Horseman Capital: "A Sharp Spike In Yields Preceded Every Market Crisis In The Last 20 Years"

Tyler Durden's picture

Earlier this week, when looking at the alarming tightening in financial conditions, we asked if "the market was wrong" and was getting far ahead of itself in extrapolating bening growth as a result of Trump's proposed policies instead of the risk of a "stagflation bond crash", something which has emerged as the biggest market whisper risk according to the latest Bank of America survey of fund managers.


Overnight, a similar concern was voiced by Horseman's Russel Clark who observed that 30 Year Treasury Yields have had a rapid rise since the election of Donald Trump, and then makes the following troubling observation: sharp yield spikes have preceded every major crisis in the past 20 years.

"the problem with sharply higher US bond yield is that this tightens financial conditions.  We have often seen rises in yield coincide with financial market crises.  A rise in yields preceded the 1987 market crash.  A rise in yield in 1994 preceded the Tequila crisis, when the Mexican peso devalued by half.  After both events, yields quickly fell to new lows. Yields rose in 1996/7 before the Asian Financial Crisis, and yields again rose in 1999 before the dot com crash.  After both  events, yields fell to new lows. More recently, bond yields rose in 2006 before the Global Financial Crisis, and again in 2010/1  before the Euro-crisis. There was also a rise in yields before the crash in oil prices in 2014.  In all cases yields fells to new low."

One way to see what Clark is referring to is the following:

He then points out that intriguingly, the rise in yields post the election of Donald Trump, has been associated with several financial moves that would usually be associated with lower yields. One has been the widening of spreads between Italian and German bonds.

The Trump victory has also seen an acceleration in Asian currency weakness, which historically been associated with weak equities and strong bonds. Much of the weakness has come from a very weak Renminbi, which is now weaker than where it was in 2008.

Clarks then notes that in his view, quantitative easing (‘QE’) and zero interest rate policies tend to artificially weaken the currency of the country undertaking QE, and incentivises capital and credit to flow to trade partners. This can create a credit bubble and an overvalued exchange rate. When the trade partner devalues, or the credit bubble bursts, this leads to a prolonged period of equities underperforming bonds. In Japan, this has held true since its bubble burst, and in Europe since the dot com bubble.

He then notes that the US with its QE policies, has performed much better than either Europe and Japan, but even here, its has still not confirmed that its equities can outperform bonds. However the weakness in bonds and the strength of equities in the US since the Trump victory has pushed it to the very extreme of this ratio.

His conclusion echoes what Ray Dalio warned last month when he likewise warned about the dangerous side effects of a sharp spike in yields:

While many financial commentators and investors have become very bullish since the election, the weakness in the Renminbi, and widening spreads in Europe lead me to think that weaker equities and stronger bonds look more likely.

With the S&P just shy of all time highs, and the USD pringint at fresh 13 year highs, so far the market is clearly oblivious to any such warnings.

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johnofRandI's picture

what if Trump really does get it?  Can tax cuts and low cost repatriation of offshore capital negate these rising rates and tightening credit conditions?

Time will tell

JRobby's picture

Oh No!!!!

This time it's different! I swear it is!

SomethingSomethingDarkSide's picture

Clobber The Speculators, Magical Priests!

ToSoft4Truth's picture

Trump must cut the gimmes during the next economic crisis.  And no bailouts. 



JRobby's picture

Goes without saying.

And it will be a great time to unseal all the bankster indictments.

Mtnrunnr's picture

Are you kidding me? He has billions in assets and most are probably speculative. If there is a downturn, not to mention a crash, he will lose billions. He WILL bail out himself and by extension every other player in the space.

ToSoft4Truth's picture

I often think the same thing.


All Trump would have to do is modify rural development loans to urban redevelopment loans. 


If this is the cae you'd want to be long commercial real estate in inner cities. 


1. Electric cars require population density.

2. Trump is in commercial real estate.

Deathrips's picture

Dont liberal neighbot told me that this is all due to fake media form the alt right!



abyssinian's picture

Yep! this time is way different... not sure what but different.... 

jamesmmu's picture

It won't, at least not immidiately. The offshore capital takes time, long time to go back to US, even corp tax cut is implement. income tax cut and infrasutre spending, the impact is immidiately, the yield is go up. Remember offshore capital tax at 0% or near that number I believe. It takes alot of factors before any major corp decide to move capital back to US. even they would do it, they wont move back all at once.


They really want to crash the market when Obama officially finish the term. Trump could be only a 4yrs president, unless he know how to deal with the Fed. Fed rate is much powerful than income tax rate, affect everything in the financial market. 

ejmoosa's picture

If corporate profits after taxes are rising faster than 10% year over year in 2020, Trump will be easily elected.  Corporate taxes are -6.30 % year over year as of right now.

That's why Obama's party is having to leave the WHite House.

ejmoosa's picture

Letting people keep their own money is the right thing to do regardless of the economic impact.

A. Boaty's picture

Norman, coordinate!

brodix's picture

Interesting if this should occur between the election and inauguration, similar to 2008. Then when they fix it up by making the banks whole again, the blame is distributed.

 Though if Hillary comes in like McCain did, they will just prop her up in the chair.

Ecclesia Militans's picture

Tequila Crisis?  Like when you sub Cuervo for Patron by putting it in an empty Patron bottle once everyone gets trashed enough not to notice, then get caught?

