Life as a perma-bear

Perma-bear: a not so rare breed of investors

Perma-bear is defined any investor who consistently acts in the expectation that the value of stocks and shares will fall (often dismissing more positive signs of market or economic conditions) => permanently bearish.

Relatively well-known in the fields of investing, such definition was found inside a wise newsletter written by a colleague and fellow professional investor from Barcelona, who I respect very much as one of the sharpest minds in the industry. The newsletter was related to Q1 2024 and thus not up to speed with the current situation, But such definition was continues to be very relevant now.

But why?

What's up with markets, recessions, bears these days?

‍

Inverted US curve...dis-inverting

In these hot days of summer, markets keep going higher but something apparently creepy is happening behind the scenes: the inverted US curve is dis-inverting after long time.

For who's not an expert investor:

• the US yield curve is a line chart that compares the yields of short-term vs long-term government (Treasury) bonds
• such yield curve has normally a positive slope: longer bond maturities pay better than shorter ones (because of normal growth prospects priced-in for the long term)
• such slope can invert sometimes: an inverted yield curve shows that long-term yields are lower than shorter ones; this normally happens ahead of a recession, as future growth prospects fall (and so long term yields)

This week such inversion seems to be...reverting and going back to normality. Can you see the trend in the yield differential, as highlighted by the red arrow below?

‍

‍

Ok we can see it. Next question: is it such a big deal?

Yes, normally it is. If a curve inversion has historically predicted a recession 12/24 months ahead, the moment the curve dis-inverts has normally be the time that a recession SHOWS UP.

Should we be concerned then?

We'll talk about it in a second. Meanwhile, be aware that the internet has been flooded by renewed concerns.

‍

‍

Such concerns are reasonable and connected to history. This indicator has been almost always right. It demands attention and needs to be carefully considered. But it should not be automatically BELIEVED.

Anyway, going back to permabears, you can imagine that such dis-inversion has made permabears come back to roar that we are doomed, that they were right a few months ago, that a recession is finally about to come.

Is it?

- - - - -

(Quick note for long time readers: you might remember than I was highlighting the risk of recession at the end of 2022 after hyperinflation and aggressive rate hikes, I do not want to hide. These indicators are often important and have a solid track record, so it is normal to believe and pay attention and report possible market risks. On the other side, what's new and different from permanent bears is that (1) we learn from experience, and so I will explain why a recession is now unlikely, and (2) in any case we now have SPECTRA - our intelligent system - investing wisely with complete independence from classic opinions as our investing style is about adapting to the market whatever happens) :D

- - - - -

‍

For what is worth, acknowledging that it's not possible to predict the future, my view is that there are no signs of recession coming soon. YES the dis-inversion of the yield curve is a big deal but MUST BE PUT into context.

Dis-inversion normally happens as markets discount a recession (given certain economic data) by expecting interest rate cuts. These expected cuts are expressed in markets as lower bond (in this case US Treasury) yields. If short-term yields go down because cuts are expected, the inversion of the curve disappears => recession!!!

But this time looks different.

Sharp rise in short-term rates (and so the inverted curve) has been consequence of hyperinflation and aggressive rate hikes (now digested by markets). But the economy has not been damaged by those hikes. Quite the opposite: we experienced and still have economic growth and supportive leading indicators (refer to our last weeks' article) confirming it for the near future.

That same inflation that has pushed rates much higher seems to be softer on a permanent basis - US example below (same trend for Europe) - pushing investors to believe that rate cuts will come.

Rate cuts will come not because of a recession, but because inflation seems to recede. Can you see the difference?

‍

‍

In other words, all remains in check.

If you are a bearish reader, it's probably worth showing you that:

• the popular 10-2yr curve differential is dis-inverting but the more credible 10yr - 3mts is NOT
• investors' sentiment in other pockets of the market does not show concerns (see cyclical vs defensive stocks and RSI on the S&P)
• volatility remains normal

‍

‍

Bonus chart:

‍

our adaptive investment strategy that has shown impressive performance vs its market of reference (like 3x fast) remains long equities as we type.

‍