Declines in the stock market tend to garner most of the media’s attention, but the collapse in U.S. and global interest rates likely deserves much, much more.
Rates are crashing around the world, and this does not bode well for the global economy.
Late Monday, after China allowed its currency to slip in value against the U.S. dollar, the U.S. Treasury Department named China a “currency manipulator,” escalating an already bitter trade war between Washington and Beijing.
One cannot rule out further tit-for-tat retaliation between the two countries, nor can we rule out a worldwide series of competitive currency devaluations designed to give each country that devalues a competitive export advantage.
The problem here is that a race to the bottom of foreign exchange values is just the type of policy, coupled with trade protectionism, that helped turn a deep recession in the late 1920s into The Great Depression of the 1930s.
While we’re not there yet, economic nationalism, trade protectionism, extreme indebtedness of developed nations, and a distinct lack of diplomatic professionalism may, once again, hurtle us toward an economic abyss.
In the U.S., the yield on the 10-year Treasury has buckled below 1.7%, the lowest level since before President Donald Trump was elected in 2016.
(As a side note, be careful what you wish for Mr. President. This is not good news!)
The U.S. yield curve (the relationship between short and longer-dated Treasury securities), is partially inverted … and a full inversion represents a bond market warning that has preceded every recession since 1967.
Even worse are the glaringly negative signals being sent by the global bond markets.
Given the precipitous plunge in rates over the last 48 hours, it is likely that over $15 trillion in sovereign debt carries negative interest rates … quite possibly even more.
In Germany, you’ll pay the government a half point to lend them money while in Switzerland, that “vig” has plummeted to a negative 90 basis points.
In the 5,000 years of recorded history of interest rates, Swiss rates are at a historic low.
Further, Gluskin Sheff economist David Rosenberg pointed out Monday on CNBC, that yield curves in the U.S., Europe and Japan are signaling trouble.
The message of those three bond markets is bodes quite ill for future growth.
U.S. stocks are only about 5% to 6% below their most recent highs. The small-cap Russell 2000 is almost 20% off its most recent high, another under-watched warning signal. But bonds are the market to watch.
Global bonds are cumulatively sending a message that suggests a clear and present danger of a global recession, irrespective of what bullish prognosticators might have to say about economies and equities.
Recall that in 2007, as stocks were making new highs, bond market interest rates were tumbling, the yield curve was inverting, and many economists were extolling the resilience of the U.S. economy when they should have been warning of recession.
This is no time to be glib about trade wars, nor how easy they might be to win, or how much tariffs can fill the Treasury’s coffers … they can’t.
The world, led by this president, needs quickly to come to its senses and end a senseless escalation in this war over trade.
While China needs to play by global rules, there are other ways, and other plays, that would, or could, get them back to the bargaining table.
Aligning our interests with those of our economic and NATO allies could be very effective in confronting China’s economic and emerging military aggression.
And while it may be too late for the U.S. to rejoin the Trans-Pacific Partnership, the U.S. needs to spend more time in the Far East to secure more favorable trade relations with China’s local rivals before it’s too late.
Already, Japan and South Korea have become more adversarial on the trade front as well, adding to global trade tensions.
The world is sliding back in time thanks to ill-conceived policies and strategies.
Global bond markets are pleading with us to stop the madness.
One hopes the world has the wisdom to listen.
A trader works as a screen shows Federal Reserve Chairman Jerome Powell’s news conference after the U.S. Federal Reserve interest rates announcement on the floor of the New York Stock Exchange (NYSE) in New York, U.S., July 31, 2019.
Brendan McDermid | Reuters