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On The Fun (But Pointless) Debate Between Rick Santelli And Rich Bernstein On What The Yield Curve Indicates (In A Time Of Central Planning)

Tyler Durden's picture





 

Rich Bernstein who while at BofA used to be one of the few (mostly) objective voices, today got into a heated discussion with Rick Santelli over yield curves and what they portend. In a nutshell, Bernstein's argument was that a steep yield curve is good for the economy, and the only thing that investors have to watch out for is an inversion. Yet what Bernstein knows all too well, is that in a time of -7% Taylor implied rates, QE 1, Lite, 2, 3, 4, 5, LSAPs, no rate hikes for the next 3 years, and all other possible gizmos thrown out to keep the front end at zero (as they can not be negative for now), to claim that the yield curve in a time of central planning, is indicative of anything is beyond childish. A flat curve, let alone an inverted curve is impossible as this point: all the Fed has to do is announce it will be explaining its Bill purchases and watch the sub 1 Year yields plunge to zero. Yet the long-end of the curve in a time of Fed intervention is entirely a function of the view on how well the Fed can handle its central planning role: after all, the last thing the Fed wants is a 30 year mortgage that is 5%+ as that destroys net worth far faster than the S&P hitting the magic Laszlo number of 2,830 or whatever it was that Birinyi pulled out of his ruler. As such, Santelli's warning that a steep curve during POMO times is just as much as indication of stagflation as growth, is spot on.

Furthermore, to Bernstein's childish argument of "where is the stagflation" maybe he should take a look at commodity prices, unemployment levels and double dipping home prices, and the answer will suddenly become self evident. But either way, the point is that during central planning the shape of the curve does not matter at all, and certainly not to banks. The traditional argument that banks make more money on the long end breaks down when nobody is borrowing on the long-end, and with mortgage apps, both new and refi, plunging to fresh lows, that is precisely what is happening. But who cares about facts: all one has to do is roll one's eyes and smile flirtatiously at Becky Quick (making sure of course that Warren is nowhere to be found).

The video of the argument between the two is below:

Regardless, while Bernstein's objectivity is now sadly very much under question, if understandably so as his new business requires a bullish outlook no matter what, here is a primer on curves that was posted on Zero Hedge previously for all those who may have been confused by today's debate.

Posted on Zero Hedge in June 2010:

Why the Yield Curve May Not Predict the Next Recession, and What Might

Gone Are the days when "green
sh#%ts" was bleated daily on CNBC amongst a chorus of permabull snorts.
Even the experts now recognize the recovery as a BLS swindle,
and it is important to reintroduce the possibility of not only a low growth
future, but one of outright and persistent contraction. As “double dip” has recently worked its way into
the popular lexicon, we will explain why a traditional forecasting tool of
recessions may not flash a warning this time around. Afterward, we explore why
even “double dip” may not be an accurate term, as well as what a cutting
edge-new economic indicator is forecasting.

Gary North wrote an excellent article explaining why yield curve
inversions predict recessions. It is instructive now to illustrate how the
fundamental backdrop has changed amidst unprecedented government intervention.

The interest rates for more distant maturities
are normally higher the further out in time. Why? First, because lenders fear a
depreciating monetary unit: price inflation. To compensate themselves for this
expected (normal) falling purchasing power, they demand a higher return.
Second, the risk of default increases the longer the debt has to mature.

In unique circumstances for short periods of
time, the yield curve inverts. An inverted yield occurs when the rate for
3-month debt is higher than the rates for longer terms of debt, all the way to
30-year bonds. The most significant rates are the 3-month rate and the 30-year
rate.

 

The reasons why the yield curve rarely inverts are simple: there
is always price inflation in the United States. The last time there was a year
of deflation was 1955, and it was itself an anomaly. 
Second, there is no way to escape the risk of default. This risk
is growing ever-higher because of the off-budget liabilities of the U.S.
government: Social Security, Medicare, and ERISA (defaulting private insurance
plans that are insured by the U.S. government).

