This Time is Different | The Great Reset

ready for it this time is different

reports let's get into why Goldman Sachs

says this time is different now that the

inverted yield curve isn't as bad as it

seems we know that generally the

inverted yield curve when you look at

the difference between the 10 year and

the two-year treasury being inverted is

a signal a Surefire signal of a

recession to come and it is one of the

most

prominent signals for Bears to say we're

done we're out we are sitting the

sidelines because it's just a matter of

time the bond market knows best now

Goldman Sachs says well maybe they don't

let's analyze why Goldman Sachs thinks

that especially since the most dangerous

words in investing or this time is

different but before we do let's give

you a quick reminder of what the yield

curve chart looks like this is the chart

of the inverted yield curve as you can

see we had a massive inversion lower

than where we sit now right before the

banking crisis we were so inverted

because that February and January data

was coming out so strong markets were

convinced the Federal Reserve was going

to hike us to Oblivion when the banking

crisis occurred we actually had a very

rapid steepening of the yield curve

because markets thought oh my gosh this

is it the FED will stop hiking because

of the banking crisis and they won't

drive us into a deep dark ugly recession

now the bond markets once again seems

convinced with an almost 100 basis point

in version of the yield curve this type

of inversion by the way forecasts over

500 basis points of fed Cuts being

priced into the market going forward now

there is a potentially simple

explanation and we'll look at what

Goldman says a potentially simple

explanation is look

everybody expects inflation to be

transitory now and if you expect

inflation to be transitory you expect

that the 10-year treasury yield and the

two-year treasury yield won't last this

long so what happens people demand a

higher yield now for two-year bonds

because we're still in a period of high

inflation but when that high inflation

goes away people will once again return

to accepting a lower yield on the

two-year and a higher yield on the

longer term commitment the tenure

who knows that's been my simple

explanation though I give a lot of

credence to the bond market and I like

to pay attention to uh anything that

that's potentially a negative signal I'm

not a big fan of getting trapped in

confirmation bias I want to see what is

everyone else thinking uh but lately all

the Bears have been flip flow okay well

not all of them but I I vomit when I see

the Bears flip-flop with the argument of

well you know we're still bearish but

we're going to increase our Equity

allocation because uh you know stocks

are going up that was TS Lombard for you

last a little respect there anyway

Goldman Sachs first I think Note 4 is

their inverted yield curve uh discussion

but let's take a look at some of the

things that Goldman Sachs saying here

first Goldman Sachs just cut their

probability of a U.S recession starting

within the next 12 months to just 20 20

that is a down from 25 it is also down

from the 35 uh chance of a recession

within the next 12 months that they

argued for back during the banking

crisis and it is way below the 54

amongst Wall Street Journal economists

who are surveyed on the probability of a

recession within the next 12 months now

what do we have on the second argument

here argument number two U.S economic

activity remains resilient Q2 GDP growth

tracking at 2.3 percent consumer

sentiment rebounding sharply from

depressed levels unemployment falling

back to 3.56 in June initial jobless

claims reversing most of their mini

spike in jobless claims true those have

been pretty stable we do expect some

deceleration in the next quarters when

it comes to employment because of the

slower real disposable income

potentially leading to some lower sales

interesting especially since we did just

get retail sales numbers

prior report May report revised up a

little June report revised down a little

bit but easing Financial conditions

easing Financial conditions think about

that a rebound in the housing market

easing Financial conditions to be lower

yields we haven't seen that rebound and

housing I've been seeing that and the

ongoing boom in Factory building all

suggests the U.S will continue to grow

albeit at a lower Trend Pace okay it's a

good setup so far

then they argue that even though we have

this student loan headwind ahead of us

which is now widely being associated

with basically a five percent cut in

people's income Goldman Sachs believes

the biggest growth drags or really

behind us I've personally been arguing

that we really lack a lot of negative

catalysts ahead of us short of some kind

of Black Swan it's very difficult to see

big negative catalysts right now unless

we have some really bad earnings season

but so far that doesn't seem to be the

case

the 0.16 percent increase in cpix food

and energy in June was the lowest since

Feb of 2021 follows a string of 0.4

readings but it doesn't mean it's just

one month of better news as measures of

underlying inflation such as trimmed

mean CPI and PCI or pce rather here I am

thinking about PCI cards for computers

because I'm installing one but anyway

now PC has been easing for quite a while

moreover there are strong fundamental

reasons to expect ongoing disinflation

used car prices are sliding on the back

of higher Auto production and

inventories rent inflation still has a

long way to fall before it catches up to

the message from median asking rents so

that's owner's equivalent rents which is

what CPI uses it's like a 34 weight and

Market reads of rents big disparity

still suggesting you still have a lot of

