US Bonds Warning Versus RBA Rate Cuts

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jun 06 2019

In this week's Weekly Insights:

-The One That Got Away From Morgan Stanley
-No Weekly Insights Next Week
-Conviction Calls
-High PE Stocks Versus Hyper PE Contenders
-Rudi Talks
-Rudi On Tour

By Rudi Filapek-Vandyck, Editor FNArena

The One That Got Away From Morgan Stanley

Part Two of last week's Weekly Insights carried a chart by Morgan Stanley illustrating how, adjusted for QE and QT by the Federal Reserve, the US bond market had been in inverted yield curve mode since November last year.

For those who are less familiar with what this actually means: "inverted yield curve" refers to the rather unusual situation whereby US government bonds with an expiry date in ten years from today are offering a lower yield than shorter duration bond yields, like three months for example.

As everybody will understand, this instinctively doesn't make much sense as longer dated loans (which is what a bond effectively is) should offer higher yield than a short term loan.

In financial parlance this then translates into the US bond market is predicting an economic recession lies ahead, which is why all the talk is about recession this month.

In practical terms it means the Federal Reserve tightened at least one time too much late last year. The bond market is now signalling to the Fed thou shalt need to be loosening monetary policy, and sooner rather than later.

When looking at the raw economic data, this can get confusing because recent data might be signalling a slowing down for the US economy, but a recession? As per always, recessions don't show up in data until after they are in place, and financial markets are forward looking.

US investors are most likely to take further guidance from proprietary downturn indicators, such as Morgan Stanley's (below). When I had to make a decision which chart to include in Weekly Insights last week, I chose the inverted yield curve chart. So this week I am adding the US Cycle Indicator by Morgan Stanley.

As the asset strategists who oversee this modeling pointed out, for the first time in over a decade, the Cycle Indicator is now pointing towards a downturn taking shape for the US economy. And this downturn, on Morgan Stanley's assessment, started before trade talks between the Trump administration and China broke down and turned nasty.

No Weekly Insights Next Week

Next week starts with a public holiday across Australia (Queen's birthday) and I will be in Adelaide to present to the local chapter of the Australian Investors Association (AIA) the next day, so there will be no Weekly Insights for that week.

Weekly Insights will resume in the week Monday June 17 - Friday June 21.

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