We are no longer in a persistently
inflationary environment, despite the best multitrillion-dollar reflationary
efforts to the contrary. Disinflation and outright deflation keep popping up in
critical areas of the economy. While the central banks will likely overshoot in
the end, resulting in an hyperinflationary spiral, for the time being, lenders
are not worrying about inflation. And, while one may doubt the BLS’ calculation
expressed by the Consumer Price Index, the below chart of CPI year-over-year is
nonetheless striking, as it indicates the recent crisis brought it into the
most negative territory since inception.

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On the rise are medical and food costs, but
continued deleveraging by banks and consumers are offsetting deflationary
drags. Banks are writing down (and off) private and commercial real estate
loans, and consumers will remain in spending retrenchment as long as they
continue to work off credit in a high unemployment environment. Indeed, year
over year consumer credit is in the most negative territory post-WWII.

 

#2288bb;">

 

Though headline civilian unemployment from the
BLS’ household survey is ticking down from the ominous 10% level, this is
largely a result of the birth/death model adjustmentand the removal of
so-called discouraged workers from the counted pool. When viewed from the
larger perspective of the civilian employment to population ratio, the job
losses are staggering and unprecedented in the modern era. When the economy
eventually does show improvement, these discouraged workers will reenter the
job market and keep the headline unemployment rate persistently high.

 

#2288bb;">

 

Finally, creation of money supply, as expressed
by non-seasonally adjusted year-over-year M2, continues to reflect slow money
growth, notwithstanding the trillion or so in excess bank reserves sitting at
the Fed earning interest at 0.25%. The very fact that banks are content to earn
interest at this absurdly low rate indicates risk aversion and little fear of
inflation.

 

#2288bb;">

 

North continues:

What does an inverted yield curve indicate? This: the expected
end of a period of high monetary inflation by the central bank, which had
lowered short-term interest rates because of a greater supply of newly created
funds to borrow.

The obvious failure of the central banks to
reflate the economy has now renewed fears that monetary
inflation will not return for some time.

This monetary inflation has misallocated
capital: business expansion that was not justified by the actual supply of
loanable capital (savings), but which businessmen thought was justified because
of the artificially low rate of interest (central bank money). Now the truth
becomes apparent in the debt markets. Businesses will have to cut back
on their expansion because of rising short-term rates: a liquidity shortage. 
They
will begin to sustain losses. The yield curve therefore inverts in advance.

On the demand side, borrowers now become so desperate for a loan
that they are willing to pay more for a 90-day loan than a 30-year, locked
in-loan.

Aside from government darlings, businesses and
critically, small businesses, have largely stopped expanding and are in
defensive retrenchment. The problem is a reduction in both the supply and demand for new loans. There is definitely a
liquidity shortage, but it is being expressed unconventionally as central bank
quantitative easing and government stimulus are directed into non-productive
parts of the economy. It is these zombie behemoths in the financial and
transportation sectors that are most desperate for funds, yet they are not
penalized for it. Instead, they are encouraged to feed at the government trough
even as their smaller (and more productive) competitors are edged out through
oppressive regulation and inability to access loans at a similar rate. This
will continue to be a drag on overall growth, and without small business
growth, the threat of recession relapse is greatly heightened.

On the supply side, lenders become so fearful about the short-term
state of the economy -- a recession, which lowers interest rates as the economy
sinks -- that they are willing to forego the inflation premium that they
normally demand from borrowers. They lock in today's long-term rates by
buying bonds, which in turn lowers the rate even further.

Though long term US Treasurys are benefitting
from safe haven flight-to-quality status, short term Treasurys are similarly
benefitting to a greater degree, thus widening the spread between the two. As
stated above, banks are content to park over a trillion dollars in excess
reserves at the Fed earning interest at 0.25%. A combination of a (currently
low but slowly rising) fear of eventual US default, extreme desire for short
term safety in T-Bills, and low fear of inflation is keeping the spread wide.
Also troubling is the recent disconnect between short term Treasury yields and
the borrowing rates actually available to businesses with excellent credit.

