The U.S. Economy: Bad Moon Rising

Tyler Durden's picture

Authored by Danielle DiMartino Booth,

April 1969 saw the release of what would soon become Credence Clearwater Revival’s second gold single. Bad Moon Rising’s popularity quickly secured it a permanent spot in rock history. But it was also headed somewhere else, if not everywhere else, to places the young rockers never saw coming. In hindsight, it can only be said that while their music was great, their lawyer was lousy.

Why is that? Because, for years now, writers for both the big and small screen and all manner of productions have found the song’s addictive rhythm and lyrics impossible to resist and as a bonus, easy picking. Listen and you’ll hear it in An American Werewolf in London, My Fellow Americans, Twilight Zone: The Movie, Blade, Sweet Home Alabama, My Girl, Man of the House, Mr. Woodcock and (in the personal favorite department), The Big Chill. As for television, you’ll recognize the tune in Supernatural, Cold Case, Northern Exposure, The Following, The Walking Dead, Teen Wolf, and not to be relegated to the back of the line, Alvin and the Chipmunks, who belt out their own immensely irritating rendition.

There’s no doubt about it. John Fogerty hit a home run when he wrote Bad Moon Rising. As to why he wrote it and its meaning, he’s been quoted as calling it a description of, “the apocalypse that was going to be visited upon us.” And what of all those bad scenes visited upon Fogerty’s lyrics?

“We had no power in our contracts to veto where our music went. It was everywhere,” lamented Fogerty on the ubiquity of the song in a 2014 interview. “For every good movie you’ve heard it in – for example An American Werewolf in London, which was a pretty cool movie – there were at least 10 more that were awful.” To this day, it’s hard to predict just where that bad moon might next be rising.

The same cannot be said for investors, who happen to have a perfect predictor with which to position themselves for their rendering of a bad moon rising, as in an imminent recession. It’s called the yield curve and when it inverts, it’s time to start pondering the ramifications of the apocalypse that’s about to be visited upon the economy. Is ‘perfect’ too perfect a word?

In one word, no. In a different 2014 setting, back when he worked for LPL Financial, Schwab’s Jeffrey Kleintop noted that the yield curve’s track record was seven-for-seven, as in perfect when it came to predicting recession. Business Insider caught his remarks.

In the event you’re unfamiliar with the contorted concept, visualize a curve on a graph. Plotted are the bond yields (assume U.S. Treasurys in this case) against the length of time that remains between now and their maturity date. In a normal world, the shorter the maturity, the lower the yield. Investors should naturally expect to be paid less and less as the period of time shrinks over which they’ve assumed the risk of a bond price declining. With me? Hold bond for longer, chance price decline occurs higher. Got it.

An inverted yield curve, however, signals an economy is about to be turned upside down. Longer term yields tend to decline when the market foresees weak economic activity on the horizon. The weaker the outlook, the flatter the curve. Actual inversion is thus a process; it might begin to manifest in five-or-ten-year Treasurys having higher yields than the Long Bond, the 30-year. A full blown inversion doesn’t occur until the yields on the shortest-maturity, commonly quoted bonds, say the two-year, are higher than that of the longest maturity bonds.

To borrow from Kleintop’s succinct explanation: “The yield curve inversion usually takes place about 12 months before the start of the recession, but the lead time ranges from five to 16 months.”

As for the lead time leading up to the lead time, the U.S. Treasury curve began to flatten at the start of 2014. You may recall that in December 2013 the Fed announced it would begin to taper its purchases of securities, which at the time were $85 billion a month, and in doing so reduce the pace at which it was growing its balance sheet. Despite it being well past the time to start weaning the market, it didn’t take long for the worry to set in. Investors began to digest the prospects for the U.S. economy without the Fed blowing up its balance sheet in an attempt to stimulate the growth that eludes to this day – and they didn’t like what they saw.

The second volley arrived last December when the Fed finally hiked rates for the first time, triggering a further flattening in the yield curve. But wait. Wasn’t it just one teensy quarter of one percentage point? Well, yes. But as far as the bond market was concerned, starting points and deltas mattered.

The latest kick to the curve started with New York Fed President Bill Dudley’s and Federal Reserve Board Vice Chairman Stanley Fischer’s complacency castigations. The crescendo arrived with Janet Yellen echoing her two top lieutenants in sounding a bit more hawkish than she would have otherwise. The camaraderie on full display captured in images of the threesome emerging from the Jackson Hole meeting was the proverbial icing on the cake. It was sufficient to send the difference between the 10-year and two-year Treasury to 75 basis points, or hundredths of a percentage point, about where it is today.

