The System Is Flashing Red

  • Requiem for the 60/40 retirement strategy
  • Jim Rickards: “The most powerful yield curve market signal of all”
  • A $31 million precious metals “Ponzi-like scheme” (and a “real creep”)
  • The Big Five defense contractors mobilize near D.C.
  • RV demand… Wanna get away?
  • Banks sour “Lemonade Day” in Vancouver.

Historically speaking, U.S. Treasuries have been considered some of the safest bonds investors can buy.

For instance, recall the 60/40 retirement strategy: putting 60% of your retirement wealth into shares of stock and the other 40% into bonds. “During the decade from 2010, the 60/40 portfolio provided an annualized return of 10.2%,” said the Financial Times.

But 2020 was a turning point for the 60/40 ratio. “It is mathematically impossible to repeat the record of the 60/40 portfolio over past decades because rates are now so low,” said T. Rowe Price portfolio manager David Giroux around that time.

“I run a portfolio that competes with 60/40 strategies,” he added, “and it does not contain Treasuries and we also think most equities are not attractive.”

Foreshadowing much?

Here in 2022, given the perils of inflation and more, there’s yet another reason to look askance at U.S. Treasuries…

Yields for longer-term U.S. bonds are ordinarily higher than they are for shorter-term bonds. The longer the U.S. government ties up investors’ money, the more investors want to get paid in return, right?

And as our macro expert Jim Rickards notes: “As bond prices go up, the yield to maturity goes down and vice versa.”

Thus, the “yield curve” — which can be plotted on a chart — “is a comparison between long-term and short-term bonds that depicts the relationship between their rates of interest,” says the St. Louis Fed.

“This means that yield curves are shape-shifting,” says Jim. “They can steepen, flatten or even invert.” That said: “The yield curve is a remarkably simple construct with predictive properties that are equally remarkable…

“The yield curve is like a snapshot of how investors view the prospects for interest rates and the economy both now and in the future,” Jim continues.

“Bond yield spreads are typically used to gauge the health of the economy,” agrees Ben Carlson at A Wealth of Common Sense blog.

  • “Wider spreads between long-term and short-term bonds lead to an upward-sloping yield curve, which can indicate healthy economic prospects — most likely higher growth… in the future,” he says
  • “Narrower spreads lead to a flatter or even negatively sloped yield curve, which can indicate poor economic prospects — most likely lower growth and inflation,” Carlson concludes.

“Of course, the world today bears no resemblance to the normal world just described,” Jim adds. “Inflation, recession, volatility and war are all front and center.

“How the yield curve is shaped by these factors (and, more importantly, what the yield curve tells us about how these factors will evolve) is why yield curve analysis is so valuable.

“The predictive power of the yield curve is that it tends to get there first,Jim says.

“This means that when conditions are changing for better or worse the change in the shape of the yield curve is often the first signal,” he says. “Other market signals (stocks, inflation, growth) catch up later.” In particular, Jim looks at the “steepness of the yield curve (also called spread).

“When we look at the spread between 2-year notes (2.8%) and 10-year notes (3.04%), we see almost no spread,” he says. “Why is the yield curve steep in the short term and flat in the intermediate to long term?

“The answer is that expectations of Fed rate hikes are high, but fear of inflation down the road is

not.” Jim explains: “One inference is the Fed will fight inflation” — raising fed funds rates — “and they may win the battle… but lose the war and cause a recession.”

In other words, so much for a soft landing…

This brings us to the most powerful yield curve market signal of all,” says Jim, “a signal that is highly reliable… inversion.”

So when an inversion occurs, that means the yield on a 2-year Treasury note rises higher than that on a 10-year.

And on April 1, 2022, the yield curve did exactly that, with the 2-year yield (pink line) at 2.44% and the 10-year (orange line) at 2.42%.

Treasury Rate Chart

Source: Barry Ritholtz/A Wealth of Common Sense blog

(Prior to that, on March 28, the 5-year/30-year inverted for the first time since 2006.)

Even today, we see a slight inversion on 5-year and 10-year Treasury notes: 3.07% versus 3.04%. “There’s no reason to accept a lower yield on 10-year notes than 5-year notes,” says Jim, “unless you’re expecting a recession, a liquidity crisis or worse.

“The system is flashing red,” Jim says. “That’s the bad news.”

How does the yield curve inversion come into play? It’s only happened a dozen times since World War II. And each time, the U.S. economy sank into a recession afterward.

According to Bank of America Merrill Lynch figures, recessions have commenced — on average since 1956 — about 15 months after an inversion of the 2-year/10-year spread.

But that research is from 2019 — and does not account for the COVID crash. There, the yield curve inverted in August 2019… and recession arrived in February 2020. It was inevitable, even without a pandemic.

The gap that time? Only six months.

And Jim says the gap might be even slimmer this time around.

That’s because of another statistic Jim is eyeing — with a history that goes back more than a century now. This one is also flashing red.

“The good news,” he says, “is there’s still time to adjust your portfolios ahead of a recession or market crash.

Checking in on Mr. Market today, the Dow is down 100 points to 32,800. The other major U.S. indexes are similarly in the red, with the S&P 500 down 0.50% to 4,095 and the Nasdaq down 0.65% to 12,000.

Commodities? Oil is churning at $121.60 for a barrel of WTI — still far off the record $147 in July 2008. But denominated in euros and pounds, crude is setting record highs. As for precious metals, gold is down $4 per ounce to $1,852.40 while silver is about $0.25 under $22.

The crypto market is hanging tough for now; Bitcoin is above $30,000 and Ethereum’s over $1,800.

