This time is different...those dangerous words!

Last Sunday night I published this piece for my firm, Wedbush. It was written in the wake of Friday's market decline. A little over a week ago I gave a speech at the Wedbush Asset Management Conference, this was a follow-up.

This time is different, those are usually very dangerous words. However I believe it to be true now. The yield curve has inverted. Well sort of, the 3 month/10year US Government debt curve did indeed invert Friday for most of the day (it actually closed with a 3 month yield of 2.442% vs. a 10 year yield of 2.455%). Every time the yield curve has inverted in modern history (save 1966) it has led to a recession. In 2006 the yield curve inverted and a recession ensued 15 months later and the recession was brutal. However during the 15 month wait the S&P returned 29%.

Although there are a cadre of economic indicators demonstrating weakness, there certainly is not a wholesale demonstration of recession. Rather, I believe there continues to be overwhelming demand for US Government debt. During my talk at the Wedbush Asset Management Conference, I showed a slide with the yields on various government debt from the developed world. By far the US has the best or highest rates. This is versus many countries having zero or even negative rates, there is currently over $11 Trillion dollars of outstanding sovereign debt with negative yields!

Regardless of economic perceptions be they good or in the case of Friday bad, the value inherent in US Government debt is creating exceptional demand. Furthermore, sizable short positions hoping to benefit from a “normalization” of interest rates are not working, creating even further demand. The German 10 year yield moved to a negative number on Friday and my bet is that was driven by short covering.

Personally I don’t see a recession coming (oh boy more dangerous words) perhaps a slight economic slowdown. As long as this historic monetary experiment continues and interest rates remain at historic low levels, the economy and Bull Market will continue. We might have moments of severe dislocation (like November and December of last year) but a full on Bear Market, in my opinion won’t take place until worldwide monetary policy changes.

With that in mind, let’s take a look at some recent headlines:

BOJ leaves policy unchanged, matching expectations

Japanese government downgrades economic assessment in March monthly report – wires

FOMC holds federal funds rate at 2.25-2.50%, as expected; now sees no rate hikes in 2019 vs prior expectations of 2

The Fed’s new normal is still extremely stimulative – WSJ

ECB bulletin says asset purchase program helped fulfill price stability mandate

The next big event on this front promises to be the appointment of a new head of the ECB when Draghi’s term ends this fall. The appointment of a monetary hawk could spell the beginning of a change.