Month: April 2022

The US government is expected to announce a “significant firearms trafficking enforcement action” at 1300 ET. We expect the Biden administration to crack down on unserialized weapons in a national “Ghost Gun Initiative.”

Watch the DOJ press conference here:

*Developing 

After a Thursday report that Goldman Sachs bankers are threatening to quit over a requirement that they report to the office 5 days a week, a new report reveals the lengths to which management is now going to convince their staff to comply.

According to Business Insider, Goldman has ratcheted up the pressure – and is now electronically monitoring who’s coming in and out of the office, according to multiple sources.

Those who refuse to come to heel face disciplinary action, starting with a call from a manager or team leader, or being marked as out of the office.

Four current Goldman staffers told Insider that the firm is taking attendance by monitoring swipes into and out of its offices, including at its 200 West Street headquarters. A recent report from the New York Post, citing posts by Goldman employees on the workplace forum Blind, said some managers are also using spreadsheets to keep tabs on which teams are in the office the most. -BI

“They’re definitely watching the swipes,” said one Goldman investment banking analyst based in New York. “If you aren’t in more than three to four times a week, you’ll get a call from the business unit leaders reminding you of the expectation to be in the office.”

According to another employee, and asset-management analyst, his entire unit was told at a meeting that they were being tracked, and could be penalized for late attendance.

“We were told that from now on, every time we scan into the office, it’s going to be tracking when we are coming in,” said the anonymous employee, who added that Goldman wants people to swipe in between 8 a.m. and 10 a.m. or face consequences.

“If you’re not in by that time, it doesn’t count that you were scanned in for the day,” said the analyst. “It definitely is an uneasy feeling. Knowing you’re being tracked kind of feels like you’re going back to high school and they’re taking attendance.”

Last month, CEO David Solomon called long-term stay-at-home working conditions “an aberration” which the firm would seek to “correct as quickly as possible” – a policy that some junior bankers initially scoffed at. Solomon told Fortune Magazine, however, that “The secret sauce to our organization is, we attract thousands of really extraordinary young people who come to Goldman Sachs to learn to work,” adding “Part of the secret sauce is that they come together and collaborate and work with people that are much more experienced than they are.”

That said, as the New York Post reported on Wednesday, a group of Goldman Bankers have reportedly threatened to quit based on complaints on the company’s internal messaging board, Blind.

Junior bankers at Goldman Sachs are threatening to quit over demands that they show up to the office five days a week as the pandemic wanes — and some gripe that their bosses have been quietly checking attendance.

What’s more, a few of the workers have even bandied about the “b word” – “bullied” – claiming that their bosses have browbeaten them by quietly checking attendance and using these records to penalize employees who don’t do a sufficient job of showing face.

One anonymous source griped that the policy flies in the face of management’s insistence that it has been trying to put its “people first”. Another went even further, lambasting managers armed with attendance spreadsheets as “f***king b*llshit.

“In GS, the top management says it’s employees choice but internally they track which team has most in office attendance,” one Goldman employee wrote on the corporate message board Blind, which verifies users’ place of employment with the help of their company email accounts.

“It’s f**ing bulls**t from top management saying they are people first,” the miffed Goldman underling added. “In our team meeting, manager showed us the excel where the MDs are tracking which department has not met in-office commitments,” the staffer wrote, referring to the high-level managing directors.

Apparently, when managers determine that a junior employees’ attendance hasn’t been sufficiently high enough, they use their unofficial “attendance sheet” to “bully” that employee into showing up.

Submitted by QTR’s Fringe Finance

Friend of Fringe Finance Mark B. Spiegel of Stanphyl Capital released his most recent investor letter yesterday with his updated take on the market’s valuation and Tesla.

Mark is a recurring guest on my podcast (and will be coming back on again soon hopefully) and definitely one of Wall Street’s iconoclasts. I read every letter he publishes and only recently thought it would be a great idea to share them with my readers.

