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

[Fred]

The Double Scoop recession wont happen snytime soon, SP500 will go above 1300 first

[Fred]

The Benner cycle high is for 2010 but looks like it will hit spring 2011

[Fred]

Frost Prechter touched on the Benner cycle in EWP

http://www.davidmcminn.com/pages/brenfib.htm

[Mamma Boom Boom]

Everything falling right into place.

[Michael]

So much for the American consumer being "tapped-out". Apple sold 3.47 million MACS compared to guidance of 3.1 million. Not iPads, not iPhones, not iPods, but MACS!!!

[Michael]

Coal, copper, steel, and iron ore sectors were SURGING today and nearly took out last week's highs.

If anyone doubts today's move or is still trying to "fit" a Bearish Elliott Wave count onto the market, I suggest that they take a look at some of these names in the sectors above . . . Certainly not the kind of moves that you would expect in P3, that's for sure!

[Edwin]

This "rally" started with Shanghai broken out from its resistance at 2,500 last night.

NYSE Summation Index rose above zero.

The bull may overcome the 50 days' SMA this time and we may see SPX 1140 before sub 1K.

[Les]

Metal stocks are down 30-50 percent in the last three months.

I don't know about EW or P3, but they've washed out.

[You're All So Clever]

This place gets relatively quiet when stocks go up.

[dave]

Where do you get the -3% inflation rate from?

[yelnick]

dave, the -3% deflation comes from the link and their analysis. Seems to me it (a) is forward looking and (b) is not CPI or PPI but GDP deflator based analysis. Even if it is too aggressive, a 1% deflation short term plus a 3% inflation long term has the yield curve flat to negative: 1.25-2% short term vs under 1% long term.

[DG]

I think the set-up leans more bullish than bearish right now.

http://yfrog.com/59spxdailyjuly5p

[Wave Rust]

so, 1% deflation would raise the domestic real gdp growth by the same amount then, since it is in effect 'negative inflation'. the problem is that the deflation is really only showing its effect on real property, and not in prices of consumables nor in wages.

but because wages don't come down due to the structure of minimum wage support and because consumable inputs, like commodities, have fluctuated within a range ,,,, the great American consumer can still survive for awhile.

unfortunately, the consumer is not aware of the brink on which he/she spends their remaining dollars (which have actually gained purchasing power at the expense of their future).

"my my my! what a fine web you have there miss goldilox."

It's all bush's fault. but, barry bagahammers gonna save us all.

wave rust ,,, and getting rustier but at about 1% slower rate. :)

[Wave Rust]

DG, saw that Feb. similarity yesterday and wondered if it would go.

another up day and it would match very well.

spx 1170 is a good bet but 1300 would make more sense if bullish longer term. if it stops at 1130 in late august, the 200 point drop into halloween will be the 'drop hoid round da woild' ,,,, but i'd buy it at christmas

so what i'm saying is ,,,, take it up real high, then a big drop that retraces about 76% (eventually) but doesn't retrace more that 100% mar.09 to apr'10 ,,,, and all the rest of the bullish structure stuff remains intact.

wave rust

[DG]

wave rust,

I'm taking the "one day at a time" approach at this juncture. The structure is too unclear to do anything else and my day-to-day trading is doing just fine with that approach, so I don't think I need to "swing for the fences" any time soon.

I have my definite opinions on what the structure is and isn't, but new information can change my mind. I can definitely see the February wave relationship play out here on a lower Degree to make that wave-.E. But, I also just got some good feedback from vipul on the broader structure since the April high that makes me say it could be that I'm viewing the count incorrectly.

I do agree with Neely that the July low marked the first real show of larger-degree weakness in a long time.

[MHD]

One has to wonder how all these companies are earning so much money in an economy that is so bad.
Has a previous primary wave 3 ever started with companies making these kind of earnings?
Economic numbers continue to deteriorate, yet companies in the S&P 500 are beating estimates by quite a bit.
Very strange indeed!
The market seems to be doing a fine job messing with the bulls and bears. Each big move down will get numerous Ewave sites to proclaim Wave 3 has begun, only to see the market blast off in the other direction. But the blast off has no volume.
The new normal is....nothing's normal.

[yelnick]

Wave, think of the 1% or higher deflation as the cure not the problem: it makes the people who have kept jobs wealthier (their money goes farther), it makes people with savings wealthier, and it enables the unlucky ones with lower income to make ends meet. It hurts the indebted and accelerates write-offs and defaults, which needs to happen anyway.

We had the best growth in our history - and better than China today - during the long slow deflation from 1873 to 1896. Take a guess at unemployment at the turn of the century (1900-1910) with huge influx of immigrants, a real gold standard, no central bank, and deflation: it got under 1%.

Bankers and speculators dislike deflation, since they are heavily leveraged and their debt burden gets more expensive. Keynesians hate it as do advocates for the welfare state as it makes funding redistribution of wealth harder. Warmongers hate it because it makes war (which is funded by debt) prohibitively expensive.

