by Ivan Martchev

December 7, 2021

While it is normal for yield curves to flatten during a Federal Reserve monetary tightening, the present flattening is rather sharp, if not extreme, as the tightening has not even started. According to the Fed, “tapering is not tightening,” Chairman Jerome Powell went out of his way to label inflation “transitory,” and when he was faced with less transitory inflation in his Congressional testimony last week, he opted to retire the term. Also, the market had assumed that because of the Omicron variant, he would refrain from accelerated tapering. He flat out stated that accelerated tapering is on the table despite any virus threats.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Why, then, are long-term yields dropping so precipitously into a “likely accelerated” tapering schedule, while short-term Treasury yields are shooting higher? The 2-year Treasury yield is near its highs for 2021, while the 30-year long bond closed Friday at 1.69%, well below its summer lows and far below the spring high of 2.51%. Economics 101 teaches that long-term interest rates are mostly about inflation and economic growth prospects while short-term interest rates are more sensitive to Federal Reserve policy.

What happened to that formula? First, the QE that Ben Bernanke introduced distorted the role of long-term interest rates. Then, the even more aggressive QE that Powell engineered distorted them even more.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Long-term rates are clearly ignoring inflation now, or messaging a precipitous decline in 2022. Long-term Treasury yields may be worried also about the U.S. economy, as deficit spending is about to decelerate sharply and the Fed is expected to become more hawkish, hence the flattening yield curve.

Greenspan’s two infamous tightening cycles and yield curve inversions – where the fed funds rate and short-term Treasury yields were above the 10-year Treasury rate – preceded the 1990 and 2000 recessions. Also, Bernanke’s tightening and yield curve inversion preceded the 2007 recession.

Powell also helped the yield curve invert in the summer of 2019, but I cannot ascribe the 2020 recession to him, as that was a government-mandated shutdown due to the pandemic.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Be that as it may, if we take Powell at his word – that accelerated tapering is on the table – then the volatility in both stocks and bonds should rise. It has risen quite a bit already. The major volatility indexes for stocks are trading at their highs for 2021, while bond market volatility is even higher. If aggressive QE at $120 billion per month suppressed both stock and bond volatility and compressed credit spreads, then the accelerated reduction in the rate that those electronic dollars flow into the system should in theory increase credit spreads and push long-term rates higher, increasing both stock and bond market volatility.

Seasonally speaking, this is not the time to be bearish, and the stock market is what many traders refer to as “oversold,” so it can still deliver a Christmas rally, but that is contingent on two factors – Chairman Powell and the Omicron variant. Every COVID wave has had a diminishing economic impact on the U.S. and global economies, and I expect no greater threat from Omicron. That leaves Fed Chair Powell as the most important factor to consider when weighing how the stock market performs by the end of 2021.

Unburdened by the uncertainty of renomination, Powell could get very aggressive on inflation, tapering more rapidly, ignoring the fact that Wall Street was positioned for a December rally. I don’t know what he will do, but I do know he did great damage in December 2018. We’ll soon discover if he will do it again.

Bitcoin Trades like a High-Beta Asset

While there was high volatility in both stocks and bonds last week, the carnage in bitcoin was even greater. Bitcoin does not trade like an anti-dollar inflation beneficiary but more like those high-multiple earnings-less stocks that have had an extremely hard time in the second part of 2021.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Bitcoin trades more like a stock that should be a core holding in the Ark Innovation ETF.

I opined a couple of weeks ago here that bitcoin may be forming a monster double top. I said that a yellow flag would be a decline below the 200-day moving average, which as of Sunday stands at $46,343. (Bitcoin, unlike stocks and other financial instruments, trades 24/7 and this past Saturday it had a very bad day, declining below its 200-day moving average and then rebounding weakly.)

Bitcoin is exhibiting a similar topping pattern to the way it topped in the spring. That is not a guarantee that it will go to the summer lows, but it sure does not look good. I am not sure where bitcoin will be on Tuesday morning, when most of you will read this article, but suffice it to say that bitcoin is not acting well. Undercutting $40,000 would violate a major prior low, while a decline below the June lows of $28,500 would signify a completed double top that points to a decline to below $10,000.

Bitcoin is unravelling…

Every bitcoin owner I have talked to did not buy it to transact with it, but “because it is going up,” so they may sell it just “because it’s going down.” That’s how bubbles pop. I think bitcoin is in a bubble.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

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Also In This Issue

Global Mail by Ivan Martchev
Analyze This: Treasuries Rally into the Taper

Sector Spotlight by Jason Bodner
When Good Stocks Go Down, Buy Them

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About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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