Like many of my friends/guests, he’s the type of voice that gets little coverage in the mainstream media, which, in my opinion, makes him someone worth listening to twice as closely.

Photo: Real Vision

Mark was kind enough to allow me to share his thoughts from his March 2022 investor letter, which he published on March 31, 2022.

Mark opened by calling the meme stock rally of the last few days “a fierce bear market rally of garbage stocks”. What follows is Mark’s take, from his letter, on the Fed and Tesla – and several chart annotations that I think help make his point.

Mark’s Thoughts On The Market & The Fed

The biggest asset bubble in U.S. history was blown with the Fed printing $120 billion a month and short term rates at zero while the government concurrently ran a record fiscal deficit and inflation was moderate.

Now we have no Fed printing (in fact, its balance sheet may soon be reduced), almost the entire Treasury rate curve well over 2%, rapidly declining fiscal deficits, and the highest inflation rate in over 40  years, exacerbated (and not yet in the latest inflation numbers) by the tragic situation in Ukraine via further supply chain restrictions, while increased military spending for the entire western world (as well as Japan and South Korea) is about to erase the so-called “peace dividend.” 

Thus, in addition to our Tesla short, late in the month (and for the first time in many years) I initiated a short position in the S&P 500 (via the SPY ETF) when it bounced back to within 5% of the all-time high it set in early January under far more favorable conditions than those in the present and foreseeable future. 

In fact, the last time the 10-year Treasury yield was where it is now (approximately 2.3%) was May 2019 when the S&P 500 was approximately 35% lower than now, yet inflation was vastly lower and growth prospects were far better. And although corporate earnings are higher now than they were in 2019, I believe inflation expectations will soon substantially lower the PE multiples placed on those earnings, as occurred in the inflationary era between 1973 and 1975 when the S&P 500’s PE rapidly dropped from 18x to 8x.

In other words, I think this stock market is going a lot lower, and I want to be positioned for that. 

Meanwhile, even with the recent Fed Funds rate of 0.125% and the federal debt financed at an average of a bit over 1%, the interest on the $30 trillion of federal debt costs around $400 billion a year. That average interest cost is now on a path to double, yet even then would still be far below the anticipated rate of inflation.

Does anyone seriously think this Fed has the stomach to face the political firestorm of Congress having to slash Medicare, the defense budget, etc. in order to pay the even higher interest cost that would be created by upping those rates to a level commensurate with even 4% inflation (not to mention today’s over 7%)?

Powell doesn’t have the guts for that, nor does anyone else in Washington; thus, this Fed will likely be behind the inflation curve for at least a decade. And that’s why we remain long gold (via the GLD ETF).

Meanwhile, we can see from CurrentMarketValuation.com that the U.S. stock market’s valuation as a  percentage of GDP (the so-called “Buffett Indicator”) is still astoundingly high, and thus valuations have a long way to go before reaching “normalcy”:

[QTR’s editor’s note: This is exactly the indicator I have been using to make a similar case for a market plunge in two recent articles, here and here.]

When stocks get meaningfully cheaper I’ll be an enthusiastic buyer, but until then we’re likely to remain net short.

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Mark’s Thoughts On Tesla

We remain short the biggest bubble in modern stock market history, Tesla Inc. (TSLA) which, despite a steadily sliding share of the world’s EV market and a share of the overall auto market that’s only around 1.5%, Trevor Scott points out has a market cap roughly equal to the next 20 largest automakers combined.

So here’s why we remain short Tesla: 

1. Tesla has no “moat” of any kind; i.e., nothing meaningfully proprietary in terms of its electric car technology (which has now been surpassed by numerous competitors), while  existing automakers—unlike Tesla—have a decades-long “experience moat” of knowing how to mass-produce, distribute and service high-quality cars consistently and profitably.

2. Excluding working capital benefits and sunsetting emission credit sales Tesla generates negative free cash flow. 

3. Growth in sequential unit demand for Tesla’s cars is at a crawl relative to expectations.

4. Elon Musk is a pathological liar who under the terms of his SEC settlement cannot deny  having committed securities fraud. 