 



North concludes:

An inverted yield curve is therefore produced
by fear: business borrowers' fears of not being able to finish their on-line
capital construction projects and lenders' fears of a recession, with its
falling interest rates and a falling stock market.

Indeed, these are the fears being expressed,
but in different manners that are not immediately obvious. Small productive
businesses are throwing in the towel as their larger competitors build Potemkin
villages.

 

A further problem is that nearly all yield
curve studies look back no further than the mid-1950’s, the inception of Fed
data on US Treasury rates. Inasmuch as every recession since then (save the
last) has been manufacturing based as opposed to credit based and has occurred
in an overall inflationary backdrop, there lacks a crucial window into prior
deflationary times concurrent with extreme government meddling—in particular,
the Great Depression.

 

Many economists from the Austrian school
follow M2 money supply as a harbinger of economic growth or contraction, as it
tracks the creation and destruction of money through economic activity at the
margins. As noted previously on EPJ, Rick Davis and others
at the Consumer Metric Institute have created a novel indicator that tracks, in
real time, consumer demand for capital goods. Accordingly, it should and does
reflect similar activity, though with enhanced granularity. Indeed, it anticipates
US GDP by an average of 17 weeks. A future post will explore this aspect of
their data and possible uses for market timing. For now, Davis tells
a different story
 than the governments that collude to forge a
statistical recovery:

Our 'Daily Growth Index' represents the
average 'growth' value of our 'Weighted Composite Index' over a trailing 91-day
'quarter', and it is intended to be a daily proxy for the 'demand' side of the
economy's GDP. Over the last 60 days that index has been slowly dropping, and
it has now surpassed a 2% year-over-year rate of contraction.


#2288bb;">

The downturn over the past week has emphasized
the lack of a clearly formed bottom in this most recent episode of consumer
'demand' contraction. Compared with similar contraction events of 2006 and
2008, the current 2010 contraction is still tracking the mildest course, but
unlike the other two it has now progressed over 140 days without an
identifiable bottom.

 

#2288bb;">

As we have mentioned before, this pattern is unique and unlike
the 'V' shaped recovery (or even the 'W' shaped double-dip) that many had
expected. From our perspective the unique pattern is more interesting than the
simple fact of an ongoing contraction event. At best the pattern suggests an
extended but mild slowdown in the recovery process. But at worse the
pattern may be the early signs of a structural change in the economy.

While confounding the average GE cheerleader,
this new normal of increasing destructive intervention is intuitively
understood by the consumer, who responds to this reality by pocketing the debit
card. So what can we expect in the ensuing quarters?

 

#2288bb;">

 

Davis aptly describes what has happened so
far:

[I]t has instead, unfolded so far as a mild but persistent kind
of
contraction, more like a 'walking pneumonia' that keeps things miserable for an
extended period of time.

Until governments stop
punishing innovation, stop rewarding incompetence, stop distorting economic
signals with arbitrary econometric targeting, stop coddling failures--we will
continue to walk with this pneumonia indefinitely. The solution, as always, is nothing.
Stop intervening and let the chips fall where they may. Markets will correct
things faster
than you might think.


 


 

And here is a useful primer from Fidelity on the various shapes of the yield curve and what they indicate:

Normal and Not Normal

Ordinarily, short-term bonds carry lower yields to reflect the fact that an investor's money is under less risk. The longer you tie up your cash, the theory goes, the more you should be rewarded for the risk you are taking. (After all, who knows what's going to happen over three decades that may affect the value of a 30-year bond.) A normal yield curve, therefore, slopes gently upward as maturities lengthen and yields rise. From time to time, however, the curve twists itself into a few recognizable shapes, each of which signals a crucial, but different, turning point in the economy. When those shapes appear, it's often time to alter your assumptions about economic growth.

