Since you asked
What does it mean that the spread between the 10-year and 2-year U.S. Treasury rates is as inverted now as it has been in 40+ years?
In short, it likely means that the Fed is tightening policy by too much. Short rates have been pushed higher, while the 10-year U.S. Treasury appears to be crying uncle, or more specifically signaling lower future nominal growth. The last time the yield curve was this inverted was in 1981. Yes, it portended a recession but also turned out to be a very attractive buying opportunity for equity and credit investors.
Song of the month
In response to October’s better-than-expected U.S. inflation reading, let’s go with Timber by Pitbull.
U.S. economic history suggests that high inflation tends to come down rapidly, which explains why “Timber!” has been on repeat in my mind this month. As the saying goes: “The bigger they are, the harder they fall.” Remember, markets likely won’t wait to recover until inflation is back in the perceived “comfort zone.” “Better-than-expected” may be all the market needs.
Phone a friend
I once again dialed Ashley Oerth, an investment strategist and Invesco’s resident crypto expert to help me to understand what is transpiring with the crypto exchanges and what the implications, if any, could be for the global financial system. Here’s what Ashley had to say:
Following the implosion of the FTX crypto exchange and its related businesses, questions are swirling over what contagion we may see in decentralized and traditional markets. In crypto, Bitcoin and Ethereum fell sharply along with other big-name cryptos, and crypto-linked trading firms and services are facing serious hardship; Alameda Research, a quantitative crypto-trading firm (also run by Sam Bankman-Fried) was wound down, and lending services BlockFi and Genesis have halted withdrawals, with possible bankruptcy in the cards. Complicating the situation is that there are currently more rumours than facts, which has only helped stoke concerns. Despite all this, this crisis appears so far to be contained within the crypto sphere, which remains largely unregulated, leveraged, and without any institutional backstops (such as a central bank) — all factors that help enable crises like we’ve seen with FTX and Terra Luna.
In the longer term, I suspect that these events may help further the distinction between cryptocurrencies, as embodied by coins and tokens, and the underlying use cases that are found in decentralized ledger technology, which is ultimately a new spin on database technology. Without meaningful, international, cooperative regulation, the crypto world will probably continue to be something of a wild west.
On the road again
My travels in early November took me to the City of Brotherly Love, a city electrified by their professional sports franchises. At the time, the Philadelphia Phillies were leading the World Series by two games to one. More than a few optimistic fans prepared me for what victory might mean — each time Philadelphia had won a World Series, the economy had fallen into recession (1929, 1930, 1980, 2008). Does their loss mean we’re now in the clear?
I was in Philly to speak at a conference for investment professionals, where I was on an agenda with Mike Quick, the former Philadelphia Eagles wide receiver. Quick told his story of what it took to rise from a small town in North Carolina to the heights of the National Football League. He also was sure to note that he is currently the radio announcer for the (then) undefeated Eagles. Quick was asked, “Who hit you the hardest?”
Me (thinking): I bet he gets asked this all the time.
Quick: “I get that question all the time.”
Me (thinking): I bet he’s going to say Lawrence Taylor.
Quick: “You all think I’m going to say LT. Well, it was my sister Linda.”
Me (thinking): That’s hilarious. I may be a lifelong Giants fan, but this guy is ok.
See you in December. I think most of us are ready to put 2022 to rest. Here’s to a less volatile and more fruitful 2023!