On Monday, a federal court ruled on a $31 million precious metals “Ponzi-like scheme.”

“Bernard Ross Hansen, 61, the former CEO and president of Northwest Territorial Mint, was sentenced to 11 years in prison on 14 counts of wire and mail fraud charges,” The Charlotte Observer reports.

And Hansen’s business partner and “vault manager” Dianne Erdmann was sentenced to five years in prison, convicted of 13 counts of wire and mail fraud.

In terms of restitution, the two were ordered to pay $33.7 million and $32.1 million respectively.

According to court documents, Northwest Territorial Mint, headquartered in Washington state, was a gold and silver bullion dealer as well as a precious metals custodian, charging a fee for its services.

From 2009–2017, feds claim Hansen and Erdmann “lied about shipping times for bullion, used customer money to expand the business to other states and to pay their own personal expenses.”

“By 2012, the duo ‘lacked enough assets’ to handle their business and began fulfilling new bullion orders by taking metal that was meant to be stored for other customers without refunding them,” says The Charlotte Observer.

“In total, more than 3,000 people were defrauded out of about $31.4 million,” the article says.

“It is heartbreaking to hear how the fraud upended… lives and left them working longer, harder and in deep stress to try to recover,” said U.S. Attorney Nick Brown.

[Sidebar: In Ed Steer’s Gold and Silver Digest newsletter, Mr. Steer said Wednesday: “I met Ross once at a precious metals conference in Vancouver — and knew immediately that this guy was as crooked as a dog’s leg… a real creep — and one scary dude. He got what he deserved.”]

On Tuesday, defense contractor Raytheon Technologies announced its relocation to the belly of the beast — Arlington, Virginia.

Note: Raytheon’s decision to decamp from Massachusetts comes just one month after Boeing announced its own redeployment from Chicago.

“With Raytheon and Boeing coming to town, every one of the five leading defense contractors will now be based in the D.C. area, giving them closer access to the network of officials, politicians and lobbyists that help these defense giants bring in massive profits,” says Responsible Statecraft.

Perfect.

“In other words, the military-industrial complex has officially set up shop in the Pentagon’s shadow.”

National security analyst Mark Thompson of the Project on Government Oversight believes defense contractors located within spitting distance of the Pentagon is equal to “WD-40” for the “revolving door” between the two.

“This increasing concentration of the military-industrial complex a stop or two away from the Pentagon,” he adds, “is really not good either for taxpayers, for troops or for national security.”

Heh… Wanna get away?

“RV sales have been on a decade-long upward trend, but the coronavirus pandemic supercharged consumer interest,” says Investor’s Business Daily.

“Americans, cautious of traveling in airplanes, packed into RVs and motorhomes.” To say nothing of the “office on wheels” trend, like this WFH Airstream we featured last year…

RV Office

That said, Indiana-based Thor Industries (THO), which manufactures RV brands including Airstream, Heartland RV, Jayco and Livin Lite, reported red-letter earnings yesterday.

“THO earnings per share ballooned 92% versus a year earlier to $6.32,” IBD notes. “Revenue increased 34.6% to $4.66 billion.”

But North American demand for RVs is starting to moderate, according to Thor CEO Todd Woelfer and the RV Industry Association.

“We agree with the revised lower end of the wholesale RVIA’s forecast,” Woelfer says, “and we believe it is in alignment with our forecast RV industry retail sales… to more normalized levels.”

IBD mentions: “THO reports inventory will remain below normal levels until early in calendar year 2023… Supply continues to be an issue due to a global chassis shortage.”

Since 2007, the Greater Vancouver Chamber has sponsored “Lemonade Day” in early June every year, encouraging young entrepreneurs.

This year on June 4: “More than 150 children, ranging from 6–16 years old, displayed their imaginative creations and entrepreneurial zeal Saturday at… the Vancouver Farmers Market,” reports The Columbian.

Aww, right? Nope…

My Lemonade Day

Courtesy: YouTube, My Lemonade Day

Instead, the “Main Squeeze Investor” for Lemonade Day — iQ Credit Union — has kids applying for “microloans” to finance their startups.

No word on interest rates… But it’s not lost on me that this program commenced in 2007.

Try to have a good day, and we’ll be back tomorrow.

Best regards,

Emily Clancy
The 5 Min. Forecast

Emily Clancy

Emily Clancy

Recent Alerts

Sleepwalking Into Nuclear War

We return today — however reluctantly — to the unsettling topic of nuclear war. Read More

Debt Dominoes Fall

The countdown clock begins: Russia defaults on a $100 million payment… But it’s not that Russia’s government lacks the money. Read More

What Really Wrecked Crypto

Here’s the problem for crypto: At this moment in financial history, it trades like a “risk asset” along with stocks. Read More

“This Is Not Dystopian Science Fiction”

“Weaponizing health apps — foreshadowing of things to come outside of China?” writes one of our longest of longtime readers. Read More

The System Turns “Critical”

For an update from the Prospectors and Developers Association of Canada (PDAC) in Toronto, we turn to energy, mining and precious metals expert Byron King. Read More

Reality Check (Energy)

It fell to Treasury Secretary Janet Yellen to take the bullet on the talk show circuit… and deny that Team Biden policies have anything to do with high gas prices. Read More

IRS Springs a Surprise

“They will find you, they will find your assets, they will find your account[s],” says Mark Steber of Jackson Hewitt about the goons at the IRS. Read More

Crashing the Economy to Crush Inflation

It’s becoming painfully apparent the Fed no longer has the economy’s back. Read More

The Fed Will Fail

The media won’t have the Fed’s back Read More

Worse Than 2008

The financial media are starting to invoke memories of 2008. Read More