Wall Street Lies, But The Yield Curve Doesn’t

There are a number of economists and strategists stubbornly clinging to their belief that the U.S. economy is strong and that markets have decoupled from economic fundamentals. I would respectfully suggest that markets decoupled from economic fundamentals a long time ago when the S&P 500 rose three-fold since March 2009 while the economy barely grew at 2% per annum and are now merely returning to the mean.

But that won’t play out in a straight line. Nothing ever does in a complex system.

So it’s not surprising that this week has been a very strong one for the U.S. markets and for oil (on track to end this week with solid gains, thanks to a three-session rally). And it’s no shock that Wall Street is starting to make encouraging noises about “recovery.” But when did those folks ever tell you the truth?

There is one signal that never lies. It always lights up red when the system starts to fail.

The Yield Curve Is Flattening

Unlike the financial media, Wall Street, central bankers, and politicians, the yield curve does not lie. It is flattening and those that understand what that means will tell you to pay attention.

A flattening yield curve and sharp drop in yields is signaling not only economic weakness but deepening fears among investors about systemic fragility. Even in a world where the Fed has destroyed many of the signaling mechanisms of the markets, a flattening yield curve combined with all of the other negative economic data is flashing red that the economy is faltering.

Now that we’ve learned that we can have a bear market without (or at least before) we enter a recession or the Fed begins to aggressively tighten, it should be apparent that economic weakness is not far behind. The December 2015 unemployment number that the press and many analysts are hawking as a sign of economic strength was much weaker than it appeared. The Atlanta Fed’s GDPnow tracker placed 4Q GDP at +0.6% as of January 15 despite balmy holiday weather. Holiday retail sales were extremely disappointing and the year was greeted by large lay-offs and store closings at Macy’s and Wal-Mart. The consensus is programmed to chirp that “the American consumer is fine” while ignoring the fact that she may be just great – the only problem is she isn’t spending money! While France’s socialist President Francois Hollande is finally admitting that socialism doesn’t work, Americans are cheering on Bernie Sanders and Barack Obama keeps burying the country in more regulations.

I can go on peddling what Mr. Obama calls fiction, but my sad if unpatriotic duty remains to point out that the facts demonstrate that the U.S. economy is struggling again in 2016. Low oil prices are a serious problem for the economy.

There’s another secondary indicator I watch, a measure of fear and loss of confidence in our central bankers, and it will probably not come as a surprise to my regular readers.

Gold Prices Actually Measure Fear

The current rise in the price of gold is another indicator that investors and citizens are questioning the integrity of paper money and the policies of the central bankers destroying it.

I’ve said before that I expect gold prices to go up as panic sets in to the markets, and this is already happening. Last week, gold experienced its biggest rally in over seven years, rising 5.5% just on Thursday. Jordan Eliseo, chief economist at ABC Bullion, says “In US dollar terms the gold price is up around 15 per cent, currently trading around [the] $US1,250 an ounce mark.”

Gold prices don’t lie, either – and the worse market conditions get, the more investors will flee equity and run to “safe havens” like gold and silver.

The world’s paper currencies are being destroyed by the deliberate policies of central banks because they have no other tools to promote growth or inflation and governments have no other way to pay back the trillions of dollars of debt they have created.

I think these are the wrong policies, but we must take the world as it is and not as we would like it to be. Accordingly, the only antidote to the destruction of paper money is tangible assets such as gold and silver. Sure, these could go lower, but eventually they will be worth much more than their current depressed prices. These are generational investments, not short term trades. Investors should continue to buy gold and buy silver and save themselves.

My Gold Recommendations So Far

CEF: Up 19.32% since Dec. 30

GLDX: Up 25.96% since Dec. 30

GDXJ: Up 29.23% since Dec. 30

PHYS: Up 17.32% since Dec. 30

Whenever I want to see what’s really going on in the markets, I look for a flattening yield curve and spiking gold prices.

I see those two signals lighting up right now, and that means things aren’t good.