To help you learn to predict economic activity by using the yield curve, we've isolated four of these shapes -- normal, steep, inverted and flat (or humped) -- so that we can demonstrate what each shape says about economic growth and stock market performance. Simply scroll down to one of the curve illustrations on the left and click on it to learn about the significance of that particular shape. You can also find similar patterns within the past 18 years by running our "yield-curve movie" and -- by clicking the appropriate box -- you can compare any shape within that time period to both today's curve and the average curve.

Normal Curve
Date: December 1984

When bond investors expect the economy to hum along at normal rates of growth without significant changes in inflation rates or available capital, the yield curve slopes gently upward. In the absence of economic disruptions, investors who risk their money for longer periods expect to get a bigger reward -- in the form of higher interest -- than those who risk their money for shorter time periods. Thus, as maturities lengthen, interest rates get progressively higher and the curve goes up.

December, 1984, marked the middle of the longest postwar expansion. As the GDP chart above shows, growth rates were in a steady quarterly range of 2% to 5%. The Russell 3000 (the broadest market index), meanwhile, posted strong gains for the next two years. This kind of curve is most closely associated with the middle, salad days of an economic and stock market expansion. When the curve is normal, economists and traders rest much easier.

Steep Curve
Date: April 1992

Typically the yield on 30-year Treasury bonds is three percentage points above the yield on three-month Treasury bills. When it gets wider than that -- and the slope of the yield curve increases sharply -- long-term bond holders are sending a message that they think the economy will improve quickly in the future.

This shape is typical at the beginning of an economic expansion, just after the end of a recession. At that point, economic stagnation will have depressed short-term interest rates, but once the demand for capital (and the fear of inflation) is reestablished by growing economic activity, rates begin to rise.

Long-term investors fear being locked into low rates, so they demand greater compensation much more quickly than short-term lenders who face less risk. Short-termers can trade out of their T-bills in a matter of months, giving them the flexibility to buy higher-yielding securities should the opportunity arise.

In April, 1992, the spread between short- and long-term rates was five percentage points, indicating that bond investors were anticipating a strong economy in the future and had bid up long-term rates. They were right. As the GDP chart above shows, the economy was expanding at 3% a year by 1993. By October 1994, short-term interest rates (which slumped to 20-year lows right after the 1991 recession) had jumped two percentage points, flattening the curve into a more normal shape.

Equity investors who saw the steep curve in April 1992 and bet on expansion were richly rewarded. The broad Russell 3000 index (right) gained 20% over the next two years.

Inverted Curve
Date: August 1981

At first glance an inverted yield curve seems like a paradox. Why would long-term investors settle for lower yields while short-term investors take so much less risk?

The answer is that long-term investors will settle for lower yields now if they think rates -- and the economy -- are going even lower in the future. They're betting that this is their last chance to lock in rates before the bottom falls out.

Our example comes from August 1981. Earlier that year, Federal Reserve Chairman Paul Volker had begun to lower the federal funds rate to forestall a slowing economy. Recession fears convinced bond traders that this was their last chance to lock in 10% yields for the next few years.

As is usually the case, the collective market instinct was right. Check out the GDP chart above; it aptly demonstrates just how bad things got. Interest rates fell dramatically for the next five years as the economy tanked. Thirty year bond yields went from 14% to 7% while short-term rates, starting much higher at 15% fell to 5% or 6%. As for equities, the next year was brutal (see chart below). Long-term investors who bought at 10% definitely had the last laugh.

Inverted yield curves are rare. Never ignore them. They are always followed by economic slowdown -- or outright recession -- as well as lower interest rates across the board.

Flat or Humped Curve
Date: April 1989

To become inverted, the yield curve must pass through a period where long-term yields are the same as short-term rates. When that happens the shape will appear to be flat or, more commonly, a little raised in the middle.

Unfortunately, not all flat or humped curves turn into fully inverted curves. Otherwise we'd all get rich plunking our savings down on 30-year bonds the second we saw their yields start falling toward short-term levels.

On the other hand, you shouldn't discount a flat or humped curve just because it doesn't guarantee a coming recession. The odds are still pretty good that economic slowdown and lower interest rates will follow a period of flattening yields.