The Big Lie is that deflation cannot be stopped by central banks and so must be prevented at all costs. This is incredibly silly - why do we care about their span of control? Deflation runs its course as prices and wages remark to the new reality, then it abates. One explanation of why the Great Depression was so Great is that Hoover and then FDR spent inordinate energy using coercion and laws to keep wages and prices high, preventing the market finding a new equilibrium price. When companies could not drop wages, they fired people. When they couldn't lower prices, they made fewer cars and other things.

In this view WW2 did not so much get us out of the GD but reset production and hired a boatload of people at low wages (the Army does not pay much!). When the war ended, rather than continue the wartime and New Deal central management of prices and wages, the Congress rejected the New Deal, reduced spending, and removed the shackles that had bound the economy for over a decade. I believe that unemployment was lower in 1946, and fell after, than any year from 1930-1941. The ending of wage & price meddling ended the GD.

[Whitebear]

Well Said.

Time to shatter the lies that the so-called deflation in the early 30s was bad for everyone.

[My 2 Sense]

Prechter in the NYT?! Sounds like a bottom to me.

[MHD]

If not for the Gov and Fed, Prechter would have probably been spot on on his Wave counts. He seems to never anticipate this. When Ben gets that shi@ eating grin on his face, the Feds are up to something.The Feds and Obama are making the waves impossible to interpret, in my humble opinion.

[Chico]

When Ben gets that shi@ eating grin on his face, the Feds are up to something.The Feds and Obama are making the waves impossible to interpret, in my humble opinion.

The EW purists will say none of this matters, as the theory is all-inclusive.

[Wave Rust]

Duncan,
agree that general deflation is curative in its own way but the Fed can't stop it or its expected unemployment ,,,, nor can it stop unemployment during high price and wage inflation.

so at extremes of the flation cycles, the Fed is throwing water baloons at the T-rex of unemployment swings. But in normal times, it is effective in keeping unemployment moderated. The fed drives the employment bus while sitting in the back seat ,,,, a difficult task I think.

also agree about unshackled, this economy would grow on its own and take itself right out of this recessionary posture.
but Barry and his congressional cult are following smoot-hawley and FDR's multitude of new deals and regulations ,,,, but they have raised the bar so high, that few small businesses can survive.

but big businesses will do extremely well ,,,, especially since they know what's coming and have been hoarding cash to make it through tough times if they develop into an even worse economy.

I don't resent or begrudge big business' tactic of hoarding cash when an authoritarian federal government (one party rule)
is doing everything it can to penalize the innovators and risk takers. they see obama and his cult for what it is. they will bide their time until his ilk is gone.

i hope the Dodd Frank finreg law will go down in history as much worse than smoot hawley. but i don't think it will. i think the worst is yet to come- and thats next at bat. Cap and trade is on deck and ready to go.

GS and most big utilities just frikkin love cap and trade. It's the utilities' free backstage pass to raise rates through the roof. they can legally by-pass state utility regulatory agencies. if anyone missed the Enron game, the utilities didn't ,,, they learned alot.

Now the utilities are ready to "green" you into their game. climate change is their stage- price gouging is their play. Utilities could well be the buy of the decade.

michael has been pounding the table for a long time about coal etc. The utilities know, Canada knows, China knows, drillers (crude and natgas) know,

everything relies on energy and its sources. they learned from Enron and the rothschilds - control of source, production and distribution, and you have a no risk winning cabal.

maybe cap and trade will pass in late august ,,,, talk about ending deflation!!

wave rust

[da bear]

anyone know of how many different forms a-b-c-d-e corrections can take?
In this correction, if the Flash Crash is the iii of 1 down (which it should be) then this is the only possible count. That we are somewhere in wave 'e' or have just completed it.

So far, if wave 'e' is still in force, then 9,600 was the low then the run into 10,400 was wave iii. the correction into 10,000 was iv. Now v of 'e' is a possibility now. If 10,240 is exceeded soon then 10,500 to 11,000 is the target range. Sounds odd, but that is the best fit for this wave 2 (of whatever degree).

da bear

[Michael]

"Economic numbers continue to deteriorate, yet companies in the S&P 500 are beating estimates by quite a bit. Very strange indeed!" - MHD

Corporate America is doing quite well given that they have $2.1 TRILLION in cash on their balance sheets.

You seem to ignore the fact that the majority of the S&P gets a substantial amount of their earnings overseas as GLOBAL players in the market place.

Corporate America is lean and mean. Should domestic GDP and consumer demand ever come back to sustainable growth levels, TOP LINE growth will surge for Corporate America.

The "perma-bears" fail to realize this.