Tailwind to get this inflation down

which is great

and the labor market continues to

rebalance with a slow downtrend in job

openings but then also fewer quits which

is good and nominal wage growth that's

still positive for workers because

you're still making money real wage

growth just when positive but it is uh

you're not growing your wages as quickly

as you once were now what about the

yield curve because this is the part

that I think is so fascinating where you

have Goldman Sachs finally and it's been

a while I mean I've been

trying to explain why it's possible that

the yield curve could be inverted and

not signal a recession for I feel like a

year now anyway uh Goldman Sachs here we

go

we don't share the widespread concern

about yield curve inversion

conceptually an inverted yield curve

means that rates

that the rates Market is pricing in

future cuts that are large enough to

outweigh term premium which accounts for

its usual upward slope in English

when the yield curve is inverted markets

expect the Federal Reserve to cut rates

so quickly and in such a large way

that you have higher yields now

that are greater than the usual reward

you get for committing your money longer

usually you commit your money longer you

make more money

and when you get an inversion it's

because the markets for some reason are

expecting big cuts

now there are two reasons the markets

can expect big cuts

one recession panic and then you get you

know cuts and a steepening yield curve

and that tends to be the really painful

part it's usually it's not the inversion

It's usually the steepening that's the

painful part usually

and then of course you have uh uh you

know this this uh you know potential for

disinflation uh to be why we're seeing

this but okay let's keep going with what

Goldman's argument is okay so reading

this properly in the past this has

generally this in other words the

inverted yield curve right are you ready

for this

this has generally only happened in

situations where a recession was

becoming clearly visible okay now this

is important because they're arguing

that usually you saw a yield curve

inversion once it was blatantly obvious

that you were going into a recession

now that's interesting we'll look at

some charts in a moment here that's very

very interesting

hence the curve strong track record as a

recession predictor in other words

they're kind of throwing cold water on

this indicator saying look

it's so good

Because by the time a recession is

usually obvious

that's when the yield curve tends to be

inverted when it's already obvious that

a little bit feels like cheating

honestly but okay let's keep going here

so

uh but three things are different about

the current cycle oof boy we love those

words this time is different not really

but okay keep going here three things

are different let's hear what the three

things are

first the term premium is well below its

long-term average okay in other words

the amount of money that you get

compensated today

for investing your money into treasury

bonds longer is already relatively low

so you don't get that much of a premium

anymore these days uh just for investing

your money longer term before covid the

premium you'd get between the 10 and the

two year like if you look at 2018 with

somewhere around 30 to 50 basis points

relatively low that was your positive

term premium okay second there is a

plausible path to Fed easing easing on

the back of lower inflation now of

course some bears argue this is going to

lead to a disaster of uh of basically uh

the FED creating you know stimulating

again and then what you end up with an

oopsie-doopsies inflation again now

remember though we already know because

we've studied this so much on this

channel that what caused inflation

during covet was not the fact that we

printed money it was how rapidly we

printed the money so yes

we could return to what we saw between

2010 and 2020 which is where we slowly

printed money and didn't have any

inflation kind of wild

all right in fact both hour and the next

fomc's non-recession projections call

for more than 200 bips of gradual Cuts

over the next two to three years that's

two to three percent of cuts over the

next two to three years

third okay so so two reasons so far we

started out with a low term premium

we're already pricing in Fed rate Cuts

without a recession

so you know usually you get an inverted

yield curve when you're pricing on rate

Cuts because of a recession

but we're not seeing a recession yet so

the inverted yield curve happened so

early

and maybe that's a sign that

you know with markets are just reacting

the fact that the fed's expecting the

cup okay third reason

if forecasters are overly pessimistic

now

rate Market investors and thus

expectations priced into the yield curve

are probably also overly pessimistic so

the argument that the inverted yield

curve validates the consensus forecast

of a recession is circular in other

words the more people say the inverted

yield curve is going to cause a

recession the more people in the bond

market start pricing in a recession and

then the more economists start pricing

in oh my gosh we're probably gonna have

a recession in the next 12 months and

then you get this sort of reiteration

now the yield curve converts even more

blah blah blah blah blah right

now there are two big two more pieces

here from Goldman Sachs but uh Matt

Thompson here says declining earnings in

commercial real estate are big negative

catalysts the problem with this is

as we just saw from The Wall Street

Journal s p earnings are already

expected to fall 8.1 percent per share

EPS down 8.1 percent per share year over

year you're in the earnings recession

yeah what's the stock market doing it's

