“Yea, it is an angry and unforgiving Economy. To repent we must stop frivolous spending! Instead of paying for cable, let us watch clouds! Instead of buying clothes, wear but sheets from thine beds! Cut spending to only the bare essentials! Water and bread and margaritas, yea.” Randy Marsh, South Park

I was a big fan of Twin Peaks (the TV show, not the sports bar,, it may be great too but I’ve never tried it) which premiered in 1990. It was groundbreaking, well not really, but it was entertaining. It featured Kyle MacLachlan as FBI agent Dale Cooper trying to solve the murder of homecoming queen Laura Palmer. On one episode, after agent Cooper was shot by someone, a Major from a nearby military installation stopped by his hotel room. He said that his job was monitoring deep space noise which for his whole career had been incoherent garble but at exactly the time that Agent Cooper was shot, he heard the title phrase of this blog.

I think that that phrase is a perfect description of the US economy and ergo the equity markets. On the surface, the economy is humming along at full employment. In fact, the President often exclaims that it the best economy in history. Likewise, this week the S&P 500 made all-time highs. The recent run that eclipsed previous highs was brought on by the Federal Reserve saying that they would contemplate cutting interest rates at their next meeting.

And that’s the rub. According to all the Keynesian economists, central bankers are supposed to cut rates when the economy is slowing, which most leading indicators are signaling that it is. Even more revealing is the track of the yield of the 10 year Treasury note. The Federal Reserve consistently lowered interest rates in the wake of the great recession until rates were essentially at zero. They also printed a few trillion dollars in what they called quantitative easing. They should have called it screwing the saver as that was the effect. That and the enrichment of the ultra-elite who were allowed to borrow free money.

Since reaching a low in 2016 of 1.37%, the yield had been steadily increasing, finally breaking 3% in late 2018. However, something broke at that point and it has steadily been decreasing until it fell below 2% this week again. That does not portend anything good for the economy. as rates have now inverted – short-term rates are higher than long-term rates. A rate inversion is not a 100% indicator of the next recession but in the past it has been a reliable indicator. If you look around the globe, rates are a lot lower. In fact they are negative in Japan and Europe. Can you imagine, you buy sovereign bonds and you pay interest to the government. In fact, this week the total amount of bonds bearing negative interest rates exceeded 12 trillion dollars for the first time.

Even if a recession is coming it does not mean it will be another great recession. I think that one may be a few years down the line as confidence in the central bankers is still strong. However, it always wise to heed the teaching of Randy Marsh and be prepared.

