Month: December 2018

Five months after the “godfather of payday lending” was sentenced to a 14-year prison term and stripped of $64 million in assets after a jury found him guilty of effectively extorting and exploiting nearly 1.5 million low-income borrowers, and just days after Bloomberg published the final installment in a series of investigative reports describing how small-business cash advance lenders transformed New York Courts into a debt collection machine – and widely engaged in fraud and abuse, including inventing loan defaults out of thin air to seize exorbitant sums from their unsuspecting customers – the New York State Attorney General is launching a civil probe into abuses by pay day lenders targeting contractors, truck drivers and other small businesses in the state.

According to Bloomberg, Attorney General Barbara Underwood is investigating merchant cash-advance companies who engage in fraud or have abused the state court system. Underwood office kicked off their investigation last week by subpoenaeing one of the state’s largest cash-advance companies, Yellowstone Capital.

Underwood accused Yellowstone – which refused a Bloomberg request for comment – of defrauding and deceiving small business owners by using deceptive fine print that effectively robbed the company’s borrowers of their right to legal recourse.

“It’s reprehensible to defraud, deceive and harass small-business owners through predatory debt-collection practices and the abuse of our court system,” Underwood said in a statement to Bloomberg News that didn’t provide details. “If a company is engaging in fraudulent and deceptive conduct, we want to know.”

Underwood said her office has been monitoring the industry “for some time” but only decided to act after Bloomberg published its investigation. The civil probe is still in its early stages. Some of these lenders charge usurious interest rates as high as 400% annually – higher than the rates charged by Mafia loansharks. Companies get around restrictions on lenders by categorizing their “loans” as cash advances on future business receipts – a technicality that courts have largely protected.

These companies have been using a legal agreement called a “confession of judgment” to turn NY’s courts into a debt-collecting racket where companies are left with virtually no recourse against fraudulent claims.

Over the past few years, a group of these firms have turned New York courts into a debt-collection machine that’s draining the bank accounts of thousands of small businesses. The lenders require customers to sign an obscure legal document called a confession of judgment in which they forfeit their right to defend themselves in court. Armed with one, a lender can accuse borrowers of not paying and legally seize their assets before they know what’s happened.

Some states have outlawed these confessions, but New York recognizes them no matter where the borrower is located. Since 2012, cash-advance companies have obtained more than 25,000 judgments in New York worth an estimated $1.5 billion, according to data on more than 350 lenders compiled by Bloomberg. In interviews and court filings, borrowers across the country describe lenders who’ve forged documents, lied about how much they were owed or fabricated defaults out of thin air.

The probe is in its early stages, and Bloomberg’s sources said it could result in no action. But given all of the bad press surrounding pay day lenders, we imagine the state will do everything in its power to drive them out of business – leaving a gulf in the market for providing “cash advance”-type loans that banks will have every incentive to fill.

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The Fed is trapped.

As everyone knows by now, and as Deutsche Bank reminds us this morning, rising long-term interest rates in the US since August 27 have triggered a case of “risk off” globally, one which juxtaposed higher interest  rates and a low VIX, which DB’s team repeatedly noted “cannot coexist.”

And sure enough it did not, resulting in a VIX that jumped in early October, and remained elevated ever since, at around 20. Meanwhile, higher interest rates triggered a rise in the dollar index, depressing commodities and emerging market currencies as – finally – credit spreads widened rapidly.

None of that is new and a similar rise in interest rates and the US dollar took place just a few years ago, back in 2015 following the Chinese yuan devaluation which triggered, via lower commodity prices and emerging market currencies, turmoil in credit markets between December 2015 and February 2016.

According to Deutsche Bank, “recent trends are reminiscent of that period.”

Of course, the 2016 turmoil episode was resolved with the Shanghai Accord: after the G20 summit of 26-27 February 2016, the Fed took back its hawkish stance, and together with the ECB and BoJ deferring on additional easing, the dollar’s appreciation corrected, and market liquidity recovered.

Fast forward to last week when – pressured by president Trump who called for the Fed to halt rate hikes while hinting he may “replace” Powell – a mini “Shanghai Accord” moment took place when on 28 November, Chairman Powell said the Federal Funds rate is just below the neutral (a dramatic reversal to his October 3 statement that “we are a long way from neutral at this point”). This sparked the view that the pace of rate hikes would slow in 2019, pushing yields down and stocks up.

