Gold, bitcoin, and the bond bubble
EDITOR'S NOTE
If our starting point for a recession is a less-than-2% yield on the 10-year Treasury and $13 billion of negative-yielding global debt, what's the endgame look like?
Flashback to June 2006, when we were hurtling into a severe credit crunch and a generationally deep recession. The yield on our 10-year was 5.15%! Even by early 2008, when the downturn was evident in the data, the yield was over 3.5%. In fact, it was still above 3.5% when the recession formally ended in June 2009.
This morning, the 10-year yield went below 2% again after the consumer confidence report missed expectations. In fact, it slid more than 12 points for June--the biggest one-month drop since...drumroll please...August of 2011. We've talked about that month before; it was the last major confidence shock, triggered that time by the euro debt crisis and the U.S. debt downgrade.
There were tons of forecasts of a "double-dip" recession back in August 2011, but it never came to pass. Now too, we have incessant warnings of a downturn. But they're inconsistent: some are calling for a flat-out U.S. recession (after all, "we're due"), some are calling for a global recession and just a U.S. slowdown--but a slowdown is what, exactly? Less than 2% growth? Less than 1%? For how many quarters?
The imprecision creates an ominous backdrop for every data release, especially scary-sounding ones like the confidence drop this morning. But is every confidence shock (this one trade-and-tariff spurred) a recessionary sign? Is every growth slowdown a sign the expansion is over?
So here we sit with investors desperately chasing fixed income returns either by force (say, pension funds) or choice (Austria's 100-year bond** is up 40% since October!). Others are snapping up gold and bitcoin because hey, if bond yields have gone negative, why not buy zero-yielding "real assets" instead? People wonder if the ECB's next step will be buying stocks, like Japan does. Great. And that's going to deliver long-term prosperity?
A 5.15% yield on the 10-year in 2006 offered zero predictive power of the decade that was to come. I don't see why sub-2% in 2019 (and let's not forget, we were sub-1.5% in 2016) will prove to be any different.
See you at 1 p.m.!!
Kelly
**Thanks to Peter S. for pointing out that I mistakenly called it Australia's 100yr bond last week
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