I am basically a positive person. I never have been much of a Cassandra who predicts the end is near and the world is about to end. Nor have I ever been one to exaggerate. In this day, the raw facts are strange enough.
But you know what? The end really IS near and the world IS about to end.
If you knew that a trillion-dollar trade was about to unwind wouldn't you like to get in front of it? If you could you would be able to make a fortune for yourself.
Well guess what? Just such an opportunity is staring you in the face.
I am talking about the inversion of the yield curve, which I have been warning you about for the past two years. Now the mainstream media is finally getting on the bandwagon and starting to focus on this arcane concept.
During expanding economies, long-term interest rates are always higher than short-term ones to compensate investors for the greater risk that extended duration implies. The longer the life of a bond, the more things that can go wrong. They also need to be protected from rising inflation.
Inverted yield curve takes place when long-term interest rates are lower than short-term ones. This takes place when the Federal Reserve raises overnight rates to higher-than-normal levels to cool an overheating economy. This is a rare event, as the Fed action brings results usually in months. Yield curves are only inverted about 10% of the time, or about one year in every 10.
It turns out that the yield curve is the best predictor of recessions and bear markets out there. Take a look at the charts below, which I lifted from my friends at The New York Times. They show a yield curve inverting in 2007. The Great Recession and a 52% slide in the S&P 500 followed. It turns out that every recession of the past 60 years was preceded by an inverted yield curve.
It isn't just the yield curve that is anticipating the end of the Great Bull Market of the 2010s. The headline unemployment rate is also raising a red flag. The current jobless rate is now at 3.8%, an 18-year low. The last time we saw numbers this robust was, you guessed it, back in 2007.
In fact, I am seeing a whole range of data points warning that this economic cycle is coming to an end. As a hedge fund friend of mine told me the other day, "A year from now we'll be kicking ourselves over why we didn't sell. All the signs were there."
With the government about to report a US Q2 GDP figure of anywhere from 3% to 4% you must think I'm smoking California's largest cash crop (it's not grapes).
But having been through nine bull markets during my lifetime, I can tell you this is exactly what tops look like. Business is booming, you can't hire anyone, there are long lines everywhere, and nary a space is to be found in a shopping mall parking lot. This is when economies exhaust themselves, by overheating and pulling growth in from future years.
Now about that trillion-dollar trade.
Back in 2011, the spread between the two-year and 10-year Treasury paper (TLT) was a generous 3.0%. Bond traders made money hand over fist borrowing short, lending long, and leveraging this trade up anywhere from 10 to 100 times. The risk reward was so great that the aggregate value rose to the tens of trillions of dollars.
Today, that spread is on 34 basis points. Traders are still putting it on but keeping every close eye on the exit. After all, 34 basis points X 10 is 3.40%, which still handily beats overnight deposit rates.
When the spread turns negative the sushi hits the fan, and they sell everything, taking the rest of the world with it.
What will they be dumping? The entire long dated maturity range of not just Treasury bonds (TLT), but ALL bonds (LQD), (JNK) and high yielding stocks (HYLD), ETFs, MLPs (AMLP), and REITs (SPG). They call this a "bear market."
What's the cleanest way to play this? Sell short the (TLT) or buy the inverse 2X short Treasury ETF (TBT). Right here, with yield at a five-month low and prices at five-month highs, is a great entry point.
Just thought you'd like to know.