Which in turn brings us to why the Fed is trapped: As Deutsche Bank says, over the short term, lower long-term rates will surely bring about a recovery in global market liquidity. However, with the US is at full employment, inflation still rising, and corporate debt and consumer loans as a ratio of GDP continues to hit new record highs, the Fed is unable to begin a full-blown easing process and even pausing the rate hikes could be seen as betraying its mandates.

So, as the economy and credit have grown “to their limits” and do not permit any additional easing without the risk of several economic dislocations in the future, Deutsche Bank’s ominous view is that “a major turning point could come within the next 1-2 years”, which incidentally is precisely what Morgan Stanley said over the weekend when it previewed 2019 and said it will be the “turning point“ year.

Confused? Don’t be: the following “simple” chart from Deutsche Bank, which recaps the “spread of risk-off sentiment” in 2016, just before the Shanghai Accord, also “explains” the dilemma facing the Fed right now, and why – as a result of fiscal policy which is overheating the economy unlike back in 2016 – Powell is well and truly trapped.

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Authored by Ritesh Jain via WorldOutOfWhack.com,

I had written about some observation from singularity university almost 18 months back and if you look around then it seems everything is falling in place.

The original article below:

Singularity University, based in NASA Campus in Silicon Valley is the world’s leading learning-cum-incubator university for innovation and technology set-up in collaboration with NASA, Stanford etc and we had leading Silicon Valley entrepreneurs presenting here including the guy behind Google Maps.

OBSERVATIONS OF VARIOUS SPEAKERS THERE:

We are witnessing more disruption in human history over next 10-20 years than what we have seen in the last 20,000 years. Their prediction is that 60% of Fortune 1000 companies will be out of business in just next 10 years.

There is a convergence of exponential development & convergence of technologies and also business models across industries (Blockchain, Artificial Intelligence, Biotech & Genetics, 3D Printing, Solar Energy, Cellular Agriculture etc). These are no longer technologies in the lab, but are already commercialised. So a 10 year old for example will never need to go to college or ever get a driver’s license!

KEY actionable and insights for every business are

1. Organisations built for the 20th Century are destined for failure. Organisations built for efficiency and predictability will fail. They are unable to think and grow exponentially but are predicated on linear growth models. We all come from scarcity mindsets where as the world is moving rapidly to abundance. Ability to rapidly iterate, learn and execute will be required. Today’s 18 year old has the ability to approach the same problem very differently and successfully.

2. People from completely outside the business will end up disrupting these businesses (Zerodha, Alipay did it to broking businesses without any background). Exponential is when you can deliver price-performance which is 10x better – not 20-50% better. There are several areas and technologies where price-performance is doubling every 12-18 months (Moore’s law from Intel days).

3. Everything which is information based will priced at or move quickly to ZERO. They call this “democratisation” of information (We are seeing signs of this in Equity Research, MF Distribution etc).( In the Dec 2016 quarter, there were more than 450 conference calls held by corporate bodies discussing quarterly results, with discussion note available while I remember less than 50 per quarter a decade ago. Institutional Investors with their superior management access will not offer any distinction in investment performance though may suffer from their herd behavior). The sorry state of mutual fund industry in the US is a prime example in front of us.Entrepreneurs will have to work on alternative revenue streams. Huge implications for all businesses. (Zerodha makes money from float rather than commissions,so is Alipay and so will be Paytm ). Move towards building platforms rather than products. (Google, Apple are platforms whereas Blackberry, Yahoo etc were products).

4. Everything is moving to a Service/Subscription model from a Sales model. Rolls Royce has moved to this model for their aircraft engines! They no longer sell engines. They charge for hourly use and provide analytics on actual usage to optimise for their clients.(my monthly subscription for various services just continue to add up)

Large organisations cannot change and do not have the time to change.(if you are working for these organisations then this is your warning, get out). There is an immune system response, legacy business becoming a barrier and hierarchical structures where anyone over 30 years of age today has very limited clue as to what is happening to the world which will prevent organisations from rapidly transforming.( get it guys most companies will just not survive ….. have a look at GE or GM)

5. The recommended solution for large organisations is to build teams completely outside their existing business

• which have NO people from existing businesses
• They are given he mandate to build a business model which completely disrupts our own existing business, leveraging these key trends
• to set up a multi-skilled team of 6-7 people which is under 35 years of age, NOT from the existing business or people who are the most willing to challenge status-quo
• Housed independently with no corporate processes at all
• Working on lean startup principles (Design thinking/MVP/Agile)

If such a business turns out to be successful, do NOT bring it back into the Mother organisation. Always keep it independent. In fact, make that the centre of gravity for building new businesses. (Unilever has implemented this globally and 5 of such initiatives/products have become the most profitable of all)

Framework for building Exponential Business Models

Each business needs to drop the vision, mission statement and have a simple Massive Transformational Purpose (MTP) that everyone in the team can understand and aspire to. For example Google has “To organise the world’s information”
Businesses need at lease 4-5 of the following 10 things to create exponential growth.