That's what happened in 1989. Thirty-year bond yields were less than three-year yields for about five months. The curve then straightened out and began to look more normal at the beginning of 1990. False alarm? Not at all. A glance at the GDP chart above shows that the economy sagged in June and fell into recession in 1991.

As this chart of the Russell 3000 shows, the stock market also took a dive in mid-'89 and plummeted in early 1991. Short- and medium-term rates were four percentage points lower by the end of 1992.

   

 


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Tue, 01/04/2011 - 16:56 | Link to Comment Salinger
Salinger's picture

CNBS loves the traffic to their site nice of ZH to help them out

Tue, 01/04/2011 - 16:58 | Link to Comment Guinny_Ire
Guinny_Ire's picture

pictures? we don't need no stinking pictures!

 

8 images under the video aren't coming down

Tue, 01/04/2011 - 17:04 | Link to Comment mynhair
mynhair's picture

Where the hell did those charts come from?  They weren't in the 'story'!

What part of 'buy the fugging dip' don't you understand?

Refer:  the Wanker.

Tue, 01/04/2011 - 17:14 | Link to Comment tickhound
tickhound's picture

The market dips?

Tue, 01/04/2011 - 17:20 | Link to Comment mynhair
mynhair's picture

market dips = we who trade, may God have mercy on our souls

Tue, 01/04/2011 - 17:52 | Link to Comment tickhound
tickhound's picture

Lmao! Market dips = a phenomenon once seen in ancient markets

Tue, 01/04/2011 - 17:12 | Link to Comment RobotTrader
RobotTrader's picture

Amazing recovery in the broads.

Perhaps the broad market is celebrating the imminent collapse in commodity prices?

i noticed that the banks were strong all day long.

No short lines laid out yet, until I see a definitive break of the banking or semiconductor sectors. I was close to tagging some shorts on the XRT or IWM, but on a closing basis, they didn't violate any support levels.

Tue, 01/04/2011 - 17:14 | Link to Comment goldmiddelfinger
goldmiddelfinger's picture

"Perhaps the broad market is celebrating the imminent collapse in commodity prices?"

Hey! That's not inflationary!

Tue, 01/04/2011 - 17:14 | Link to Comment mynhair
mynhair's picture

U gonna post more broads?  Just askin'.

Maybe some shortie pics?  Please?

Tue, 01/04/2011 - 17:31 | Link to Comment VegasBD
VegasBD's picture

Agreed. Lets see some hot midgets.

Tue, 01/04/2011 - 17:24 | Link to Comment tickhound
tickhound's picture

Your now repeated, borderline historic, anticipation of an "imminent commodity collapse" is in direct contradiction to the word "imminent"

Tue, 01/04/2011 - 17:12 | Link to Comment goldmiddelfinger
goldmiddelfinger's picture

You just watch CFNBC for the laughs?

Tue, 01/04/2011 - 17:18 | Link to Comment mynhair
mynhair's picture

What happened to CNBS?  Dang, I hate my wireless carrier.  Oh, that's right, he videoed and is no more.

Tue, 01/04/2011 - 17:35 | Link to Comment bob_dabolina
bob_dabolina's picture

This may sound ignorant but I'm starting to believe that higher rates won't do much to housing.

Banks aren't handing out mortgages to shitty credit risks anymore. It takes someone with good credit and responsibility to get approved for a mortgage today. I don't think a 5% mortgage vs. a 6% mortgage rate is going to deter someone who can actually afford the house and is willing to throw down some cash on a 10% (at least) down payment.

I don't think we are living in a day where an extra $500 on a mortgage payment is going to be the straw that makes someone walk away from purchasing a home. I don't even think its enough to deter consumer spending because the only people buying IPADS are i. people who can afford their mortgages, or ii. people who don't care to pay their mortgages.

Maybe it has something to do with the loans getting ready to reset/recast? I just don't know what the fuck is going on anymore. 