In the event you’re still wondering what all the fuss is about, I’ll let Kleintop sum it up: “The peak in the stock market comes around the time of the yield curve inversion, ahead of the recession and accompanying downturn in corporate profits.”

But wait, you might be saying – we’re already in a full blown, protracted profits recession. Recall that Kleintop made his observations in 2014, long before the heat of the currency war really set in, triggering a race to the bottom of the unconventional monetary policy barrel. You just thought Quantitative Easing (QE) had long since ended. That’s true, but only as it pertains to the Fed.

In fact, you might not know it, but a two-year anniversary is upon us. Surely those in the Fed will raise a glass this October 29th to commemorate the end point of their ambitious exercise to expand the bank’s balance sheet. That is, unless they’re already contemplating Blowing Up the Balance Sheet, Part II.

(Don’t misunderstand. Those firmly in charge have always maintained that they would never dare allow the assets on the balance sheet to run off until rates were normalized and they pretty much knew that would never happen. In fact, the current campaign aims to move even those goalposts so the stated goal of normalization is that much more impossible to attain. What few appreciate is this is where the real action has been in recent years, the very source of animated discussions around that big conference room in the Eccles Building. Reinvestment, baby. That’s where it’s at. Pardon the lengthy digression.)

Getting back to the point of the yield curve, or what’s left of it, over the past two years, other central banks have more than made up for the Fed’s exit from the QE game. Aggregate purchases are nearing $200 billion per month creating a vacuum across other countries’ yield curves as the supply of eligible securities with positive yields dwindles.

According to the Financial Times’ math from earlier this month, “Three years ago the difference between two- and 10-year Treasurys, gilts (U.K.), Bunds (Germany), and Japanese government bonds was about 228 basis points (bps), 201 bps, 150 bps and 65 bps respectively. Despite a slight reversal, the same spread now stands at 87 bps, 61 bps, 55 bps and just 9 bps.”

The relative flatness of other major sovereign’s yield curves helps explain the rush into our Treasury market, all to secure some semblance of yield vis-à-vis the increasing number of countries whose sovereigns sport not just low, but increasingly negative yields. According to Bank of America Merrill Lynch data, at last count, we’re talking some $13 trillion, or roughly a third of the global fixed income debt market. (In case you missed it, that was a WOW moment.)

You may be wondering at this point — hopefully you are — why on earth the Fed would be trying to beat the band to hike rates when all they’ve got to work with is roughly 75 bps, give or take?? These days that question is raised just about every minute of every day, namely because so few can come up with a credible answer.

As for the incredible realm, one explanation is that the Fed is scared stiff it has nothing left in its toolbox to combat the next recession. Few major downturns have begun with the fed funds rate so perilously close to zero.

The ultimate Catch 22 is that the flatness of the yield curve makes any fantasy of a Fed rate hike all too real for a dead breed the world once knew as ‘bond market vigilantes.’ It’s altogether possible that one more hike would be all it takes to invert the yield curve. The rest, as history has never failed to repeat, would be just that – history. Should the Fed decide to ignore the warning flashing in the flattening yield curve, there could indeed be a bad moon on the rise over the U.S. economy.

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SidSays's picture

My favorite drinking song these days.

I prefer the original.

Boris Alatovkrap's picture

Hope you are got your thing together

Hope you are quite prepare to die!

Please, visit new Poll of Boris… "Who is ZHer?"

Delving Eye's picture

Looks like we're in for nazty weather,

One eye is taken for an eye.

monad's picture

Again. With decepticons in place. Just like last time.

Before I go.

The family is fundamental to all humans. The imposed State directive will never change this. The extended family is fundamental to all humans.The imposed State directive will never change this. The church is the extended family. Community aid with volunteers worked for 900 years.

Trump or his failure is the 1 yard overtime play in our end zone. This is it. The future of the renaissance depends on your clear, rational judgement in the face of the many well published lies of your Old World oppressors. This is not a 4rth turning.

Fate is not written. Its made.

espirit's picture

@ Boris

We love you in a manly kind of way...

but don't ask us to 'Twitter'.

Is kind of like, 'Copper Socks'.

bleu's picture
bleu (not verified) espirit Sep 2, 2016 9:23 PM

Too bad America is NEVER getting better.