We are still in a long-term, potentially multi-year bear market. We’re still right on target for a Super Crash by this summer.

Sincerely,

Michael Lewitt

19 Responses to “Wall Street Lies, But The Yield Curve Doesn’t”

  1. How does the recent “oil production freeze” affect your outlook for this bear market/super crash. Does a freeze not mean that demand will begin to catch up to the current level of production, therefore oil price would not have meaningful reason to continue lower. Of course oil price has caused significant damage to this point and we will have to deal with those effects, but in an improving supply/demand balance, oil should not provide additional negative economic pressure (beyond what already exists) and therefore improve the economic outlook.

  2. There is only one obvious outcome : currencies are dying from a terrible cancer caused by a séries of QEs sustained and aggravated by négativ interest rates. People have absolutely no alternative than buying Gold and silver. It’s so obvious! It has has already started! The game is over for the Goldprice manipulation. We won’t see last years lows any more. Act now, buy now. It’s probably the greatest wealth transfer in history of mankind. It’s exaggerated? Ok! Just wait and see.
    But when you start seeing, it will be too late! Your fault.
    Nice weekend.

  3. Michael I always appreciate your commentaries. Question: Given that the big picture is pointing down, what is your take on the Oil wild card? Your MM associate Kent Moors anticipates oil back into the $40s this year. I realize no one has a crystal ball, but could not higher oil re-energize the market for a significant burst higher (more than a mere “dead cat” bounce)? Your thoughts please.

  4. MICHAEL,YOUR COMMENTS AND OBSERVATIONS ARE RIGHT -ON.AND
    A WISE MAN SAID, “With Faith We Can Achieve All That We Believe”.I see that
    you have faith in what you believe.You have had a lot of experience in your work
    and it`s a pleasure to read your articles.Thank You.

  5. Hello Michael, I mentioned your most beneficial and current report on the coming ‘crash’ to an associate who whilst in agreement with your views
    commented “what was he saying back in the run up to the 2008 disaster” Is there an old report in particular that substantiated your views at that time.
    Keep up the excellent guidance through these troubling times.
    Robin

  6. If I interpret the yield curve chart you provide correctly, plots closer to zero indicate a flatter curve. But during the go-go years of the stock market from 1995 to 1999 (double -digits consistentl growth) the curve is much “flatter” than it is now. Im puzzled.

  7. mr lewitt,
    always enjoy your commentaries and hope your fund has been getting more recognition and will be receiving more flows going forward. just wanted to know why you have chosen the super crash by this summer? we’re not that far away from the summer and wanted to know what catalysts you see which will be causing a severe downshift in markets by summer. (i am bearish and things seem to be only getting worse but i have no idea in the timing as i have been burned before many many times in trying to predict timing)

  8. Hi Michael, I too have found your your info most interesting; I’m an expat from the U k live on the coast in South Africa, been here 40 years and had to retire two years ago, have my own home and some savings but not enough for my wife and I if we live longer than the next 5 years but could live another 15 or 20 plus yrs ! do you have any advise beside buying a gun ?

  9. Looking at the 10year/2year spread chart note that in the past when it hit zero is approximately when the stock market turned bearish. But this time we are already a half year into a bear market and it’s still well above zero. It appears the new paradigm of “Fed Funds taken down to almost zero” may now be reducing the effectiveness of Treasuries notes as an indicator. The high yield/junk bond market is probably better to watch; and it doesn’t look good at all right now.

  10. Philippe Desrosiers

    It has been reported last week (from Huffingdon post) the Alberta oil sands would see a 87% job loss. This is a massive blow to Canadian economy has the Canadian central bank is also thinking of lowering interests rates under 0 like Japan central bank. The technology used to extract oil from the oil sands make the effort of cracking this oil from sands a under cost operation if the barrel of oil is below a certain value on the market.

  11. Please verify my assumption! I read an article stating 1,000 seniors will retire every day for the next 15 years. Adding 250k jobs (recent release) and losing 300K employed seniors each month does not equate to a positive jobs report increase. There are lies, and then there are damned lies!

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