The Real Yield Curve and a Double-Dip Recession

The yield curve right now is steep, which normally predicts recoveries, the logic being the long end rises on demand for corporate investment. Since we do not have any strong evidence of corporate borrowing for investment in growth - instead, corporations are sitting on record cash - this creates a conundrum that needs to be explained. 

The yield curve short end is being held down artificially by the Fed. The last time this happened for a long duration was in the 1930s. The yield curve bent positive after 1929 and was positive for most of the time we were falling hard into the 1933 bottom - the Fed held the short rate down except during the sovereign debt crisis in 1931 when the Fed briefly raised short term rates to prevent gold flowing out of the US. Even as we came out of the bottom, we fell back down in 1938 when the yield curve was positive. Check out this chart from January 2007 when the curve ran negative (good timing!): 

 

The Cleveland Fed put out a report on the yield curve recently concluding that a double dip is unlikely - but they are tracking experience post the Great Depression. Their dataset does not include any deflationary periods, and deflation changes the real rate on short-term instruments (it raises them - see analysis below). Since we are in the fourth credit collapse in US history (1837, 1873, 1929 and 2008), the best precedent would come from those prior eras, not the in-between times. Japan has had a positive yield curve for both of their lost decades of flat to down growth and continued deflation. 

Also, the Cleveland Fed's chirpy conclusion is belied by reports that the Fed is getting ever more worried about a double-dip. The Fed lowered GDP forecasts in their FOMC meeting on Wed. 

The curve is flattening right now: The Fed holds the short term rates down, but now the mid term rates are dropping to record lows, and the longer term rates are lessening. Not a promising sign. 

David Rosenberg argues the curve would be inverted right now if the Fed were not holding rates at essentially zero. A back-of-the-envelope calculation of the real yield curve shows it is inverted: 

• the near-zero short rates less -3% deflation are running above 3% real
• the 4% long rates less a longer term modest inflation rate of 3% are near 1% real 

Comments

[MHD]

Ben should be ready to announce he was just kidding, and the markets will blast up. Right after he covers his shorts and goes long.

[Wave Rust]

ben said the economy is certainly uncertain.

everybody in the pits certainly agrees

i guess ben is not yet certain whether the ecri's wli this week will dip below -10.

with everybody wiggin out today, the market should blast off tomorrow. but the question is whether the rocket is a US rocket or north korean

so now we have a bullish up to the 13th and a correction for the past couple of days, or vice versa :))

wave rust

[JT]

A total collapse in the market today, and yet Freeport Copper (FCX) has broken out to the UPSIDE and is now trading above the 10, 21, and 40 day MA!

Sure doesn't look like the "End of the World" to me given the bullish action in FCX and a chart that has bottomed out and turning back up.

[Roger D.]

With the Euro in a motive pattern and a rising wedge up presently,markets will continue down.

http://www.screencast.com/users/parisgnome/folders/Default/media/9edae1ca-5435-44b6-8438-94389c4ce9c9

Roger D.

[Mamma Boom Boom]

>Sure doesn't look like the "End of the World" to me<

I'm happy for you. But, I don't recall anyone talking about the end of the world. Did you have a nightmare?

[JT]

Guess you haven't been reading Prechter lately or all of the "Perma-Bear" blogs.... LMAO!!!

Still long 4,000 shares of NRP from $20.73 and a 9% dividend yield.

:)

[Roger D.]

MCD Mcdonalds looks to have completed it's supercycle top, I would expect a 3rd wave down tomorrow at the open.

http://www.screencast.com/users/parisgnome/folders/Default/media/8c5e44e1-1bdf-4959-88cb-5824412a5c45

Roger D.

[Chuck Cheese]

The bear blogs have one thing right, this market will try to screw the most people possible ... 3 out of 4 days with 200 plus moves. Watch the Euro and Dollar.

FCX gapped and crapped, like AAPL, INTC etc.. GL with that, dollar may crush it, again

[da bear]

Roger D.,

That would mean that Proverbs 7:22 warning of a "correction of the stocks" is correct.

yelnick, if this happens then can we say that King Solomon nailed this decline? lol

da bear

[dogismyth]

what i find humorous, is that no one has a clue, everyone is scared shitless, and wealth is being transferred accordingly to the casino execs. So much time spent on a fixed game, but very little time spent on demanding a better model for gambling...or whatever it is you folks do with your time.

[Mamma Boom Boom]

Roger D., I'd recommend you put a blindfold on. Because, what's about to happen to you will be just too heinous to watch.

[My 2 Sense]

Roger D, do you think stocks will collapse tomorrow? I mean Friday? Whoops-- check that-- Monday? Or sometime next week? What about the week after?

If it doesn't happen this year, will it happen the day after this year? Or the day after that?

Personally, I think it will happen a miraculous, magical, mystical, wonderful

144 weeks

from today. 144 is a specially-wescially wonderful number with superteriffic socionomical astobolomical properties.

144 is a FIBONACCI number! Isn't that cool?? Now you know the secret of the universe, which unfolds in beautiful magical Precterwaves that are everywhere...

shells
flowers
music

[da bear]

Proverbs 7:22 could be pointing to a low coming up for 'c' of 'iv' of 'e' of 2. Then a rally to 10,666 by Arch Crawford's 7/30 to 8/03 time frame.

basically, we're screwed. lol

da bear

[da bear]

Arch Crawford thinks we could see solar flares.