*S-C-A-L-E & I-D-E-A-S*

S – Staff on Demand (Uber)(How many full-time employees vs Contractors)

C – Community & Crowd involvement (Google Maps, Facebook, Quora etc)

A – Algorithms (Uber – Matching drivers and passengers, Amazon – recommendations)

L – Leverage existing Assets (AirBnB, Uber)(You must never own assets)

E – Engagement (Contests, Gamification to driver user engagement)

I – Interfaces (Tech that allows external world to connect seamlessly and easily, example App Store)

D – Dashboards (Real-time MIS on key metrics, knowing every key metric in real time)

E – Experimentation (Ability to constantly experiment, iterate and learn)

A – Autonomy (How much autonomy to the lowest levels to decide)

S – Social (How do you leverage social networks to listen, learn and engage).

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Having shrugged off a collapsing Put-Call ratio as anything but a buying opportunity, and after “quadrupling-down” on his bullish take for risk assets – one which has so far failed to materialize and even following today’s latest short squeeze, the S&P remains flat on the year – JPMorgan’s quant MD Marko Kolanovic just came clean about some of the real risks in markets.

In an interview with Bloomberg Quint’s Joanna Ossinger, the global head of macro quantitative and derivatives research at JPMorgan, recently identified by CNBC in its chyron as “Half-Man, Half-God,” explains that through the 2000s, quantitative trading grew to become a bigger market force than the fundamental investors. 

And that is just where he sees the potential problems arising…

JO: What bigger-picture market trends are you watching these days?

MK: There’s this fragility in the marketplace that came with the new structure of liquidity, with electronic market-making, computers, and growth in passive. Passive assets and quant assets will grow, and computers and AI will have a bigger role in ­market-making. At some point that’s going to end up badly—most likely when the next recession hits. Some of the problems around computerized liquidity are going to be fully exposed, and it may really deal a blow to investors and markets overall. Not that we are forecasting it with a certain timeline, but more that investors should have it in the back of their minds.

Is there a way to hedge yourself for some type of catastrophic event where liquidity collapses and this whole microstructure potentially fails? Can you design strategies that are going to be resilient to this type of fragility? Can you run some effective hedges that won’t cost you a lot of money? We are thinking about a number of things like timing: market-timing and timing of risk premia. It’s almost a holy grail – can you time these risk premia? So recently we’ve been testing machine-learning algorithms in the context of timing.

JO: So you’re worried about the rise of electronic trading?

MK: There’s more algorithmic trading, where algos are going through headlines or sorting through earnings statements or going through social media in real time and trading. What are the consequences for investors?

We’re seeing reaction time get shorter and shorter for releases, which can also incur costs or take advantage of slower human investors. There are signs of potential abuses with social media posts and headlines. That’s going to get worse and worse and be more of an impediment for human investors to make money. It’s going to cause more confusion in the marketplace.

If you run a certain strategy, how do you insulate yourself against these things? If these algos are taking advantage of you on the liquidity side, maybe they are also taking advantage of you with social media and news headlines. Can you have some sort of countermeasures, if you have a strategy that is vulnerable to that type of thing? What are the limitations? What are the ­regulatory angles as well? If someone is creating fake tweets to hurt your strategy, are you allowed to defend yourself by throwing off that algorithm?

Where’s the limit of market manipulation vs. defense?

Where indeed?

Of course, as long as the algo reactions send stocks higher – not lower – it will remain off the agenda of any and everyone in the asset-gathering, commission-taking world.

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Authored by Pieter Cleppe via Open Europe,

Never underestimate French protests and never underestimate tax protests. Still, that seems what French President Emmanuel Macron has been doing…

While the so-called “yellow vests movement” has drawn a few hundred thousand people to sometimes violent protests and road blockades against high taxes on diesel, leading to two deaths and more than 500 people injured, French President Macron is travelling Europe, pontificating about things like an EU army. The protests bear a resemblance to Brexit: ordinary people have had enough, even if it isn’t always clear of what and even if they have been voting for the parties responsible for high taxation. However, to dismiss their anger and to double down on policies to tax diesel, as Macron seems to do, may be very risky.

