August 18, 2019
Ah, yes, Deuces and Dimes, Twos and Tens: inextricably linked, like… …well, like what? Ham and Eggs? Bert and Ernie? Lennon and McCartney (my personal fave)? Simon and Garfunkel?
Well, maybe II and X don’t actually go together as well as any of these, but consider a couple of contexts where they act in divine combination. First they used to teach us in driving school (back when us old codgers were learning behind the wheel of the good old Model T) to keep our left hands on the 10 O’clock position on the steering wheel, with the right hand on the 2:
Apparently, this is no longer di reguer, but nobody ever informed me. So I still rock the 2/10 in my ride, and I count this as something of a pity. I like to practice safe driving for the most part, and I hate to think that I’ve put myself, my family and other roadsters at risk for the better part of 4.5 decades.
But here, as elsewhere, I will yield to the infallible judgment of the experts.
Also (and as is less widely recognized than suits my tastes), about 90% of watch images featured in adverts have the face situated in such a way that the hour hand is always set at 10, and the minute hand at 2. I offer, as Exhibit A, the following extract from the Cartier web page:
Discerning buyers of means should be made aware that the lovely number to the left is Ronde Louis model, and can be had at the positively sacrificial price of $13,600.
I’ve done some research into the 10:10 configuration thing, and apparently it’s a combination of maximizing the visibility of watch logos, along with some sort of feng shui vibe that suggests buyers are in a happier, more acquisition-oriented mood when they look at images with upward angles.
Of course, all of this is nothing but mere prelude to the main Deuces and Dimes event: Wednesday’s brief inversion of the 2s/10s spread: a construct under which, for a brief, shining instant, two-year government bonds were actually trading at a higher yield than their ten-year equivalents:
If you blinked, you probably missed it. But no one did. Blink that is. Everyone noticed the inversion, panicked, and sold off their equity stakes to beat the band. By the time the dust had settled on Wednesday’s close, the Gallant 500 and its comrades had shed a shameful and ignominious 3% from their hard won valuation terrain. I’m not gonna lie. All of this disappointed me greatly. I’m disappointed in the markets, in the investment community, pretty much in everyone except myself.
Because in all my days banging around these here markets (dating back to my participation in the buttonwood tree sessions about six generations ago) I’ve seldom seen such a breakdown in valor, decorum, mission execution and protocol. Our troops looked terrified out there, falling just short of the infamy exhibited by the Iranian Imperial Guard in surrendering to CNN cameramen during Gulf War 1.
I expected better, in particular given that we have gone over this, ad nauseum, in these very pages. Haven’t I been borderline obsessive about describing the astonishing force of the global bid for longer dated treasury instruments: one that shows absolutely no sign of abating anytime soon? Have we not gone over the fact that what happened at the short end of the curve (more explicitly controlled by central banks) was immaterial by comparison? Hadn’t the financial web-o-sphere been tracking this march towards a negative spread for days and days, to no ill consequence, until Wednesday?
Is a 2-year yield a few basis points higher than the 10-year equivalent a materially different economic paradigm than one in which there the reverse condition (spread the other way but at minimal levels) prevails: a paradigm that has persisted through the repeated piercing of all-time equity market highs, all year long?
In case anyone has any doubts, these are all rhetorical questions, posed on my part to reinforce the notion that the selloff was beyond silly. There are many reasons to fear this market, and I won’t go into them, but a blink-if-you-missed-it inversion of 2s/10s is decidedly not one of them.
OK; I’ll discontinue my bitch slapping now, mostly out of love. Because you know I love you. Historically, the inversion of the 2s/10s has indeed been a marginally effective indicator of a pending recession, but I’m here to tell you to rip up those history books. We may be headed into recession, and of course, over the longer term, such an outcome is virtually unavoidable. But the selloff on the negative flash of the Deuce/Dime spread means absolutely nothing at the moment.
Except this. Treasury yields are likely to continue to plunge at the long end of the curve for a significant spell into the future. Published reports indicate that Europe is teeing up something big on this score next month, and that’s before Quantitative Easing Queen Christine Lagarde takes over the helm of the ECB in October.
I also hasten to remind my minions (especially Phil) that everything in the markets for the next 5 quarters will take on an increasingly political tenor. And, from this perspective, the ironically-timed WSJ revelation that United States Mortgage Debt has now reached a level that tops even the pre-crash heyday offers further insight into the likely yield trajectory of debt instruments featuring extended maturities:
I would have bet a lot of money against this even a couple of years ago, but here we are nonetheless. No doubt that this cool $9.4 tril of residential borrowings is better collateralized, has issued from more stable financial institutions, to more credit- worthy borrowers, than was the case during the last go round. But to borrow yet again from the phrase made famous by Everett McKinley Dirksen: “$9.4 Trillion here, $9.4 Trillion there, and it starts to add up to a lot of money”.
Wherever else we may differ, we may perhaps all agree that any jump in interest rates here that might render refinancing expensive and inconvenient would be politically problematic.
And it wouldn’t just be 45 that had to deal with this during the election cycle. I pity any of our 435 members of Congress who, returning to their districts, arrived to find a plurality of their constituents under water on their mortgages and unable, without great difficulty, to refinance. The easiest way to insure against such unthinkable unpleasantness is to keep them longer-term interest rates down. Of course, this will cut into the microscopic profit margins that banks will secure -- with the (shorter term) rates at which they finance at levels equal to or higher than the benchmarks against which they lend (longer term). But honestly: who under the heavens gives a rat’s @ss about the banks?
So get ready for further negative 2s/10s – coming to a theater near you. The long bond bid is globally insatiable, whereas at shorter maturities, which indeed are are more explicitly controlled by Central Banks, bear in mind that: a) these institutions don’t typically do knee-jerk cuts (except in an emergency); and b) due to the differences in financial construction, it takes a much bigger price move on a relative basis to impact rates at shorter durations.
Yes, we are in for a redux of the Deuce/Dime yield configuration. But in the name of God, when the moment comes, don’t react with a fire sale of your stock portfolios. I don’t want you to find yourselves disappointing me yet again. Because I know you would hate to do so.
In the meantime, I’m going to pass off the midweek episode to factors such as these being the dog days of August, the attendant lack of liquidity, and of course to the algos, which, if they perform no other public service, are always a convenient target for blame when markets go sideways.
If anything, right now and any point of incremental selling caused by inversion, these tidings should be taken as a buying opportunity. Because there’s nowhere to put your money given current extended microscopic yield conditions.
And in closing, I want to remind you that Deuces over Dimes is not always a bad hand to hold. Blackjack players, for instance, love it, because they know what to do when the cards are dealt in that fashion. They tell the dealer to hit them. Every godforsaken time. Nobody in that position ever sticks.
If you doubt this, just examine the example set by the Leader of the Free World, who also happens to be the owner of numerous casinos across the globe. Nobody doubts his high roller bona fides, whatever other opinions they may hold of him.
But I would caution against over-emulation of his lead, because, as we witness every day, he has a tendency to ask for another card even when he’s carrying nothing but paint.
He can arguably afford to do so; we cannot. But we’re not holding paint right now; we’ve got a deuce and a dime.
So if you press the hit button, you’ll get no complaints from me.