Short inversion vs long term rates

This might be submarine discussion here but a few might get what the topic is and I write this because today the market is down a whopping 2% which of course means the sky is falling and panic in the headlines and Trump needs to tweet about the FED again since he is a moronic child.

Most people and I would say many market watchers and those who claim to be up on this sort of stuff are missing why this inversion is happening and why it likely does not mean a recession is imminent. 

In the past an inversion of short term rates vs long term was a recessionary signal because it meant investors and institutions were concerned in the short term and wanted safety in the long term so they invest more in the longer term instrument and sell the short term ones creating higher yields in the short term vs the long term and thus a rate inversion. 

We are not in those times, that way of thinking worked in the past because the model and reasoning worked, today we are not using that model and the reasoning is completely different and I will explain how it is different and why the inversion happened a while ago in the mid term rates and now is happening in the shorter term rates and why neither really matters.....BUT the longer term situation is much much worse.

So with the FED figuratively throwing in the towel with their safety interest rates, to keep powder dry in the case of recession or market need they lowered rates .25 likely to appease that clown in office and the stock market...it signaled the end of their attempt to normalize rates and keep some ammo ready in case of need. Now the market thinks we are headed to Europe first and Japan next with monetary policy...meaning zero and beyond. Europe has been marching towards Japan for the last ten years and they will get to negative rate forever territory before we will but we are also following that same path.

The reasons why rates are dropping in the longer term yields before the shorter term is that the market thinks once we enter that grave we will not leave it but it will take a few years to get there, but once there it is game over. So the longer term rates are reflecting that feeling and it is why today the 30 yr treasury hit its lowest low ever...never a lower yield on the 30 yr than today while the shorter term rates are not reflecting that at all, and the 10 year is fast behind and dropping. The bond market knows this will take likely two years to get there, so the shorter term rates will mark that march and when the longer term rates get to the level that Europe is in then the short term rates will start to "un" invert (intentional) and normalize at the point when the disaster is complete and we can look forward to being charged for banks holding our savings and governments can spend without recourse or consequence.

And that is why the 2/10 inversion really does not matter and why it will not reverse itself until we have Japan-ized our country and screwed the savers so corps and governments can load up on debt at literally zero cost.

That should solve everything!

WallStreet. You surely meant lowered rates by .25 to appease Trump, but that typo will likely confuse the already confused even more. While I agree with you that this is almost definitely a bad situation, the path you describe is quite bleak. I prefer to take a more optimistic viewpoint. First off, I do believe that the Fed will act again prior to year end and lower rates again. The gap between global rates and rates here is simply to wide.

As soon as Trump and China come together, the economic slowdown will lessen and give way to expansion once again. This will give the Fed the reason they need to edge rates higher as you want. I imagine that we are talking probably two years for this to shake out. Trump himself has already conceded that his tariff threats are not an optimal economic outcome by delaying his threat from 10 days ago to put higher tariffs into effect on September 1st.  

The wild card indeed here remains Trump. The Fed, imho opinion, is having their hands forced so to speak. If Trump goes off the deep end and decides to play "chief economist", then we may all be dammed.

Thanks, I saw the typo but nobody mentioned, so I went ahead and changed the word and you are right it was a mistype.

I think Japan is a prime example of how the zero rates theory fails...they did it for the same reasons Trump the dope wants to do it, they erroneously thought/think it would stimulate demand and it hasnt and it wont. We already have some seriously low rates but the consumer isnt benefiting where they could use it most and stimulate the economy. Corps are holding those benefits for themselves and not spreading it around and that could be done in a variety of ways.

Corps are leveraging debt to buy back stock and enrich themselves and investors, not to either hire more or pay more to current workers...for the COST of rates in the last 15 years to savers and a benefit to corps the return has been horrible. Meaning the saver and prudent citizen has gotten next to nothing with the low rates..outside a mortgage there is zero benefit. Credit cards and loan rates are much higher than the early 2000s when rates were higher...which means lender corps are not lowering interest rates to borrowers. And our consumption comes from borrowing, our savings rates are awful as a country thus the consumption is coming from our massive debt levels as consumers or from our paychecks and neither has benefited remotely the way that the elite have especially with how much the tax cut cost that Trump gave to the wealthy and corps.

The way to stimulate a spend and not save economy is make consumer borrowing costs less, that unleashes moronic spending and thus the short term economic impact. Either that or penalize corps who are buying back stock and incentivize them to hire and invest in R&D, to raise wages..that stimulates spending.

But no the wise who hold the power gain all the benefit and the little guy gets the shaft and in summary that is why our inflation rate and growth rates are not strong especially relative to the massive massive spending that Trump has done since in office, we have spent stupidly giving the money to those who are not going to spread it around and thus the economic impact is severely muted.

I think once we enter the Euro and Japanese zone we are screwed...corps are going to get hooked on rates and so the FED barring some massive inflation will never be able to raise. Inflation comes with excess demand and there is none in the mid and long term, there hasnt been and wont be.

Good discussion Street. 

For now, it looks like the only thing that will hold the Fed off of another rate cut before the end of the year is if the market continues to rally. The September meeting will be very interesting.