Former US President Ronald Reagan once described what, according to him, was typically a government’s view of the economy: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” With diesel, the cycle started with subsidies. Between 1995 and 2015, the share of diesel cars on European roads doubled to around 50 per cent. Without government support for diesel-fulled cars, which were thought to emit less CO2 than their petrol counterparts, researchers have concluded the share would have remained constant around 25 per cent.

Now that we’ve arrived in the taxation stage, which has pushed up prices by 23 percent in France over the last year, Macron is feeling the heat. Some 77 per cent of French people now support the yellow vests movement, and the number is rising. Even among Macron’s own voters, support stands at 41 percent. Some of the leaders of former President Hollande’s party are also on the street, despite being the ones who came up with some of the taxes that are being contested. The centre-Right and hard-Left opposition have also united against Macron to express support. 

The French socialist party has accused Macron’s government of trying to link this grassroots movement to the far right Marine Le Pen “to better disqualify it”. But according to sociologist Vincent Tiberj, the yellow vests movement derives largely from the lower-middle classes, who earn enough to pay taxes but not enough to live comfortably. A lot of the protesters come from “La France profonde”: small towns and rural areas that have often gone through dire economic times, far away from the world of Emmanuel Macron, a former investment banker.

Macron himself has reacted by saying his government intended to “tax fossil fuels more” as a way to “support the poor”. Unfortunately for him, it seems the poor are not so keen on the method. A poll reveals that 82 per cent of French think the government should simply scrap the increase in fuel taxes foreseen for January. Macron’s popularity meanwhile continues to tank, from a 29 per cent satisfaction rate in October to 25 per cent just one month later. One in three French do not have an alternative to driving to work and cars are essential not only for economic but also for social reasons, preventing social isolation of the more vulnerable. For many people, this is not something to mess around with.

Is this Macron’s “let them eat cake” moment? The phrase, attributed to Marie Antoinette, the last Queen of France before the French Revolution, was apparently uttered by her after she learned that the people were suffering due to widespread bread shortages. Suggesting that the ever higher fuel taxes are necessary for the environment may have the same effect on many of the “yellow vests”.

Even if these taxes are needed to save the environment, many may wonder why then people were encouraged to buy diesel-fueled cars in the first place. They may also wonder why then only 184 million from the 3.9 billion euro extra income from the so-called “domestic consumption tax on energy products” raised this year will be used to finance the “energy transition” and why the rest will be used to help cover France’s extensive budget deficit. That’s especially the case as these taxes hit the less well-off harder, due to the fact that they tend to use older vehicles.

Of course, if France weren’t the country currently leading the global ranking of government spending to GDP, people may be more relaxed about an extra 50 euro per month to fill up their tank to save the environment. But France’s “tax freedom day”– when people start working for themselves – only comes on July 27. Then the French government seems more keen on new taxes than on spending cuts. New taxation initiatives meanwhile include tax hikes for health care providers – a baffling 40% for 2019 -, on garbage collection and tourist accommodation.

How will this not hit ordinary people? If a completely spontaneous yellow vests movement can already hit the revenues of big French supermarkets with 55 per cent in one day, one should wonder what will happen if the protestors start organizing themselves properly.

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It appears that special counsel Robert Mueller withheld key information in its plea deal with Trump’s former attorney, Michael Cohen, which would exonerate Trump and undermine the entire purpose of the special counsel, according to Paul Sperry of RealClearInvestigations. 

Cohen pleaded guilty last week to lying to the Senate intelligence committee in 2017 about the Trump Organization’s plans to build a Trump Tower in Moscow – telling them under oath that negotiations he was conducting ended five months sooner than they actually did. 

Mueller, however, in his nine-page charging document filed with the court seen by Capitol Hill sources, failed to include the fact that Cohen had no direct contacts at the Kremlin – which undercuts any notion that the Trump campaign had a “backchannel” to Putin. 