JohnG's picture

There's a bathroom on the right.

espirit's picture

Yeah, voice recco in the 23rd. century will finally identify that.

Escrava Isaura's picture

Article: The ultimate Catch 22 is that the flatness of the yield curve


But, the real catch 22?


Usury —interest rates itself.


By Margrit Kennedy: If Joseph the father of Jesus would have invested one penny at his birth at 5% interest, and Jesus would have returned to the same bank in 1990 - at the time of the German unification - he would have been able to buy, with the money accrued in the meantime, 134 billion balls of gold of the weight of the earth, based on the official price of gold at this time.


This shows mathematically that the continual payment of interest and compound interest over a longer period of time is practically impossible. And explains why we have economic and social breakdowns.,d.cWc


SidSays's picture

It is not practically impossible, it is impossible.

"I have bought you this day; you and your land" - the original Joseph

espirit's picture

Yeah, me too but Forgarty was handy.

SidSays's picture still beat me to it.


espirit's picture

Yep, my mispelling but Sid replied before I could correct.

Dudes sharp.

Stuck on Zero's picture

I've been on six Southwest Air flights in the last two weeks and four were half full. If you know Southwest you know that that's really rare. Economy?

peddling-fiction's picture

You are peddling fiction...

Their engines are falling off mid-flight though.

Somethings got to give right?

Does that look like "engine failure" to you:

SidSays's picture

Deferred maintenance?

The first sign of financial stress.

SidSays's picture

"Hope ya got ur shit together"

I love that line.

monad's picture

200 million guns a'loaded. Satan cries.

Fair game.

espirit's picture

You got it Bro.

It's tough getting old.

monad's picture

Its easy being old. Nothing to lose.

I have it. Having it, I can by their actions see that nobody else has it. Not even the US.

I've had it for 15 years. 15 years ago dickhead Cheney and the neotards convinced me to keep it to myself.

I can save the world and I can let all you fools die.

Continue this path, you all die at your own hand. I'm not just watching this sick race extinction, I'll die with.

I can't stop you from being the stupid cunts you all are. But I don't have to help you.


Here2Go's picture
Here2Go (not verified) Sep 2, 2016 5:25 PM

How cute... Charts! On UST yields no less... & prognostications thereto!


It's like I just woke up & I was 30 years younger!

espirit's picture

Change I can believe in.


yogibear's picture

It would be satisfying to see the crowds of people rip down the central Bankster's buildings.

Ms No's picture

That would be amazing. I secretly fantasize about that while watching the WWZ Israeli wall scene periodically.  I figure most of these oligarch banker types are too ancient to run so...

Ms. Erable's picture

Which brings up an interesting hypotheical question: can a vampire (e.g., Soros) become a zombie? Or is it not possible for the undead to become differently undead?

Ms No's picture

This has yet to be determined which is why the meteor has become preferred.  We can't allow them off this planet.  It would be like when the Zenomorph and the Predator (predalian) combined. 

UnschooledAustrianEconomist's picture

It's not either or. He is already both, some kind of evil hybride.

SgtShaftoe's picture

It's not a bad moon.  The US economy is "dead right there".  It's toast:

Ms No's picture

On the bright side of things we just missed a very serious asteroid on the 28th.  They detected it late and it was just a quarter of the distance to the moon away.  It wasn't a planet killer but it would have rescued anybody in the immediate area.  They also had a large fireball and explosion over Bristol UK and one in Canada.  We are getting an unusual amount of asteroids and isn't being properly covered, so with any luck... we might be able to go the easy route and just skip Hillary, Soros and our financial problems altogether.

ZombieHuntclub's picture

We can ill afford another Klendathu. Would you like to know more? 

Ms No's picture

Who is the Fellatrix that keeps stalking and downvoting me?  SHOW YOURSELF!!!  Gay bar must be closed for the holiday again. 


espirit's picture

I used to keep track of the NEO's, but it became depressive.

Now, it's blind side hit or miss - but high ground is best or plan to barbecue & beer out.


Nobody gets out unscathed.

Ludicrise 3:17


Guaranteed Wall Street won't be gloating come October when Deutsche pulls a Lehman.

Bobportlandor's picture

Yemen just fired 2 scuds towards Mecca and Taif Air Base, Saudi Arabia

21°29'00"N 40°32'40"E


monad's picture

Somebody in Yemen who had 2 scuds to spare fired them at etc.

giggler321's picture

apparently it's hollow as well, the moon that is.