Thursday, Sept 5, 2024

yield curve, jobs, international governance, Swiss banks

“Most people spend more time and energy going around problems than in trying to solve them.” – Henry Ford ||

Hello everyone, I hope you’re all doing well! I woke up today with both computer AND phone acting strange, not finding connections, dropping thumbnails, showing new formats, and so on – no virus or malware that I can see, anyone else having this issue? Things work, but ugh, September, I mean really… (see music link below).

Since many of you are new here (welcome!!!!), I should introduce myself again: I’m Noelle, and I’ve been researching and writing about crypto since 2014. After a couple of decades in tradfi and then running an e-commerce business I founded, I was figuring out what to do next after selling my company when I stumbled across a how-bitcoin-works video on Khan Academy (remember them?). I got goosebumps. I’ll go into why another time (there’s a story there), but I couldn’t stop thinking about it, and since I learn by writing, I started a crypto blog (remember blogs?). In 2016, I figured I finally knew enough to try to get a job in the industry, and was hired by CoinDesk to launch their newsletters. After a couple of years doing that, I went on to set up their research team. I left in 2021 to set up research for Genesis Trading, and left there in September 2022 to focus on what you see before you – how crypto is impacting the macro landscape, and vice versa.  

I really, really want to be able to support myself by doing what I love, which is figuring out narratives and mechanisms – in other words, by researching and writing about what I think matters. If you know anyone who might find the bigger picture interesting, do please nudge them in the direction of subscribing. 😊

IN THIS NEWSLETTER:

• Yield curve rumbles

• What next?

• JOLTS give a jolt

• Swiss banks and crypto

• Putin in Mongolia

WHAT I’M WATCHING:

Yield curve rumbles

Well, well, it happened. The yield curve uninverted.

(chart via TradingView)

You might have heard about this happening briefly in early August, but here’s why that move wasn’t taken seriously, but this one is – it’s to do with the volatility. Back in August, rates were swinging wildly. Now, they seem more determined.

(chart via TradingView)

Why does the uninversion matter? For now, it’s mainly symbolic, but in markets, symbols can move prices because of their impact on expectations.

The term “yield curve” technically refers to the difference in yield between US treasuries of different maturities. The benchmark tends to be the gap between the 10-year and 2-year bonds, but some prefer to look at other differentials (eg. the 1m-3m, or the 5yr-30yr).

Historically, the inversion of the yield curve (when the difference between the yields of US 10-year and 2-year treasuries turns negative) signals a recession is around the corner.

Economists will also talk about bull steepenings and bear flattenings (here’s a good explanatory thread by @MacroAlf) – these terms refer to whether rates are moving up or down and at what relative speeds. And those frameworks do matter for the actual macroeconomic impact of the yield curve (are short-term yields increasing and thus choking off credit? are long-term yields dropping, implying lower growth expectations?), but for now, let’s focus on the signalling.

One important takeaway from our recent yield curve inversion was what it said about expectations. Typically, long-term bonds yield more than short-term bonds since savers should be paid more for term risk – longer-term risk is intuitively greater because the more time you have, the more things can go wrong. And higher risk deserves a higher return.

When short-term yields move above long-term yields, that suggests traders see more risk in the short term. That’s never a good sign.

This happened in July of 2022, which sent Chicken Little scurrying and got us all obsessing over manufacturing data and the number of multiple job holders, as if we expected the recession to show up right away. More than two years later, it still hasn’t, but the chart above shows that recessions tend to start when the yield curve uninverts.

So, in theory, here we go. The folks over at the National Bureau of Economic Research, who get to decide when recessions begin and end, are probably sharpening their pencils as I type.

Or maybe not.

For one, they only know the start of a recession when it is well in the rear view mirror, typically nine months to a year later, sometimes longer.

Also, this time is different: apart from the levels of US debt to GDP (now at over 120%), we have consensus acceptance that fiscal stimulus is driving the train, and that debt doesn’t matter anymore – have you heard either US presidential candidate talk about bringing it down?

But, the first rate cut (which impacts short-term yields) is getting closer, and economic data so far this week supports Fed action soon (more on this below).

What next?