On page 7 of the statement of criminal information filed against Cohen, which is separate from but related to the plea agreement, Mueller mentions that Cohen tried to email Russian President Vladimir Putin’s office on Jan. 14, 2016, and again on Jan. 16, 2016. But Mueller, who personally signed the document, omitted the fact that Cohen did not have any direct points of contact at the Kremlin, and had resorted to sending the emails to a general press mailbox. Sources who have seen these additional emails point out that this omitted information undercuts the idea of a “back channel” and thus the special counsel’s collusion case. –RCI

Page 2 of the same charging document offers further evidence that there was no connection between the Trump campaign and the Kremlin; an August 2017 letter from Cohn to the Senate intelligence committee states that Trump “was never in contact with anyone about this [Moscow Project] proposal other than me,” an assertion which Mueller does not contest as false – which means that “prosecutors have tested its veracity through corroborating sources” and found it to be truthful, according to Sperry’s sources. Also unchallenged by Mueller is Cohen’s statement that he “ultimately determined that the proposal was not feasible and never agreed to make a trip to Russia.”

“Though Cohen may have lied to Congress about the dates,” one Hill investigator said, “it’s clear from personal messages he sent in 2015 and 2016 that the Trump Organization did not have formal lines of communication set up with Putin’s office or the Kremlin during the campaign. There was no secret ‘back channel.’”

“So as far as collusion goes,” the source added, “the project is actually more exculpatory than incriminating for Trump and his campaign.” –RCI

The Trump Tower Moscow meeting – spearheaded by New York real estate developer and longtime FBI and CIA asset, Felix Sater, bears a passing resemblance to the June 2016 Trump Tower meeting between members of the Trump campaign and a Russian attorney (who hated Trump), and which was set up by a British concert promotor tied to Fusion GPS – the firm Hillary Clinton’s campaign paid to write the salacious and unverified “Trump-Russia Dossier.” 

“Specifically, we have learned that the person who sought the meeting is associated with Fusion GPS, a firm which according to public reports, was retained by Democratic operatives to develop opposition research on the president and which commissioned the phony Steele dossier” –Washington Post

In both the Trump Tower meeting and the Trump Tower Moscow negotiations, it is clear that nobody in the Trump campaign had any sort of special access to the Kremlin, while Cohen’s emails and text messages reveal that he failed to establish contact with Putin’s spokesman. He did, however, reach a desk secretary in the spokesman’s office. 

What’s more, it was Sater – a Russian immigrant with a dubious past who was representing the Bayrock Group (and not the Trump Organization), who cooked up the Moscow Trump Tower project in 2015 – suggesting that Trump would license his name to the project and share in the profits, but not actually commit capital or build the project. 

Sater went from a “Wall Street wunderkind” working at Bear Stearns and Lehman Brothers, to getting barred from the securities industry over a barroom brawl which led to a year in prison, to facilitating a $40 million pump-and-dump stock scheme for the New York mafia, to working telecom deals in Russia – where the FBI and CIA tapped him as an undercover intelligence asset who was told by his handler “I want you to understand: If you’re caught, the USA is going to disavow you and, at best, you get a bullet in the head.”

The Moscow project, meanwhile, fizzled because Sater didn’t have the pull within the Russian government he said he had. At best, Sater had a third-hand connection to Putin which never panned out. 

Sources say Sater, whom Cohen described as a “salesman,” testified to the House intelligence panel in late 2017 that his communications with Cohen about putting Trump and Putin on a stage for a “ribbon-cutting” for a Trump Tower in Moscow were “mere puffery” to try to promote the project and get it off the ground.

Also according to his still-undisclosed testimony, Sater swore none of those communications involved taking any action to influence the 2016 presidential election. None of the emails and texts between Sater and Cohen mention Russian plans or efforts to hack Democrats’ campaign emails or influence the election. –RCI

As Tom Fitton of Judicial Watch noted of Mueller’s strategy: “”Mueller seems desperate to confuse Americans by conflating the cancelled and legitimate Russia business venture with the Russia collusion theory he was actually hired to investigate,” said Fitton. “This is a transparent attempt to try to embarrass the president.”

The MSM took the ball and ran with it anyway

CNN, meanwhile, said that Cohen’s charging documents suggest Trump had a working relationship with Putin, who “had leverage over Trump” due to the project. 

“Well into the 2016 campaign, one of the president’s closest associates was in touch with the Kremlin on this project, as we now know, and Michael Cohen says he was lying about it to protect the president,” said CNN‘s Wolf Blitzer. 

Jeffrey Toobin – CNN‘s legal analyst, said the Cohen revelations were so “enormous” that Trump “might not finish his term,” while MSNBC pundits said that the court papers prove “Trump secretly interacted with Putin’s own office.” 

“Now we have evidence that there was direct communication between the Trump Organization and Putin’s office on this. I mean, this is collusion,” said Mother Jones‘s David Corn. 

