Juggling Dynamite

Last week, the two-year US Treasury bond yield (3.654%) closed below the ten-year yield (3.716%), making for a +.062% spread and the first upward-sloping curve for these yields since July 2022.

The re-steepening of Treasury yield spreads after months of inversion has historically proven to be a reliable warning of economic contraction, accelerating unemployment, and the most punishing part of bear markets.

Commodity prices appear to concur with the CRB Index (39% weighted in oil and gas, 41% agriculture, 7% precious metals and 13% industrial metals), down sharply on the week and -10% since May. Oil (WTIC) is negative year to date, -13.5% in the past year and -25.6% since peaking in May 2022.

Fossil fuel company shares (XEG basket), typically the last leg propping up Canada’s TSX at cycle peaks (in black below, versus other sectors, since April 2022), had fallen 4% to the end of August (as shown below) and are down another 10% so far, in September.

The downdraft in equities and other risk markets has been minuscule relative to the due give-back period. So far, stocks and the highest-risk corporate debt have priced less than 20% odds of an incoming recession (black bars below), compared with economically sensitive Treasuries and base metals (in yellow below) that are now priced for 70 and 66% odds of recession, respectively. See, Wall Street Traders Suddenly Converge on Economic Prospects Ahead:

“…the sentiment gap between stocks and bonds was noticeable last month. An equal-weight version of the S&P 500 — which gives Big Tech companies the same weighting as the humble consumer staple — ended August at an all-time high in an upbeat signal about the business cycle ahead. Meanwhile, the yield on two-year Treasuries kept falling, reflecting the conviction that Jerome Powell & Co. will be forced to enact a faster-than-expected pace of rate cuts.

If that conviction builds, risky assets may be forced to take fresh cues from the world’s most important bond market. It’s not a perfect science, but for three sessions in a row earlier this week, the S&P 500 stood within 2.5% of a 52-week high, while two-year rates sat within 50 basis points of a 52-week low — a cluster of divergence not seen since 2019.”

The most important question is not whether a recession and bear market will come—they are inevitable parts of financial cycles. The question is how we will fare when they do.

What’s your plan to survive and thrive through the downcycle? Most individuals and investment advisers don’t have one.

Danielle was a guest with Jim Goddard on Talk Digital Network, talking about recent developments in the world economy and markets. You can listen to an audio clip of the segment here.

Also, see, Toronto home prices fall as active listings surge:

Home sales were down 5.3 per cent in August compared to the same time last year, and decreased by 7.7 per cent compared to July. New listings were up slightly year-over-year and active listings surged by 46.2 per cent, the report said.

Historically, the GTA’s real estate market is known for its lack of supply, but there is now plenty of choice. The last time this happened was during the 2008-09 financial crisis and the early months of the pandemic, Mercer said. As interest rates continue to drop, active listings will also decrease, he added.

The average selling price was down by 0.8 per cent compared to August 2023 to $1,074,425 — on a seasonally adjusted basis, the average selling price edged lower compared to July.

Home prices across all property types in the GTA dropped with detached, semi-detached, townhouse, and condos seeing a 0.3 per cent, 3.9 per cent, 4.6 per cent, and 4.5 per cent decrease, respectively.

Fine wine prices have tumbled back to the pandemic lows of 2020 due to falling consumption, globally.

Fine wine prices are decreasing sharply amid rising inventories and low demand for some of the most expensive wine #MacroEdge pic.twitter.com/qzuVSh3ixd

— MacroEdge (@MacroEdgeRes) September 3, 2024

Are consumers struggling financially or realizing that alcohol is toxic for their brains?

At the same time, slumping demand for luxury goods is causing Swiss watchmakers to seek state aid:

Swiss watchmakers are suffering from a sharp decline in demand, especially in China, following an unprecedented boom during the post-pandemic era when consumers rushed to buy pricey timepieces. After three straight years of record exports, wholesale watch exports have fallen by 2.4% in value in the first seven months of the year as consumers refrain from splashing out on expensive watches.

The drop in consumer demand has hit brands making slightly less expensive watches the hardest, while top-selling brands such as Rolex and Patek Philippe have been more resilient.

The slowdown has also affected Richemont, the group behind Vacheron Constantin and IWC, and Omega owner Swatch Group AG, which have both seen sales dive in China.

The earnings of art dealers are sporting similar trends, see Sotheby’s earnings plunge as art market catches a chill:

Sotheby’s has reported an 88 percent plunge in its core earnings and a 25 percent decline in auction sales, as a chill in the art market hits one of the industry’s most famous brokers.

The first-half figures at Sotheby’s main auction business reveal the extent of the financial pressure the group came under before it struck an investment deal with Abu Dhabi this month.

Weaker luxury spending in China is among the factors weighing on demand for fine art and affecting both Sotheby’s and historic rival Christie’s.

This morning, the US 2-year Treasury yield fell to 3.796%, the lowest level since May 2023. In the process, the US 2 and 10-year yield curve (below since 2019) turned briefly positive (short yield lower than long) after a record 796 days of inversion (2-year yielding more than the 10-year) since July 8, 2022.

The July 2024-Sept 2024 curve inversion is now the longest since 1927/29 and exceeds other record inversion periods that preceded the brutal 1973/74 and 2007/08 recessions and bear markets. It was when the curve finally un-inverted that all hell broke loose.

There are some important warnings here for those able and prepared to see. Sadly, most financial ‘experts’ are paid to look the other way and keep customers long-always the riskiest investment products.