Tesla’s Q1 2022 delivery number (to be reported in early April) will likely only be slightly better than Q4 2022’s 308,000, perhaps a 20,000 (or fewer) unit gain that would be a rounding error for an auto company trading at even one-tenth of Tesla’s valuation.

If in any quarter GM or VW or Toyota sold 2.02 million vehicles instead of 2 million or 1.98 million, no one would pay the slightest bit of attention to the difference. Seeing as Tesla is still being valued at over seventeen GMs, it’s time to start looking at its  relatively tiny numerical sequential sales growth, rather than Wall Street’s sell-side hype of “percentage off a small base.”

In other words, if you want to be valued at a giant multiple of “the big boys,” you should be treated as a big boy. And yes, Tesla is somewhat capacity constrained, but so are all its competitors. Let’s see how quickly “constraint” morphs into “excess capacity” when the German and Texas factories are fully online! 

Meanwhile in January, Tesla reported results for Q4 2021 and once again proved that it’s a truly horrible business. Although the company claimed to have generated $2.8 billion in free cash flow for the quarter, that was almost entirely created by massively increased payables & accrued liabilities, and by stock-based compensation.

After adjusting for those factors (and a tiny increase in receivables), Tesla’s free cash flow was just $119 million, and that undoubtedly included several hundred million dollars of previously earned & billed emission credit sales, a revenue stream which will almost entirely disappear next year as other automakers begin selling enough electric cars of their own. Thus, despite all the sell-side and media hype, on a sustainable basis Tesla’s free cash flow is still resoundingly negative. 

And for those of you who think that Tesla is “really an energy company,” in Q4 “Tesla Energy” had revenue of $688 million (down 8.5% year-over-year and 8% sequentially) and cost of revenue of $739 million, meaning it had a negative gross margin. So if Tesla is “really an energy company,” it’s even more screwed than if it’s just a car company! 

Meanwhile, perhaps the biggest reason Tesla has recently been able to post marginally increasing sequential quarterly deliveries is because competitors’ production is at the lowest level in decades due to the massive chip shortage, thereby eliminating a number of “Tesla alternatives.” Yet Tesla is enjoying record production because Musk (a notorious “corner-cutter”) is apparently willing to either substitute untested, non-auto-grade chips for the more durable chips he can’t get (please see my Twitter post about this) or simply eliminate entire crucial safety systems such as back-up steering and crash-avoidance radar. 

Meanwhile, many Tesla bulls sincerely believe that ten years from now the company will be twice the size of Volkswagen or Toyota, thereby selling around 20 million cars a year (up from the current run-rate of  around 1.3 million); in fact in March Musk himself even raised this as a possibility.

To illustrate how utterly absurd this is, going from 1.3 million cars a year today to 20 million in ten years means that in addition to one million cars a year of eventual production from the new German and Texas factories, Tesla would have to add 35 more brand new 500,000 car/year factories with sold out production; i.e., a new factory nearly every single quarter for ten years!

And what then? Well, then you’d have a car company approximately twice the size of Toyota (current market cap: $249 billion) or Volkswagen (current market cap: $110 billion). If that would make Tesla worth, say, $500 billion in 10 years, discounting that back at 15%/year and allowing for enough share dilution to pay for all those factories, Tesla—in that absurdly  optimistic scenario—would be worth just $100/share today, down almost 93% from its current price. 

Another favorite hype story from Tesla bulls has been “the China market.” But based on the Chinese domestic (non-export) sales numbers we have for January and February it appears that Q1 2022 sales there barely grew (or may have even contracted) from Q4 2021’s. And in Q4 Tesla had only around 1.5% of the overall Chinese passenger vehicle market and just 11% of the BEV market. 