Bill of Rights's picture
Horseman Capital: "A Sharp Spike In Yields Preceded Every Market Crisis In The Last 20 Years"


Under Obama, there fixed it for you....

Felix da Kat's picture

The 35 year-old bull run in bonds isn't quite over.

buzzsaw99's picture

okay class i want you all to REREAD the indented paragraph which ends with: In all cases yields fell to new lows (sic).

mkkby's picture

Why I bought bonds last week, and will buy more on spikes.

oddjob's picture

When a person says I bought bonds, I immediately know they have a lot more money than me.

assistedliving's picture

btw, same can be said for the Dow.

jamesmmu's picture

IF elites plan to crash the market and blame it to Trump, not only he wont get re-elected, republican could lost both senate and house. Big setup.

ToSoft4Truth's picture

Or Trump knows the Elites will crash the market so Trump allows the market to Super-Crash then tells the surfs who the Elite are.  Offering clemency of course. ;)

kidbroge's picture

If Bush neocons are re-inserted it will be more like Make America Fail Again... He said he wouldn't and I hope he doesn't, otherwise it was just another fucking con job, like Change We Can Believe In, remember that line of happy horsehit. We'll soon find out. 

Davidduke2000's picture

Stop hyperventilating , the depression started in 2008 and conrinuing , it is no surprise to the people who elected Trump.

I will make you a prediction: Trump will get soros arrested and sent to jail , he will triple the taxes on speculators.

Jim Shoesesta's picture

There appear in that chart to be just as many rises in yeilds that lead to nothing. Another moron data fitter. 

Cluster_Frak's picture

There are many yield spikes on that chart that did NOT produce a broad market correction.

buzzsaw99's picture

yes but in every single case new all time low yields followed.

Elco the Constitutionalist's picture
Elco the Constitutionalist (not verified) Nov 17, 2016 3:00 PM

The first line graph shows that the spike is less than 50% predictive.

TheVoicesInYourHead's picture

The Swiss National Bank is the lonely marginal buyer of USA equities, prolonging the charade.

How long the SNB can keep the printing press going is anyones guess.

cheech_wizard's picture

Man, I completely missed out on that Tequila crisis. Were the shelves empty at the liquor stores?

Standard Disclaimer: Or did I miss a release of the Director's cut of "Urban Cowboy"?

Davidduke2000's picture

Sharp spike is caused by investors who want return on their money or they will refuse to buy bonds. 

ne14truth's picture

Bonds don't pay crap...why would anyone buy them? Lazy I guess, cannot watch your own money so you just dump it in bonds? I am well over %200 up in the market....but hey, I watch my money. When the bonds dump, it is over.

conraddobler's picture

A more telling statement would be that the FED has presided over every major market crisis since it's inception in order to further it's goals.

The precursors of the FED also did the exact same thing.

In every case the agenda was to either show who was boss or make itself more boss.

You have to actually stand up to this kind of shit at some point or they will flush humanity down the toilet.

Hohum's picture

If you gonna ride, don't ride the white horse.

wisehiney's picture

Get the crash out of the way, then rebuild over four years.

Trump coasts to second term.

ShrNfr's picture

In other news, the sun came up the day that the crash happened. Beware of all days when the sun rises.

TheABaum's picture

This is new meme; ignore the structural deficiencies and statistical redefinitions of the Obama debt spree; claim everything is wonderful and then when the party is over, blame Trump. Trump is to be blamed for hangover we'll get when we stop drinking with Obama.

mosfet's picture

Shit or get off the pot you bitch Yellen.  Quit talking in circles and start acting like you're an actual head of the Fed rather than some wishly washy cunt who's clueless about what to do over the next 5 minutes.  My money's still on them not hiking but I know 'when' they don't raise, it'll be the same pretending & talking in circles crap for every meeting from here to eternity.

indygo55's picture

Fisher is really at the helm. Yellen is a front. 

Kat Daddy's picture

Would be great to have on overlay of S & P on 30 year Treasury chart.

NDXTrader's picture

This rally is nothing more than a suckers play. You can see by the dramatic rise in volume, and higher volume on down days that this is big boys selling to retail. They stick saved it on election night so that they could all exit the boat safely. Look for a big drop before Dec 14 to scare the Fed (although I don't think it will stop them this time)

mosfet's picture

Normally I'd say you're spot on but I don't see any way the (pretend) rate hike won't be called off well before Dec FOMC.  At the current rate of Dollar index & yield gains, 30 yr paper will be 5%, mortages will be 6%, USDCNY 7.2 and EURUSD 1.0 within 2 to 3 weeks.  Yellen's gonna cave early and (because she's spineless) she'll send out a Fed governer or president to do the dirty work for her.  I'm guessing she'll wait for a 300+ pt sell off in the DOW as the indicator that things are about to go south fast before reacting.

Seeing how she behaves in public, I've worked around these types of people in real life.  They're ideological dreamers who view themselves as superior for the sole fact that they have (unrealistic) lofty goals.  When confronted with making any hard decisions, they'll stall, change the topic, employ double-speak, refuse and even run away if all else fails.  When push comes to shove they don't ever bother to have a real plan and resort to pure reactive mode.  They love taking the helm when there's no pressure & credit to be had but will always have their subordinates do the dirty work when things go to shit due to their incompetence.

Iconoclast421's picture

This is reaching. Bond yields spiking in 2004 was a precursor to what, exactly?