 

Tue, 01/04/2011 - 17:38 | Link to Comment centerline
centerline's picture

The relationship is basically that rising interest rates causes a higher mortgage payment which means you can afford less house for the same payment.  This is driven by typical front-end and back-end ratios to income that are supposed to be the "norm" for prudent lending along with good credit, decent % down, etc.  Thus, rise in the interest rates = housing prices drop.

Tue, 01/04/2011 - 17:53 | Link to Comment bob_dabolina
bob_dabolina's picture

Right...

What I'm saying is if I want a $100,000 home and put let's say 34% down on a 30 year I'll be paying $354 a month @5% interest rate. Lets move that rate to 6% my monthly payment goes to $395 per month.

Thats not a big deal especially if credit worthy and qualify to begin with. I mean...is that difference of $41 per month enough to change my mind or even influence me? Is that really going to stimulate my market enough to make any meaningful difference especially when commodity prices are moving the way they are?

I think they are doing the wrong thing...like I said unless it is for all the loans that are supposed to reset/recast this year.

Wed, 01/05/2011 - 10:59 | Link to Comment ElvisDog
ElvisDog's picture

Your example is silly. Someone in the market for a $100K will most likely not have saved up $34K for a downpayment. And how many $100K homes are out there anyway in a place that you would want to live? Re-do your calculations with a more realistic example - someone buying a $300K house with 3% down.

Tue, 01/04/2011 - 17:57 | Link to Comment Commander Cody
Commander Cody's picture

Does anybody?

Tue, 01/04/2011 - 18:37 | Link to Comment XPolemic
XPolemic's picture

Maybe it has something to do with the loans getting ready to reset/recast?

Correct. Option-As, ARMs, Alt-As: millions of them reset in 2010 (at surprisingly low interest rates), millions of them reset this year, next year and the year after that.

The current shadow inventory is ~6.5 million homes (mortgagees in default), if rates rise over the next 3 years, then there will be at least double that number, and perhaps tripple, as many of those notes were written at teaser rates of 1-2%, resetting to the floating rate in 5 years.

The US residential mortgage market is unusual (on a worldwide basis) in that there is a lot of fixed rate notes written. Elsewhere in the world, the majority of notes are floating rate, and the fixed rate notes are usually short (5 years) and price in IR term volatility into the rate.

What should be noted though is that commercial RE notes in the US are often floating rate notes, and if rates rise there will be carnage in the CRE market. (Actually, there is already carnage in the CRE market, but that would turn into a permanent rout if interest rates rise.)

 

Wed, 01/05/2011 - 10:57 | Link to Comment ElvisDog
ElvisDog's picture

I don't think we are living in a day where an extra $500 on a mortgage payment is going to be the straw that makes someone walk away from purchasing a home

Oh, I disagree. I think the unwashed masses that make up 80% of the population don't have an extra $50 at the end of the month let alone $500.

Tue, 01/04/2011 - 17:41 | Link to Comment rlouis
rlouis's picture

"Until governments stop punishing innovation, stop rewarding incompetence, stop distorting economic signals with arbitrary econometric targeting, stop coddling failures--we will continue to walk with this pneumonia indefinitely. The solution, as always, is nothing. Stop intervening and let the chips fall where they may. Markets will correct things faster than you might think."

Japan is still suffering from zombie banks after 20 years.  gawd am I sick of the sh*!  

Tue, 01/04/2011 - 18:15 | Link to Comment virgilcaine
virgilcaine's picture

4.50 % on the long Bond looks pretty good in this high risk envronment. Even If Bernank raised rates that Long Bond is going to just sit there or move lower.. collect 4.5% in a zirp environment.

When the Euro goes byebye (and it will) more $$ into USD and USB. Then when USD and USB crashes back into Pm's..easy stuff.

vc

Tue, 01/04/2011 - 18:13 | Link to Comment crzyhun
crzyhun's picture

"...to Bernstein's childish argument of "where is the stagflation" maybe he should take a look at...."

