Thursday 17, March 2022

Inversion Alert

To my mind, on of the finest free resources on the web is Alex Manzara’s blog, Chartpoint. Today’s entry is all about how the Fed yesterday spooked markets into inverting the 5Y-10Y curve, and generally bending the curve down over out over a couple of years. The Fed’s most powerful weapon is signalling. The market’s is money. Not just the “smart money,” all the money.

Manzara argues that we’re entering a Dec 2018 scenario. It’s not exactly the same, and the 10Y T-bill future ($ZN on globex) doesn’t show any indication of rallying yet, but if the recession that is being predicted by the curve inversion comes to pass, surely it will.

It’s not hard to see a few possible triggers. China has rescued its stock market, but western politicians will increasingly be unhappy about the west importing manufactures which are made from cheap Russian primary and intermediate goods (minerals, oil, lumber etc.) when their domestic industries are suffering. The war in Ukraine may go on much longer than anyone expected, and the longer it goes on the more western powers will be drawn in as suppliers of military hardware, food etc. The demands to make Ukraine a no-fly zone are getting shriller by the day. Although nobody wants to start WW3, surely Biden must fancy his chances of victory given all the evidence that Russia is a paper tiger and is on the brink of being defeated by a TV comedian and a rag-tag army.

Dictatorships usually have terrible armies. Citizens of Russia are probably happy enough to take what they can get without rocking the boat, because they have no easy alternative. When it comes to dying for a corrupt kleptocratic regime, they have other ideas. Russia has always suffered from the brightest and the best defecting to the west. This, surely, will have increased since the start of the war.

Anyway, I am not a geopolitical commentator, and the event or factor which pushes us in the west into a recession might be anything, or even nothing. Markets are driven by irrational and volatile responses to unimportant events. Keynes wrote:

The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll. Furthermore, an investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money — a further reason for the higher return from the pastime to a given stock of intelligence and resources. Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in theshort run he is unsuccessful, which is very likely, he will not receive much mercy.

— Keynes, John Maynard. The General Theory of Employment, Interest, and Money (p. 96). Kindle Edition.

Oil has swung around 30% in price over the course of a month. It looks as though it’s going higher again, but this sort of market it seems crazy to try to predict anything, other than that there will be fluctuations.