Consumer Confidence is down … the most extreme yield curve inversion since 1981 may not be all bad … Fed President James Bullard sees rates staying high all next year … bitcoin is going how high? The news keeps coming fast and furious. Let’s cover a handful of top stories impacting your portfolio. Consumer confidence continues falling Yesterday, we learned that the November Consumer Confidence reading fell to 100.2.
On one hand, anything above 90 is considered “healthy” so this isn’t a bad reading. On the other hand, this is the lowest level in four months, and the trajectory isn’t good.
Here’s additional context from MarketWatch: Consumer confidence tends to signal whether the economy is getting better or worse. The index began to fall in the spring because of high inflation and now a slowing economy is adding to the worries. Consumer confidence is important because consumer spending accounts for more than two-thirds of the economy. Gauging how individuals might behave in the future provides clues about where our economy is headed.
On that note, the forward-looking expectations are the more worrying part of yesterday’s report.
Back to MarketWatch: A similar confidence gauge that looks ahead six months fell to 75.4 to from 77.9 to mark a six-month low. Remember, “90” was our line-in-the-sand. Forward-looking numbers in the 70s aren’t what we want to see.
The biggest danger is that consumer expectations become self-actualizing. Pessimistic sentiment tends to close consumer wallets, which hurts businesses, curbs hiring and salary increases, and often creates the exact challenging economic conditions that consumers hope to avoid. ADVERTISEMENT New broadcast exposes income secret of the One Percent One interviewer recently sat down with one of America’s wealthiest men to learn how to extract massive cash payouts from the markets over and over again. Full story, here. Over in the bond market, this pessimistic, shorter-term outlook has resulted in an extreme yield curve inversion To make sure we’re all on the same page, a yield curve is a graphical representation of the yields of all currently available bonds – from short-term to long-term.
In normal times, the longer you tie up your money in a bond, the higher the yield you would demand for it. So, you’d expect less yield from a two-year bond and more yield from a 10-year bond.
But when economic conditions become murky and investors aren’t sure what’s on the way, this can change. Specifically, uncertain economic times tends to flatten the yield curve. And if the yield curve actually inverts, history has shown that it serves as a highly accurate predictor of recessions, though the timing of those recessions is varied.
The most widely-referenced yield curve inversion involves the 10-year Treasury yield and the two-year Treasury yield. This is the big “recession watch” indicator.
Now, the 10-year and two-year yields have been inverted since the summer, but in the last few days, the size of this inversion has clocked in at a record level.
Here’s The Wall Street Journal: …The yield on the 10-year U.S. Treasury note dropped to 0.78 percentage point below that of the two-year yield, the largest negative gap since late 1981, at the start of a recession that pushed the unemployment rate even higher than it would later reach in the 2008 financial crisis. There is, however, a silver lining here.
Yes, this extreme inversion suggests a coming recession. But we can also read it in a positive light – bond traders believe inflation is on its way out.
After all, if short-term rates are extremely elevated while longer-term rates are much lower, this is the bond market saying “yes, things don’t look good today, but further out in the distance, we see conditions returning to normal.”
If the bond market expected inflation to be with us for a long, long time, we’d be seeing higher yields for the 10-year Treasury. That’s not the case. It’s been falling fast in recent weeks while shorter-term rates remain elevated. As I write Wednesday morning, the yield on the 10-year Treasury is down to 3.78%.
Here’s the WSJ’s take: At a basic level, an inverted curve means that investors are confident that short-term rates will be lower in the longer-term than they will be in the near-term.
Typically, that is because they think the Fed will need to slash borrowing costs to revive a faltering economy. Logically, this fits our current thinking for upcoming economic conditions…
Today’s yield curve reflects fears of a recession… which is increasingly likely as the Fed hikes rates to kill inflation… but on the other side of that recession and peak inflation, things will return to normal, with the lower 10-year Treasury yield reflecting that return to equilibrium. ADVERTISEMENT Learn how to generate massive cash in any market Inflation, bear market, recession… none of that matters when you know this income secret. Watch Now. Speaking of the Fed and its inflation fight, St. Louis Fed President James Bullard expects the Fed will have to keep rates above 5% next year The Fed has already hiked rates by nearly 400 basis points this year. The upper bound of the Fed’s target rate today is 4%.
But if Bullard is right, rates are going higher and they’ll be staying high for months to come.