I suggest Mr B read Barron's, Abelson's run down from the King Report about how things have gone on the inflation front. VERRY BADLY!! It was in last weeks issue. Read it and ask "Where the F is the CPI, PCE on this?" Govvie man-ip-pu-la-tion! Some people really do live in ivory towers or a shack by the river!

 

Tue, 01/04/2011 - 18:48 | Link to Comment cocoablini
cocoablini's picture

The yield curve inverted in July 2007. Thats when the depression started. Then the markets couldn't hold on after 1 year. Even I know that.

Santelli needs to shut up on occasion and listen. The yield curve inverted 1 year before the crash and anyone who paid attention to it stayed dry.

Right now the system is complacent, so the curve is steep. Earlier in the summer it flattenedout and then Europe went tits up for 2 months in a currency crisis which the FED had to print a trillion for.

 

Tue, 01/04/2011 - 20:23 | Link to Comment Red Neck Repugnicant
Red Neck Repugnicant's picture

And there is Rick Santelli, once again, offering his daily dose of useless commentary that is only slightly more insightful than Steve Liesman, yet pathetically worthless and propaganda-driven nonetheless. Yes, there he is, in the pits of the CME where American's who need to eat and drive truly, truly get fucked.

May I refer you to the following video (erroneously titled) from the summer of 2008 where he defends the rocketing price of oil as not being driven by his speculative friends (only a little distortion), but rather by true supply/demand concerns - after all, why does the roll continue? Somehow he musters these claims while inventories were rising, consumption was declining and the world was just a few months from total economic implosion. If all your friends are speculators and traders, then reality is nothing but a bid.  

http://www.youtube.com/watch?v=6oGAX1g60HU&feature=related 

Shamelessly defending the greedy speculators that have driven the price of everything higher, he pathetically claims that the Roll (see GSCI) must meet reality on the last day of the month, and since the roll continues ever higher, then the market is presenting true price discovery. In other words, don't blame oil on my speculative friends.  

Pay particular attention to 2:21, when he - quite accurately, though he doesn't know it at the time - claims that if oil was part of a vast "evil conspiracy you would have a mammoth dive straight down." The roll would stop rolling, so to speak. 

The next day, oil began its "mammoth dive" driven by "evil conspiracy" to $30, an 80% collapse. How's that for "mammoth dive"?

That is the true Rick Santelli, reporting live from the Devil's Den, broadcasted on CNBC for your viewing pleasure and always shilling for his friends at the GSCI and his trading buddies who gather all the crumbs.  

Wed, 01/05/2011 - 11:05 | Link to Comment ElvisDog
ElvisDog's picture

I think you're a little hard on Santelli. You expect someone who works on the floor of the Chicago exchange to be Mother Teresa? He's there to make money. It's like expecting a Repo-man not to take possession of the single mom's car. At least Santelli is smart enough to know what is really going on and to give the viewers some insight into it.

Wed, 01/05/2011 - 12:21 | Link to Comment Red Neck Repugnicant
Red Neck Repugnicant's picture

Did you not read my post?

Giving viewers insight?  How did that "insight" on oil speculation pay out?

Tue, 01/04/2011 - 22:11 | Link to Comment fedspeak
fedspeak's picture

For those of you who do not understand what an inverted yield curve is, here is the explanation..

http://www.investopedia.com/terms/i/invertedyieldcurve.asp

Looking at the last 7 years in the Market Rick Santelli is once again spot on when he asks Bernstein..."When did it invert??"  Bernsteins answer of I do not know exactly when is because it never did in those 7 years...Toche' Rickster!!

 

http://stockcharts.com/freecharts/yieldcurve.html

Tue, 01/04/2011 - 22:31 | Link to Comment Red Neck Repugnicant
Red Neck Repugnicant's picture

You need to view this chart:

http://www.ny.frb.org/research/capital_markets/Prob_Rec.pdf

Then perhaps you might want to peruse through the following page, and brush up on your own perception of an inverted yield curve: 

http://www.ny.frb.org/research/capital_markets/ycfaq.html

Wed, 01/05/2011 - 01:36 | Link to Comment JW n FL
JW n FL's picture

Nice, its all there... if people would only read... some? more? at all?

