Juggling Dynamite

It’s important to understand that yield curve inversion and bear markets typically begin 9 to 12 months before any recession is officially proclaimed in backward looking data.  Here is my partner Cory Venable’s chart showing the inversion points in the past two cycles, and where we are today.

In the last cycle, the US yield curve inverted in early 2007 as the US housing market decline was already underway.  The S&P 500 peaked in October of that year, but it was not until 13 months later on December 1, 2008 that NBER and mainstream commentators declared that a recession had begun in December of 2007. By the time of that announcement, the stock and corporate bond market had already fallen 47% and pundits were insisting, as usual, that no one could have seen the losses coming.  Moves in the yield curve offer a valuable heads up for risk management.

Bloomberg has a habit of posting just a 2 or 3 minute clip of full guest interviews, which often miss the meat of the matter.  Komal Sri-Kumar had many relevant observations this morning in his hour long appearance. In this 3 minute clip that was posted, he discusses how the 10 and 2 year treasury yield curve is moving toward zero, and how one more Fed hike (on May 2nd?) could be enough to invert the curve.

Komal Sri-Kumar, president and founder at Sri-Kumar Global Strategies, discusses Federal Reserve policy and recessionary warnings from the flattening yield curve.

Here is a direct video link.

The Atlanta Fed is out today with its latest mark down in the US GDP growth estimate for Q1 2018:

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 1.9 percent on April 16, down from 2.0 percent on April 10. The nowcast for first-quarter real personal consumption expenditures growth declined from 1.1 percent to 0.9 percent after this morning’s retail sales release from the U.S. Census Bureau.

Here is their chart.

Economic growth is slowing, not just in the US, but worldwide.  Despite China’s officially proclaimed 6.8% growth rate in the first quarter today, Capital Economics estimates that it was closer to 4.8%, down from around 6% six months ago.

As explained in the latest Q1 2018 Hoisington Quarterly Review, unprecedented debt abuse over the past 8 years is now compounding an economic slowdown globally, while rendering the economy increasingly immune to the efficacy of monetary stimulants in truncating the coming recession.  Here’s why:

The fact that there is such a long lag between policy change and economic impact is critical in analyzing the circumstances today. For instance, suppose the Fed is able to identify the next recession on day one. Also, suppose that on the first day of the recession the Fed drops the federal funds rate to zero. Due to the economy’s extreme over-indebtedness, along with long monetary policy lags, a minimum of one and half years could elapse before even a slight economic recovery is experienced. But, recovering from the next recession, the lag could be much longer since interest rates are so close to the zero bound and indebtedness continues to rise to record levels. Both will interfere with the potency of the liquidity effect. Thus, despite a rapid Fed response, a long recession could ensue.

Where savings is present consumption denied, debt is future consumption denied. And here is an updated portrait of the debt now weighing on the world’s future consumption.

Self-dealing, breach of trust business models are so mainstream and lucrative in finance, many seem to feel that resistance is futile and we have no choice but to keep feeding the beast.  This thinking is financially suicidal and must change.

Of course we can and must demand that ‘advisors’ be held to a fiduciary standard.  We do so in other critical advisory professions like medicine, law and engineering.  Similar potential conflicts of interest are inherent between doctors and big pharma companies for example, and we still demand doctors honor a fiduciary standard of care or face prosecution, lawsuits and loss of their ability to practice.  See more on the never-ending battle for pharma payment transparency in medicine in Canada’s pharma companies disclose payments to doctors for 1st time:

In the U.S., any transfer of value to a doctor exceeding $10 must be disclosed by law. The information is publicly available on a searchable website, with details about travel, meals and other reasons for the payments. There are similar laws in France, Portugal, Denmark and other European countries.

“Unfortunately Canada is lagging behind,” said Dr. Andrew Boozary, a Toronto physician who leads the Open Pharma campaign, which calls on Ottawa to require mandatory disclosure in Canada.

“The backbone of any physician-patient relationship is trust. Where there could be perceived conflicts, where this is not public, where this is confidential or clandestine for whatever reason, [it] can really start to erode that.”

In finance, rampant self-dealing is the norm and nearly unchecked, especially for the largest firms who largely fund and staff revolving-door regulators, and pay cost-of-business fines only here and there.  The fact that most financial advisors and finance executives don’t see a need to reform the status quo, speaks volumes.

In the meantime, we taxpayers and individuals will continue to pay the compound cost of harmful financial advice, while bailing out and backstopping a lawless system.  See From Hawaii to Italy, free trips fuel retirement savings sales push:

Financial firms that reward salespeople with free vacations for promoting retirement investments — including some high-fee products — are pressing the Securities and Exchange Commission for leniency in a looming rule covering sales practices.

On April 18, the SEC is scheduled to propose new regulations for financial advisers who offer savings products such as mutual funds and variable annuities.

Companies such as Primerica, Edward Jones and John Hancock want the agency to develop a less-stringent version of the hotly contested fiduciary rule that the Labor Department finalized in 2016 to ensure that advisers act in the best interest of clients. These firms are hoping to get a more sympathetic ear from the SEC, an agency headed by one of President Donald Trump’s nominees.

At stake for the firms is an incentive system for brokers..Financial advisers are paid millions of dollars to sell products to people who may be oblivious to potential conflicts of interest fueling the sales practices.

The stakes may be even higher for Americans saving for retirement and seeking investment advice from brokers providing mutual funds, insurance and other products. Small investors end up paying for products involved in incentive programs that allow salespeople to go on free vacations to destinations from Hawaii to Italy.

“In my experience, the worse the product, the more it needs big incentives to sell it,” said Scott Dauenhauer, owner of Meridian Wealth Management in Murrieta, Calif., and an investment adviser.