[MHD]

Michael.... the huge amount of cash these companies have is nothing more than future demand pulled to the present by easy credit. I'm just surprised by how much they're surpassing estimates. We should seeing a decrease in the growth rate of earnings soon, or something else is going on. There's only so much fat they can cut out.

[Chuck Cheese]

They have cash because they are not hiring and expanding. You don't hear about high cash levels in bull markets.

Has Prechter ever used the word crash? Everything I see, which is limited, is long down turn, like the move from 1930 to 1932, 1 1/4 years. Could have started in April. Point being, crash calls and SPX 1300 calls are both quite premature. Could be neither are right.

[Chuck Cheese]

Hopefully they will ultimately use the cash to expand, but it may be globally, and many US companies may still fail, arguing for a sideways market.

Correction 2 1/4 years ..

[Fred]

Why are people so bearish?

Benner chart says the BIG low was 2003 and the next BIG high isnt until 2018

http://theelliottwavesufer.blogspot.com/search/label/The%20Benner-Fibonacci%20Cycle%20and%20Armstrong%27s%20Economic%20Confidence%20Model

[Whitebear]

If the above failed to predict the 2008 low, what makes people continue trust the above?

[Roger D.]

Sure looks like a 3rd wave.

[MHD]

WTF.... Dow dropped 100 points in 5 minutes.....Wave 3 is on!!!!!:) :)

[Just putting it out there]

I'm not sure about this but maybe... possibly... Benner is bs.

DISCLAIMER: Do not take this as advice! Benner might be Truth incarnate! I could be wrong! Please trade carefully using extreme caution! Apologies to everyone if I'm wrong! Especially to Benner! Benner, will you forgive me? And if you all get rich following Benner, will you let me know? And will you toss a few bucks my way? Just because, well, I don't know... I write cool disclaimers?

[I could definitely be wrong!!!]

Um... just a thought... and I might be wrong... but I'll just put this out there...

Maybe it's not wave 3?

And, heck, while I'm at it, could I just toss this out there just for the heck of it...

Maybe the concept "wave 3" is meaningless?

And maybe, just maybe, possibly... just theoretically, possibly...

Elliott Religion/Theory/Subscription/Advice/Constructs/Models

are... horesh*t?

[MHD]

We'll call the Benner forecast the 3M system!!!!Surefire money maker. Can't miss system!!!

[Benner]

My system rocks the house!!!

I spent a lot of time working on it!!!

I love my system!!!

I rule!!!

Send me money and you will rule, too!

[MHD]

I think I'd take my chances with Ewaves rather than that chart anyday.

[Benner]

Okay, so I don't have the mystical mumbo jumbo or pseudorigor of EWI.

Okay, so I'm not "International", unlike EWI which is, admittedly, extremely "International." (It is, after all, a part of their very name!)

Okay, so I don't have a built-in market in the scared and the easily scared and the chronically pessimistic and the middlebrow cranks.

But I still think my system is pretty darned good!!!!

send me money?
please?

[MHD]

I'm trying to find out why the market took a crap so fast. Did Ben slip up and forget to feed the market its daily dose of BS????

[MHD]

Benner.... just keep those rose colored glasses on and everything will be just fine!

[MHD]

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!!

[Roger D.]

The are problems with counterparties in Europe. The Euro has topped and Japan will lead the way down tonight. There were many H&S patterns and abc's that formed rising wedges that broke down when the market took off to the downside. Most bearish as yesterday's high tick was 1645 and todays was 1230.

Roger D.

[JT]

"Zerohedge said that a huge put order spooked the markets earlier." - MHD

There is so much misinformation and "twisted" financial market presentation on ZeroHedge that it's a wonder why anyone still reads them... I guess they cater to the young, naive, and unsuspecting.

[Roger D.]

The Diamond top in the ES.

http://www.screencast.com/users/parisgnome/folders/Default/media/f7990aba-b217-4e35-860c-1102317ed8f2

Roger D.

[-Anikitos]

forgive my russian, but wtf did that asshat Bernanke say?

[Fred]

Benner missed 2008 just like Benner missed 1990

They were fakeouts and BUYING OPPORTUNITIES in larger scheme bull market

[upstart]

Lovin' it. Resisted the bullish din and never gave up on the short side because 3 cycles are pointed down in July.

[Roger D.]

This Autozone chart is a perfect example of why the market took off to the downside. I was looking at it and said this market is going to head down.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/7a62b900-975a-4488-b114-2fe6eda2a974

[Chester M. Dontgiveahoot]

Wow! Three cycles are pointed down in July! That's fascinating! You seem to have figured this stuff out!

[MHD]

JT.... that would be me, except the young part. I've been trading for 30 years and still haven't learned. That would explain how the 3 Stooges are my hero's :)

[Jeff]

Market selling has nothing to do with Bernanke.

We're in the bearish T-Square Arch Crawford talked about.

http://radio.goldseek.com/nuggets/crawford07.14.10.mp3