U.S. Treasury Secretary Yellen said confidently earlier this week that high long-term interest rates are "by no means inevitable" and reiterated that she is very optimistic about the U.S. economic outlook; but she also pointed out that higher long-term interest rates on U.S. debt may pose a threat.
Regarding the soaring government bond yields, Societe Generale strategist Albert Edwards also warned in a latest report to clients that if the bond market does not cool down, the stock market will repeat itself like Black Monday on October 19, 1987, when The tragedy of the US Dow Jones Index falling 10% in a single day will happen.
30-Year U.S. Treasury Bond Hits Multi-Decade High, Will Stock Markets Be Suppressed?
Albert Edwards believes that the current soaring U.S. bond yields are "bombarding" the market. The current situation is like being trapped in a car about to crash, and can only watch the tragedy happen and be unable to prevent it.
He pointed out that the important S&P 500 index experienced its worst month in 2023 in September. At the same time, the bond market faced massive selling pressure, and the 30-year U.S. Treasury bond yield hit a new high since 2007.
The current resilience of the stock market amid rising Treasury yields reminds me of what happened in 1987, when bullish sentiment among stock market investors was finally suppressed.
Any sign of recession now would surely be devastating for the stock market.
Young readers may be less aware that on October 19, 1987, panic selling caused the US Dow Jones Index to plummet 22% that day, which was later called Black Monday. (It even led to the subsequent introduction of a circuit breaker mechanism in the U.S. stock market)
Economic data also hides hidden worries
Using another picture of the data, Edwards noted that when trucking jobs are declining precipitously, it often signals an impending recession.
At the same time, he also discovered other economic problems:
- The current number of smaller corporate bankruptcies and money supply signals are sending warning signs
- Measures the contraction of M2 (broad money) in U.S. cash, checking deposits, savings deposits under $100,000, and money market mutual funds
- The M4 money supply, which measures banknotes and coins in circulation and bank accounts, is also shrinking
Edwards said that over the past few decades, economists, especially those at the Federal Reserve, have increasingly ignored the money supply, and monetarists have been marginalized. In his view "this was a mistake." He would not call himself a monetarist, but he would pay special attention to when data confirms that the money supply is weak.
Never in my career have I seen our position in the economic cycle so uncertain.
Is the long-awaited recession still around the corner, or are we at the beginning of a new economic cycle? Many investors are clearly increasingly convinced it's the latter, but my view is that a recession is still lurking.