going up why why is it going up because

people didn't believe inflation would be

transitory now that it's turning out to

be somewhat transitory people are slowly

getting back in the market in fact a lot

of us I guarantee it in some of you

watching this feel this way right now a

lot of us are like

please just give me one more dip I've

been missing out let me put more into

the market

this is normal

it's totally normal and when we look

back at 2020

everybody was like please let there be a

double dip I just want another chance to

buy bro and it just kept going up and up

and up I'm not saying it's healthy how

quickly it's happening but it's it's

remarkable that the market is going up

when you're already expecting negative

EPS of 8.1 percent

and

net income

Falling by 11.4 percent now this other

argument Matt Thompson here says is that

well what about commercial real estate

well so far commercial real estate has

done Jack Huda nothing sure there are

write Downs for offices loan loss

reserves are going up even at Banks like

Morgan Stanley for these offices and

potentially this office and Retail

commercial Crush but I mean we're

talking about three four years before we

start seeing some of these refinances

really roll and at that point is the

economy already well beyond

who knows now zero phases here says but

the S P 500 is overbought uh on the six

month chart been overbought for like

three years

it makes you wonder if it has to do with

sort of how rapidly people now get in

and out of the stock market who knows uh

okay so uh let's get to the next

argument from Goldman here ah argument

number five

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you've got bundle up questions so going

back to Goldman Sachs right here a 25

basis point hike

five and a quarter to five and a half

percent at the July meeting is almost

certain but we expect it to be the last

of this cycle

despite some assertions to the contrary

for more hawkish participants we don't

think that the septembered meeting is

truly live both in the June press

conference and in his Congressional

testimony Powell argued moving carefully

or at a careful Pace now since we're

closer to our destination the minutes

also signaled they probably didn't have

a majority uh for for confirming what

they're going to do with the next

meeting but what's more likely to be

live according to Goldman Sachs is the

November 1st meeting where you're going

to end up with three more CPI reports

and four more pce reports lots and lots

of data

all right then we've got number six most

of the G10 Banks uh are still a little

bit further from the FED at completing

their tightening Cycles now we did just

get some great numbers from the Bank of

Canada for inflation Thanks Max for

pointing those out on the month of a

month decline there at headline under

three percent uh the Bank of Canada is

still widely expected to deliver their

final rate to 5.25 they're probably just

trying to copy America

we expect the Reserve Bank of Australia

to deliver one more 25 BP hike uh and uh

let's see and another two sir oh in

August and then another two later in the

year

uh no big implications for some changes

of the Guard you've got UK is probably

going to get to a terminal rate of six

percent uh another 100 basis points to

go thanks to that Rising core inflation

rather than falling

and then Goldman Sachs does price in

fewer cuts for Canada Europe and the US

than markets are looking at for next

year which is somewhat negative right

but uh that's also bait on the back of a

stronger economy so when we look at the

inverted yield curve

chart wise again

this is the inverted yield curve over

history

and what I'd like to see is when did we

actually get this inversion here and

here in the.com Era let's compare that

so I'm going to get the actual dates for

that so the inversion

and the yield curve happened first and

it looks like it's going to be an 07.

06.06 was your first inversion

I I don't know if you could say that uh

we were we were convinced uh that a

recession was ahead of us by by 07 but

okay interesting argument still Goldman

Sachs then you've got uh the 2000s era

we really saw the inverted yield curve

as early as February of 2000. I mean

these are these were pretty leading

inversions so I think that these the

leading-ness of some of these inversions

actually potentially gives you a little

bit of a counter argument to Goldman

here uh in that we had are below zero

percent here

pretty early when when you had the

recessions uh you know certainly later a

recession is almost more where they're

steepening uh sat so I don't know if

that really helps Goldman's argument

much but either way I personally do

agree with a couple of the arguments

they make regarding the inferred yield

curve that you've got this Doom Loop of

forecasters oh nope definitely recession

uh that increases your inverted yield

curve but you also have my argument of

disinflation and then Goldman's argument

of Fed rate Cuts already being priced in

a non-recessionary environment so is it

possible this time could be different

who knows again those are the most

dangerous words in investing so

you should prepare for no but then on

the other hand

do you prepare for yes

I don't know I don't think this is where

you could just look at these data points

you have to look at everything

holistically stronger retail sales or at

least non-native retail sales consumer

spending Bank of America suggesting hey

people still have higher deposits than

they did before the pandemic uh

inflation trending down very rapidly

earnings not coming in as bad as

expected so far fingers crossed it stays

like that but uh we'll see now I want

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