indicator has predicted 7 out of the last 7 recessions. While this statement is arguably accurate, it can be a bit misleading unless it is qualified. First of all, using daily price data, the 10Y-3M yield curve produced a false negative in the late 1950s. Second, as can be seen from Figure 2 above, the 10Y-3M yield curve inversion signal produced false positives in 1966, 1998, and early 2006. If these four failures were taken into account, the track record of the 10y-3M yield curve inversion signal would only be 4 of 8. Proponents of the 10Y-3M inversion signal generally suppress the latter two false positives by using monthly or quarterly data. Although this practice is questionable, for purposes of this article, we will go along with this assumption. Using these criteria, the 10Y-3M inversion signal has a track record of 6 out of 8 - and 6 out of the last 6. This seems like a reasonably good track record for a leading indicator, from a purely statistical point of view.But there is a critical question that is rarely if ever asked: Is there any solid theoretical or conceptual basis for using the 10Y-3M yield curve to forecast recessions? Is there any solid theoretical or conceptual basis for preferring this yield curve to any other yield curve? The answer to this question is: No, there isn't. As I will be discussing at length in Successful Portfolio Strategy in the next few days and weeks, from a conceptual point of view, there is very little theoretical or conceptual support for using yield curves at all to predict recessions. Furthermore, to the extent that yield curves are used at all for predicting recessions, there is definitely good conceptual reasons to use yield curves other than the 10Y-3M.[...] What Has Historically Happened to The Economy and Stocks After the 10Y-3M Yield Curve Inverts?Although there is little or conceptual justification for using the 10Y-3M yield curve as a basis for predicting recessions within a 6-to-18-month timeframe, we will play dumb for now and simply take this indicator at face value in the way that it is employed by most of its proponents - i.e. as a leading indicator of recessions. What has historically happened in each of the last 8 business cycles after the first inversion of the 10Y-3M yield curve? Note that we use monthly data in Figure 3 below in order to filter out false positives in 1998 and early 2006.
Let's first look at what has historically occurred to the economy after the 10Y-3M yield curve has registered its first inversion of the business cycle. The first thing to note is that the range of outcomes is quite wide. From the date of the first yield curve inversion in a cycle until recession, the time elapsed ranges from 4 years to 6 months. Including only the past 6 cycles, the range is 17 to 6 months.Now, let's look at what has historically occurred to stocks during this time. The first thing to observe is that cyclically-associated bull markets tend to continue trend higher for some time after the inversion of the 10Y-3M yield curve. The median time from the inversion until the end of the cyclically-associated bull market (and the start of a cyclically-associated major drawdown) was about 11 months. The median upside of the S&P 500 until the peak of the cyclically-associated bull market cycle is reached was 16.03% (not including dividends).The implication that can be derived from this analysis of the historical data is that a yield curve inversion does not signal an immediate end to the US economic expansion. Most importantly, the inversion does not signal an immediate end of an ongoing cyclically-associated bull market. Indeed, historical precedent suggests that after an inversion of the 10Y-3M yield curve, the S&P 500 is likely to register fairly significant upside until the peak of the cyclically-associated bull market is reached.[...] However, if one believed that the 10Y-3M inversion signal was significant, and took it at face value, this is how I would go about thinking about how to apply it to the present situation:The data on yield curve inversions is divided into two categories: A) Yield curve inversions that happened before major cyclically-associated drawdowns; B) Yield curve inversions that happened after major cyclically-associated drawdowns. As stated earlier, major cyclically associated drawdowns have always occurred after the 10y-3M yield curve has inverted - unless there has been a major macroeconomically significant shock which has imperiled the economic expansion.[...] Relating this to present circumstances, it should be noted that there have been no major macroeconomically significant shocks that have imperiled the ongoing business cycle (and which the yield curve failed to properly discount). Therefore, the current situation of the US stock market most likely falls under the first category of yield curve inversions - the US stock market is in a situation in which the end of the cyclically associated bull market is likely to occur significantly after the 10Y-3M yield curve has inverted.How much after the inversion of the 10Y-3M can we expect the current cyclically associated bull market to end? Based only on the historical experiences with yield curve inversions, a reasonable expectation would be about 11 months, with a pretty wide margin of error.[...]
Everyone focuses on the value of the indices while not counting the compounding dividend effect which over time is tremendous.I remember when the Dow was 4000 and they said it was far too high and ready to crash.I follow the W5000 index anyway. When I look at my stock mutual funds over decades, I see a significant % of the increase was actually dividends. I'm not going to give that up.
And: Has the the Brexit Issue already been priced in, or will Brexit follies start a European downturn, followed by our own recession? This is an ugly uncertainty.
A. No-deal Brexit. 1.5 months of slight panic. UK declares willingness to trade with EU states on WTO terms, continues open and vigorous trade with US and especially Commonwealth countries. City of London retains global finance hub status. EU later begs for better deal. Boris Johnson strings them along and eventually offers UK-beneficial deal.
My W5000 index fund may or may not be considered a capital appreciation fund. Although my funds were not focused on dividends, a significant % of the overall return over several decades seem to be dividends anyway.
Primecap in Pasadena
But, when I am curious about my net worth on some day after the market closes, if I just look at the W5000 index increase % and multiply it by my stock funds total net, the result is almost identical to adding up the balances that night.
buy the ones which have already gone up and become famous.
when I am curious about my net worth on some day after the market closes, if I just look at the W5000 index increase % and multiply it by my stock funds total net, the result is almost identical to adding up the balances that night.
Citibank offer 2.25 on CDs
Didn't Iwog do this and basically throw 125% of his potential net worth into a fire?
Capital One is 2.7%, Discover is 2.65%
Goran_K saysDidn't Iwog do this and basically throw 125% of his potential net worth into a fire?Watch me do the same!
I'm not questioning the logic, just the timing.I'd wait to see cracks in the dam, hopefully selling 12% or so from the top.
Watch me do the same!
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