From Bullard: I think we’ll have to stay [above 5%] all during 2023 and into 2024. Bulls and bears interpret comments like this from the Fed quite differently.
Bulls suggest that Fed officials need to talk tough to quash inflation. After all, if no one took the Fed at its word, then spending and investment would proceed as usual, exacerbating inflation.
Given this, the bullish line of thinking goes on to believe that behind this tough talk is a Fed that’s ready to pause rates – possibly even cut them – as soon as possible, based on the data.
Bears take the Fed more at face value. They also focus on the economic pain already baked into the cake thanks to past rate-hikes that haven’t yet filtered into the economy.
Yesterday, Bullard spoke to the bullish interpretation.
Here’s MarketWatch: Bullard added that it seems markets are still underestimating the degree to which the Fed will need to keep policy tight in order to rein in inflation, explaining that there is still some expectation that inflation might subside on its own…
Even as the inflation moves toward the Fed’s target, Bullard believes the central bank will need to maintain its aggressive stance until inflation has receded all the way to 2%, lest they risk easing up prematurely and risk allowing price pressures to spiral out of control.
“We do have to maintain downward pressure until it’s clear that we’re going to achieve our 2% inflation target,” Bullard said. This doesn’t bode well for the idea that we’ll see a quick pause and/or pivot from the Fed sometime in the next few months.
Of course, bulls can simply say, “This changes nothing. Of course Bullard would say this. This is the exact ‘tough talk’ he has to say.” Continuing with interest rates, this afternoon, Fed Chair Jerome Powell confirmed we could see a smaller rate increase in the Fed’s December policy meeting From CNBC: Federal Reserve Chairman Jerome Powell confirmed Wednesday that smaller interest rate increases are likely ahead even as he sees progress in the fight against inflation as largely inadequate.
Echoing recent statements from other central bank officials and comments at the November Fed meeting, Powell said he sees the central bank in position to reduce the size of rate hikes as soon as next month.
But he cautioned that monetary policy is likely to stay restrictive for some time until real signs of progress emerge on inflation. The reality is we didn’t really learn anything new here. Expectations have been growing for a 50-basis-point hike in December, yet also for an eventual terminal rate that will be higher than previously expected. Powell’s comments today were 100% in line with both of those expectations.
However, Wall Street exploded higher on the news with the Nasdaq leading the way, up 3.5% as I write.
Frankly, this is the exact dynamic we’ve been concerned about here in the Digest – bullish sentiment based on hopes of a Fed pivot driving up stock prices at the same time that underlying earnings are deteriorating.
That’s a recipe for a market correction somewhere out on the horizon.
But for now, the market is happy. ADVERTISEMENT One Percenter teaches his income secret to the 99% Multimillionaire investor Louis Navellier breaks his silence about how the wealthy generate big income from the markets. Full story, here. Let’s end with a surprising bitcoin prediction The collateral damage of the FTX implosion continues, with crypto lender BlockFi now declaring bankruptcy.
This was expected as FTX was the “white knight” that prevented troubled BlockFi from going under months ago. So, with FTX now gone, BlockFi’s demise was just a matter of time.
As we’ve noted in recent Digests, this FTX debacle is a tremendous black eye for crypto. It could take the sector years to recover from the reputational damage.
But if you think that means crypto – specifically, bitcoin – is “done,” don’t tell that to Cathie Wood.
For readers less familiar, Wood is the high-profile investment manager over at ARK Invest, where she focuses on disruptive, tech-based growth stocks, as well as some crypto.
What does Wood see happening to bitcoin’s price in the wake of the FTX meltdown?
How about a price target of $1,300,000 per bitcoin come 2030?
That’s about a 77-bagger based on bitcoin’s price of $16,854 as I write.
From Wood: If anything, we think this cycle has benefited bitcoin.
Sam Bankman-Fried didn’t like bitcoin.... Because it couldn’t be controlled. It was decentralized, open, transparent the antithesis of what FTX was.
Bitcoin and Ethereum, I would add, have distinguished themselves in this time period as some of these opaque closed, centralized ecosystems have gone bankrupt, gone down…
I think when this story is told and the a-ha moments take place, ‘wait. Sam Bankman-Fried did not like Bitcoin. Oh, for a reason. What reason?’ This is the reason it might end up adding to credibility. Millions of crypto investors are crossing fingers that Wood is right.
Have a good evening,
Jeff Remsburg | 
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