Stock up on Fiat Metals peoples.

da bear

[Roger D]

You winers,that hide behind different handles. I still say burn your chart books because you don't read them.

Roger D.

[Lou Beed]

I think Benner is actually Charles Nenner.

[DG]

You winers,that hide behind different handles. I still say burn your chart books because you don't read them.

Roger D.

Posted by: Roger D | Wednesday, July 21, 2010 at 02:47 PM

You know how I know your trading SUCKS? Because all you brag about is your ability to "read charts".

If you were making ANY money on your trades or your winning percentage and winner to loser size and other actual trading ratios were good, you'd be bragging about them all day.

You give yourself away by what you DON'T talk about here.

Loser.

[Cary Lloyd]

Am I the only one here who sees that Roger D is a genius? He isn't right 100 percent of the time but who is? If he has acted on his predictions he is probably worth millions and, excuse me, but don't we trade to make money?

It's ok to be jealous. It's just not cool to launch into bitter ad hominem attacks because of it.

[Chuck Cheese]

Kids are out throwing sand again ... and yet none of you saw today coming. Where's 1101? Where's the backed up truck? Where's the V bottom? Continually wrong but WTF, let's rag on Roger. I hope I don't die laughing at this pattern of when you guys come out crying about Roger when you are the ones wrong lately.

[DG]

Am I the only one here who sees that Roger D is a genius?

I've known plenty of geniuses in my time. Roger D isn't even a quarter-genius. He's a dumbass parroting concepts and terminology the use of which he doesn't even have the faintest idea about. Back in February when Hank Wernicki was posting his ideas about "fractals", every Roger post claimed to have found the "fractal" proving that wave-3 was just around the corner. Nevermind that Roger's "fractals" were just random patterns he drew some squiggly lines around and never corresponded to anything Hank was doing. Even if I'm not a follower of the "fractal" methodology, I know that Hank is serious about it and seems to now what he's doing, so the fact that Roger's never aligned with Hank's says that Roger didn't know what he was doing. The other day, Roger had an E-wave chart with a 7-segment Impulse wave. I mean, the guy's a methodological train wreck.

If he has acted on his predictions he is probably worth millions and, excuse me, but don't we trade to make money?

Huh? Can you "show your work" on that calculation? How do you get from almost 8 months of non-stop drumbeat about a market crash that hasn't happened to any sort of profitable trading? I'd love to see a record of his entries and exits because he's never mentioned, even ONCE, exiting a short trade (and why would he? If you think Armageddon is right around the corner, why take the risk of missing it by covering your shorts?), but he's spoken many times of entering short trades. I can't see how he could have made $1, much less $1 million.

I really wish this blog had a "search by author" function so I could gather up all of Roger's off-base predictions. I'm sure there are the equivalent of at least 10 pages (25/page) of comments about "today is the last day to get out". Yes, we all make them, but he's head and shoulders far and away the WORST forecaster I've ever met online.

[DG]

Kids are out throwing sand again ... and yet none of you saw today coming. Where's 1101? Where's the backed up truck? Where's the V bottom? Continually wrong but WTF, let's rag on Roger. I hope I don't die laughing at this pattern of when you guys come out crying about Roger when you are the ones wrong lately.

Posted by: Chuck Cheese | Wednesday, July 21, 2010 at 05:03 PM

A few weeks ago, Yelnick posted the three options of big rally, big decline or big "tease", i.e. a back and forth market. I posted then that the third one was the most likely.

So, I've been right on target. Meanwhile, Roger clearly put himself in the big decline camp. How's that been working out?

[Chuck Cheese]

I think that would make you a bigger dick than I thought.

BTW, Congrats! I hope you traded it well and crushed it!

[twitter.com/DrBubb]

"Zerohedge said that a huge put order spooked the markets earlier.The rumor is they were bought at 700. One wonders if they had some info that the markets wouldn't like. Very interesting timing!!"

I used to work for the biggest options market maker, and when I see a story like this, I think: WHAT WAS THE PRICE? If it traded on the "bid" side, it might have been the case of someone pushing out the SALE of PUTS. Various people, like Buffet, has done that in the past.

Having said that, a big purchase would not surprise me, given the astrological indicators, and all those other gurus making Bearish noises for Q3. I have summarised them here: http://tinyurl.com/Crash2010

[twitter.com/DrBubb]

"We're in the bearish T-Square Arch Crawford talked about.
http://radio.goldseek.com/nuggets/crawford07.14.10.mp3 "

Near the end of this, Arch mentions an interview with Robert Prechter that was done by a London-based interview. That was on Frisby's Bulls and Bears, a podcast show run by my friend Dominic Frisby, called: "Robert Prechter: Dow To Triple Digits"
Link: http://commoditywatch.podbean.com/2010/02/07/robert-prechter-dow-to-triple-digits/

Posting this, makes me wonder if Duncan would be willing to do an interview with Dominic. I may be able to arrange that, if he is interested.

[Mr. Panic]

Bragging about predicting a flat market. Too funny. Meanwhile the pattern of lower highs and lower lows continues while markets are trading beneath every meaningful moving average.