Macro Charts

Generational Event

The US is now facing the steepest fall in GDP.  In response to the crises, the Government and the Fed are engaging in massive fiscal spending and monetization of debt to make up for lost income because of the shelter-in-place policy and social distancing policy.  There has not been more uncertainty on how to position the portfolio since the Great Depression and WWII.

Investors should focus on diversification and uncorrelated assets because, at this point, anything could happen.

Generational Event

The US is now facing the steepest fall in GDP.  In response to the crises, the Government and the Fed are engaging in massive fiscal spending and monetization of debt to make up for lost income because of the shelter-in-place policy and social distancing policy.  There has not been more uncertainty on how to position the portfolio since the Great Depression and WWII.

Investors should focus on diversification and uncorrelated assets because, at this point, anything could happen.

Gross Domestic Product

 The US is now possibly facing the steepest fall in GDP.

US budget deficit exploding.

The Deficit-to-GDP could drop close to 20% in 2020.

Kicking the can down the road

The value of assets on the Fed’s balance sheet is one way to measure the monetization of assets.  This once unconventional monetary policy is the new norm. It’s hard to imagine that the Fed can ever reduce the balance sheet to any prior period. Investors should be concerned with how to position the portfolio when the Fed begins to reduce its purchases of assets.

Revealing co-movements in monetary policy

All central banks around the world are engaged in kicking the can down the road.

10-Year vs. 2-Year Yield Curve

The spread is the 10-Year Treasury Constant Maturity minus(-) 2-Year Treasury Constant Maturity.

It is a result of investors’ expectations for inflation in the future.

Usually approached 0 when a recession is imminent and then steepens to greater than 0 as the recession hits.

It looks like this has played out as predicted, although they have not called the recession yet.

Since the last recession, indicated under the shaded portion of the chart, this had been the most extended period without a recession.

Why a steepening of the yield curve after going to 0 or inverted?  When a crisis occurs, the Fed will respond with interest rate cuts lowering the front end of the curve to create a positive slope.  Over time, the 10-Year yield then begins to increase because investors believe inflation will pick up because of the fiscal and monetary stimulus.  

 

The Yield Curve vs. the Wilshire Total Market Cap Index

Notice the yield curve steepens into the recession, and the market continues its decent after it has retraced its initial drawdown.

10-Year Treasury Yield

Throughout the 60’s and the ’70s, if you bought bonds as an investment or diversification, you probably would have experienced drawdowns in your portfolio. An investor would have had a difficult time with a traditional stock/bond portfolio, with both asset classes losing value at the same time. After a difficult time in the ’70s, investors would have had a difficult time buying bonds near the end of the bear market.

 

But during the secular boom from 1984 to the present, bonds have achieved unbelievable returns have led everyone to believe that the 60/40 portfolio was ironclad diversification everyone needed.

 

Today bonds look expensive and risky. If the 10-year bond were to go back to 3.5%, a bond portfolio that matched that duration could lose around 22%. Investors have to think about how they are diversified. A return to secular stagflation could erode your purchasing power and your portfolio.