Wed, 01/05/2011 - 00:11 | Link to Comment Stanley Lord
Stanley Lord's picture

"In sum, the fears of Obama's harshest critics are justified. The president of the United States is a socialist."
-- Stanley Kurtz, writing in Radical-In-Chief: Barack Obama and the Untold Story of American Socialism

Wed, 01/05/2011 - 01:01 | Link to Comment cocoablini
cocoablini's picture

Here is the yield curve inversion for 2007 with examples that show when the yield curve is food for growth.
The curve clearly flattens and then invest- badness.

This portends a business cycle recession. A depression is not a business cycle of supply and demand but a credit explosion followed by a deflation of money supply extended via credit.
So, now after the inversion, yields historically begin rising not for return but because of DEFAULT risk.
These are 2 different phenomenon.
If anyone is expecting the yield curve to portend a double dip, thats not going to happen because we are now in the next stage where people are not asking for higher yields to get returns versus other vehicles, but they are pricing in a high likelyhood of DEFAULT or zero return. Therefore, I ask for 10% because I think you suck for return of principle. Not return ON principle.
See 1929-1939

Wed, 01/05/2011 - 01:06 | Link to Comment cocoablini
cocoablini's picture

Sorry, link. This is what I got from a friemd that said to get the hell out in late 2007:
http://blog.afraidtotrade.com/inverted-yield-curve-observations/

Bob Hoye of institutional advisors also updated the inversion weekly and called this the greatest trainwreck in history.

He wasn' t wrong and neither was the yield curve

Wed, 01/05/2011 - 01:41 | Link to Comment JW n FL
JW n FL's picture

Nice!

Wed, 01/05/2011 - 01:06 | Link to Comment cocoablini
cocoablini's picture

Sorry, link. This is what I got from a friemd that said to get the hell out in late 2007:
http://blog.afraidtotrade.com/inverted-yield-curve-observations/

Bob Hoye of institutional advisors also updated the inversion weekly and called this the greatest trainwreck in history.

He wasn' t wrong and neither was the yield curve

Wed, 01/05/2011 - 01:22 | Link to Comment Mark Beck
Mark Beck's picture

After the holidays its back to the trenches. So we look towards the end of Q1, and in conversations, after a few drinks, there are the wild ideas of what may happen.

My favorite unsubstantiated supposition, so far, is what will happen to equities if there is political debt ceiling deadlock? Will the FED/PDs kill equities to send a message?

For example; DOW inflicted pain over a couple weeks of interspersed declines of 1.3%, 1.7% 2.1% and 1.5%, then flat. In other words, a clear signal to raise the ceiling or else. So I monitor the approaching ceiling to get my bearings on when this may play out. I know its a wild idea, but none in my group could rule out the tactic given the available liquidity to repair what ever reduction is needed to end deadlock.

----------

The statement from Goolsbee about default (which particular default?) based on not extending the debt ceiling was so incredible that everybody just laughed, and then I found out it was true. As hard as we try, none of us could identify what he was talking about. What default? in what time frame? to whom exactly? due to what particular shortfall? In April? What?

Does anybody know?

The full faith and credit part seems to point towards us not processing redemptions or paying interest. But there is a huge amount of slack before this would become critical and hurt spending after April. Perhaps up to three months, maybe more if Treasury become highly selective.

The real problem could be on dangling budget items that still need to be resolved. But, this would largely be for new outlays.

I still can't beleive Goolsbee actually made these statements.

Mark Beck

Wed, 01/05/2011 - 03:07 | Link to Comment g3h
g3h's picture

Berstein said "trade weighted dollar index has appreciated a lot".  That is a flat lie.  It fooled Santelli.

 

Here is the chart

 

http://research.stlouisfed.org/fred2/series/TWEXB

 

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