Adam Schiff, the incoming Democratic chairman of the House intelligence committee, said Trump was dealing directly with Putin on real estate ventures, and Democrats will investigate whether Russians laundered money through the Trump Organization. –RCI

As Sperry of RealClearInvestigations points out, however, “former federal prosecutors said Mueller’s filing does not remotely incriminate the president in purported Russia collusion. It doesn’t even imply he directed Cohen to lie to Congress.“

“It doesn’t implicate President Trump in any way,” said former independent counsel Solomon L. Wisenberg. “The reality is, this is a nothing-burger.” 

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While not the media and academia’s preferred tracker of looming recessions, the front-end of the Treasury curve has now inverted…

 

…for the first time since June 2007.

Additionally 2s5s is back below 1bps…

And Breakevens are collapsing…

And as we laid out in great detail before, this is a big deal.

As JPM’s Nikolaos Panigirtzoglou wrote, an inversion at the front end of the US curve is a significant market development, not least because it occurs rather rarely, and has happened only three times over the past two decades: in 2005, 2000 and 1998 – all periods in time preceding major market busts.

While redundant, JPM explained that “such inversion is also generally perceived as a bad omen for risky markets” and highlighted that the two potential explanations are either markets pricing in a Fed policy mistake, or pricing in end-of-cycle dynamics.

Fast forward to today, when 8 months later, Panigirtzoglou writes in his latest Flows and Liquidity commentary that since then, not only has this inversion worsened, but it has shifted forward, and since the middle of November, the forward curve is inverted between the 1-year and the 2-year forward points.

This shift forward in Fed policy reversal expectations is in line with historical experience. As JPM wrote back in April, the 3y-2y forward rate spread had historically led the 2y-1y one, and this has now occurred since mid-November.

What does this mean in practical terms? Simple: the latest curve inversion implies that markets are now pricing in a peak in the Fed policy rate in end-2019 rather than during 2020 previously. JPMorgan shows this in Figure 2, which depicts the forward curve of the 1-month dollar OIS curve currently vs. its snapshot at the beginning of October before the equity market correction.

Not only has the market-implied path of policy rate expectations shifted downward in the aftermath of the equity market correction, but the whole curve has shifted forward. And this week’s comments by the Fed Chairman appear to have reinforced these policy reversal expectations with the 2y-1y forward rate spread inverting further to below -3 basis points.

Of course, as we discussed extensively in April, such pronounced shifts forward in Fed policy rate reversal expectations has also traditionally been associated with end-phases of the US monetary policy cycle. In the 2000 monetary policy cycle, the 3y-2y forward rate spread of the 1-month OIS rate turned negative in February 2000. And as JPMorgan adds, the 2y-1y forward rate spread turned negative four months later in June 2000. The Fed delivered the last hike in May 2000.

In other words, from a timing point of view, the last hike of the Fed at the time almost coincided with the inversion of the 2y-1y rate forward spread. Incidentally that also marked the bursting of the dot com bubble, as the US equity market had started declining at roughly the same time in June 2000. The subsequent equity market correction induced the Fed to start cutting rates in 2001.

Fast forward to the next rate hike cycle, when in the 2006 monetary policy cycle, the 3y-2y rate forward spread of the 1-month OIS rate turned negative rather early in August 2005. The 2y-1y forward spread turned negative ten months after in June 2006. Similar to the 2000 cycle, the last hike of the Fed at the time in June 2006 coincided with the inversion of the 2y-1y forward rate spread. There was one material diference to the 2000 cycle: the equity market had started declining much later in October 2007 when the Fed started cutting rates.

Rather concerningly, here JPM notes that although it is still early to draw conclusions, the lags from the 3y-2y inversion to the 2y-1y inversion and the September peak in the US equity market appear more consistent with the 2000 rather than the 2006 cycle.

Now as readers may recall, when the 3y-2y forward spread inversion first emerged last April, JPM argued that an inversion at the front end of the US curve “was a bad omen for risky markets.“

So, perhaps not unexpectedly, the ensuing 2y-1y inversion and shift forward in Fed policy rate reversal expectations is, according to JPMorgan, “worsening this bad omen.“

Why? Because in even more bad news for the BTFD crew, the lesson from the previous US monetary policy cycles is that a sustained recovery in equity and risky markets has tended to occur only after the inversion disappears and the front end of the US curve, in particular the 2y-1y forward rate spread, resteepens.

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