Morning Report: Don’t fret the flattening yield curve 4/19/18

Vital Statistics:

Last Change
S&P futures 2701.75 -8
Eurostoxx index 381.94 0.11
Oil (WTI) 69.26 0.79
10 Year Government Bond Yield 2.90%
30 Year fixed rate mortgage 4.44%

Stocks are lower as commodities surge. Bonds and MBS are down.

The US imposed sanctions on Russia’s Rusal, which has sent aluminum prices up 30% and nickel to 3 year highs. This has the potential to spill through to finished products and bump up inflation. As a general rule, commodity push inflation generally isn’t persistent. An old saw in the commodity markets: the cure for high prices is… high prices.

Initial Jobless Claims ticked up to 232,000 last week, still well below historical numbers.

Investors are starting to worry about the inverted yield curve. An inverted yield curve (where short term rates are higher than long term rates) has historically signaled a recession. The spread between the 10 year and the 2 year is around 41 basis points, which is a 10 year low. Is that what the yield curve is telling us now? I would answer this way: the yield curve is so manipulated by central banks at the moment, that the information it is putting out should be taken with a boulder of salt. We are in uncharted territory, where long term rates are no longer set purely by market forces.

Also, take a look at the chart below, where I plotted the last 4 tightening cycles. In the last 2 cycles, the yield curve inverted, by a lot. In late 2000, the yield curve inverted by 100 basis points – that would be like the Fed taking the FF rate up to 4% while the 10 year hovers around here – at 3%. I would note that the mid 90s tightening cycle didn’t cause a recession, and the late 90s and mid 00s tightening cycles didn’t result in recessions immediately – it took years before the economy entered into a recession.

The question is whether the Fed caused these recessions. It is possible, and the Fed was probably the catalyst to burst the late 90s stock market bubble and the mid 00s real estate bubbles. But these were going to burst anyway. It doesn’t really matter what the catalyst is. This time around, we don’t really have a similar bubble – we may have pockets of overvaluation, but we don’t have bubbles that the typical American is invested heavily in. Not like stock or houses. I think the Fed is happy to gradually get off the zero bound and once we are at 3% on the Fed funds rate will be content to stop. I could see the 10 year going absolutely nowhere during that time.

tightening cycles

My take is this: take the shape of the yield curve as a very weak and distorted economic signal – the labor data will tell you what is really going on, and the labor data is signalling expansion, not recession.

Don’t forget that bond rates are set in a global market, and relative value trading between sovereign bonds will play a role. The US 2 year is at a multi-decade premium to the German 2 year, and in theory, that should mean that investors sell Bunds to buy Treasuries. The reason why that isn’t happening? The US dollar, which isn’t buying the Administration’s rhetoric.

Facebook wants to get into the semiconductor business. Really. First Zillow wants to get into the house flipping business and now this. I don’t understand why companies with great business models want to dilute them. Both companies have a competitive moat with a largely recession-proof business model. The semiconductor business is one of the most cutthroat, lousy businesses this side of refineries and airlines. Take a look at QCOM today.

The NAHB remodeling index dipped in March, driven by bad weather in the Northeast and the Midwest. With home affordability slipping due to higher interest rates and home prices, remodeling remains a good substitute for moving up.

28 Responses

  1. Like

  2. “I don’t understand why companies with great business models want to dilute them.”

    Best example of this (even though it they didn’t have a 100% great model to begin with) was Circuit City deciding to invent a competitor to DVD’s with more copy protection.

    Liked by 1 person

    • I remember that. Facebook getting into semiconductors and porkbellies makes more sense that that awful thing did. It’s like they designed a device that people would totally hate with no positives and all sorts of negatives, and thought that was a good idea. It also was designed around buying “expiring” DVDs so not only were they better copy-protected, but the stuff sold of them could “expire” after a certain date or plays or whatever. That was such an awful idea.

      Ah, here we go:

      To play the discs, you had to buy a player that cost $100-150 more than a DVD-only player, and you had to run a dedicated phone line to the box. Most DIVX versions of movies were lower quality than their DVD counterparts. The DIVX discs usually contained cropped pan-and-scan version of the film, rather than the anamorphic widescreen that was becoming common on DVDs. The discs also lacked extra features–they didn’t contain making-of documentaries, deleted scenes, or audio commentaries.

      While the article points out that it’s not that different from renting online movies now, there is a difference in that you would be gathering largely useless physical media, the player was almost twice the price of a DVD player and was only good for DIVX discs, they were trying to roll it out with not that many places to get DIVX discs . . .


    • “where government economic planning ended predictably badly: Pfizer came, exhausted its subsidies and then departed, leaving a vacant lot where the pink house once stood.”

      Who could have predicted THAT would happen? They should have never done something like that without something that legally obligated Pfizer to maintain a significant presence in New Haven for 25+ years or pay a complete restitution of all provided subsidies plus interest. No doubt Pfizer would not have agreed, but then they wouldn’t have had to seize property private property for a corporation and have received the continuing ongoing bad press for their stupid and illiberal decision.


  3. “Facebook wants to get into the semiconductor business. Really. First Zillow wants to get into the house flipping business and now this. I don’t understand why companies with great business models want to dilute them.”

    I’m sure there’s some reason, and it’s not to compete with Intel in selling chips to Dell or AMD or whoever else. They have to have something more specific in mind. Got to.

    That being said, I understand why hardware manufacturers might get into chip design. Apple did so they could make chips tailored to their software, rather than having to always tailor the software to the chip. I think this is has paid off for them.

    Facebook doesn’t sell hardware … Then I Google that to make sure, and I guess they are going to, with the Oculus Go and apparently some kind of smart speakers. Which has to be what they are looking at having their own chip design team for.


  4. Vox on how Starbucks isn’t doing enough to fight bias:

    I love this:

    For African Americans, the biases people hold tend to be disturbingly negative. Researchers have found, for example, that we associate black skin with evil; we see black children as older than they actually are; and we see young black men as taller, heavier, and more muscular — and more physically threatening — than young white men.

    Black skin with “evil”? I’d like proof of that. As to seeing children older than they are, how in the world is that disturbingly negative? And in regards to young black men being seen as taller, heavier, and more muscular . . . again, how is that a negative? And isn’t that not uncommonly the case? I also saw the high school football team (both white and black players) as being taller, heavier, and more muscular. Was that a disturbingly negative bias?

    Christ on a cracker.

    This is simply not credible. More simply put, I think it’s an outright lie. I think, because they know no one will question the bullsh*t they are making up, they just make stuff up:

    It turns out that while people are easily taught to respond correctly to a questionnaire about bias, they soon forget the right answers. The positive effects of diversity training rarely last beyond a day or two

    I’m 49 and it’s been burned into me since elementary school what is publicly and generally acceptable regarding equal treatment of races. People may be racists, but even they know how to answer the questions.

    I’ve never been through that kind of training that isn’t so obvious I can’t answer all the questions correctly without going through the training material. The idea the world is full of stupid white people who have no idea seems lunatic. No doubt there are some, especially in the North and mostly white regions for whom regular interactions with African Americans is more theoretical than practical, but for the majority I don’t believe for a second they have no idea what the politically acceptable reactions are in any situation involving race.

    Although I suppose if the training is really about how to treat minorities as inherently superior, and they are failing those tests, it might believable. But Jimminy Christmas!

    Diversity programs — which can include everything from hiring tests and performance reviews to ensure fair hiring and pay decisions as well as trainings — are designed to “preempt lawsuits,” they added, instead of truly stopping prejudice

    That’s how incentives work. Eh, Vox.

    Another meta-analysis of more than 400 studies testing approaches to change implicit bias similarly found no evidence that getting people to acknowledge their implicit biases alters behavior.

    A man convinced against his will
    Is of the same opinion still.

    So instead of dedicating half a day to training, Starbucks could make the staff in its 8,000-plus stores more racially integrated and ensure there are minorities in leadership positions.

    They don’t touch on what those demos are now, either. One analysis in 2015 suggested that while only 16% of Starbucks executives were people of color, as about to (((white))), 40% of the store employees were people of color. The argument that they could expand the executive branch is plausible, but a 40% POC for the front line, your average Starbucks is already more diverse than America as a whole.


    • The really ironic part is that this is being done at Starbucks which had this campaign a little while back:

      Liked by 1 person

      • That’s why they are closing all Starbucks for a solid day of group race enlightment training. Presumably including hte 40% POC who work in their stores.

        Because it’s totally not PR but an earnest attempt to “race together” or something.


    • I still don’t see how it is Starbuck’s fault if the Philly PD went overboard…

      Liked by 1 person

      • I don’t see how it’s every employee at Starbuck’s fault if one manager in one store was a little too quick to call police on some loitering African Americans because that one manager is maybe a little bit racist or implicitly racist or something. It’s like enacting a sweeping national policy based on a study that contains one single anecdote as proof.


      • The Starbucks manager called the cops. I blame the manager more than the PD.

        It’s Starbucks fault as an organization if the manager was following policy, which it looks like they may have been in terms of restrooms only being for paying customers.

        There was a good piece about how these sorts of incidents are inherent to their squishy model of providing a public place for people to hang out and use Wi-Fi and work that’s not their home and not their office, as long as they continue to buy coffee and then leaving it up to the store employees discretion as to who is allowed to hang out that way and who gets kicked out for taking up space.

        I personally don’t sit around in places like this and get on the internet and hang out. I go in, buy what I want, and leave.


  5. It’s always useful to dig down into the details of “social science” when people try to cite it as proof of something.

    “Definitions are important. How do you measure racism in your new research?

    We are actually measuring a concept called “denial of racism.” The basic idea here is to differentiate Americans who acknowledge the fact that there are racial disparities in society from those who deny that such disparities exist. For our scale, people who score higher in denial of racism are those who disagree with statements such as, “White people in the United States have certain advantages because of the color of their skin” and “I am angry that racism exists,” while agreeing with the statement, “Racial problems in the United States are rare, isolated situations.” This is not racism per se, but it is a reluctance to acknowledge that racism is an unfortunate fact of life.

    But in many ways, we think this captures what modern-day prejudice looks like.”


    • So, we’ll just move the goal posts until everyone who doesn’t agree with us is a racist. “Race denial”.

      These are people for whom problems must never be solved, merely expanded.


      • They explain their reasoning a little later on:

        “In fact, denial of racism was a significant and pretty strong predictor of whether somebody who voted for Obama in 2012 would then vote for Trump in 2016.”

        At first glance, it’s hard to make the case that someone who voted for Obama is a racist, but with enough effort it can be done. That’s the goal here, making the data fit the argument.


    • Steven Hawking should have thought of using racism in the Grand Unifying Theory. Cause racism apparently explains everything…


  6. This dude’s pluckiness is awesome! If he asked me for a hummer I’d feel a bit obligated.


  7. I’m a picker, I’m a grinner, I’m a lover, and I’m a sinner…


Be kind, show respect, and all will be right with the world.

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