Meanwhile, as Tesla continues to sell its fraudulent & dangerous so-called “Full Self Driving” the head of  that program just took a four-month sabbatical; the last major Tesla executive who did that (Doug Field) never returned. In a sane regulatory environment Tesla, having sold this garbage software for over five years now…

…would be prosecuted for “consumer fraud,” and indeed the regulatory tide may finally be turning, as two U.S. senators continue to question its safety and in October the NHTSA appointed a harsh critic of  this deadly product to advise on its regulation. (For all known Tesla deaths see here.)

Are major write downs and refunds on the way, killing the company’s slight “claimed profitability”? Stay tuned! 

Meanwhile, Guidehouse Insights continues to rate Tesla dead last among autonomous competitors:

Another favorite Tesla hype story has been built around so-called “proprietary battery technology.” In fact  though, Tesla has nothing proprietary there — it doesn’t make them, it buys them from Panasonic, CATL and LG, and it’s the biggest liar in the industry regarding the real-world range of its cars. And if new-format 4680 cells enter the market some time in 2024 (as is now expected), even if Tesla makes some of its own, other manufacturers will gladly sell them to anyone. 

Meanwhile, Tesla build quality remains awful (it ranks second-to-last in the latest Consumer Reports reliability survey) while the latest survey from British consumer organization Which? found it to be one of  the least reliable cars in existence. And Tesla’s worst-rated Model Y faces current (or imminent) competition from the much better built electric Audi Q4 e-tron, BMW iX3, Mercedes EQB, Volvo XC40 Recharge, Volkswagen ID.4, Ford Mustang Mach E, Nissan Ariya, Hyundai Ioniq 5 and Kia EV6.

And Tesla’s Model 3 now has terrific direct “sedan competition” from Volvo’s beautiful Polestar 2, the great new BMW i4 and the premium version of Volkswagen’s ID.3 (in Europe), plus multiple local competitors in China. 

And in the high-end electric car segment worldwide the Audi e-tron (substantially improved for 2022!)  and Porsche Taycan outsell the Models S & X (and the newly updated Tesla models with their dated exteriors and idiotic shifters & steering wheels won’t change this), while the spectacular new Mercedes EQS, Audi e-Tron GT and Lucid Air make the Tesla Model S look like a fast Yugo, while the extremely well reviewed new BMW iX does the same to the Model X. 

And oh, the joke of a “pickup truck” Tesla previewed in 2019 (and still hasn’t shown in production-ready form) won’t be much of “growth engine” either, as it will enter a dogfight of a market; in fact, Ford’s terrific 2022 all-electric F-150 Lightning now has over 200,000 retail reservations (plus many more fleet reservations), GM has introduced its fantastic 2023 electric Silverado with over 110,000 reservations and  Rivian’s pick-up has gotten excellent early reviews. 

Regarding safety, as noted earlier in this letter, Tesla continues to deceptively sell its hugely dangerous so-called “Autopilot” system, which Consumer Reports has completely eviscerated; God only knows how many more people this monstrosity unleashed on public roads will kill despite the NTSB condemning it.

Elsewhere in safety, the Chinese government forced the recall of tens of thousands of Teslas for a dangerous suspension defect the company spent years trying to cover up, and now Tesla has been hit by  a class-action lawsuit in the U.S. for the same defect. Tesla also knowingly sold cars that it knew were a  fire hazard and did the same with solar systems, and after initially refusing to do so voluntarily, it was forced to recall a dangerously defective touchscreen.

In other words, when it comes to the safety of  customers and innocent bystanders, Tesla is truly one of the most vile companies on Earth. Meanwhile the massive number of lawsuits of all types against the company continues to escalate.

Now read:

• The Global Rush To Own Gold Has Only Just Begun
• Nothing Has Changed, Except For Everything
• Russia Will Backstop The Ruble With Gold

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About Mark Spiegel

Mark manages Stanphyl Capital, established in 2011, a deep-value equity & macro long-short investing fund based in New York City. Mark can be reached at mark@stanphylcap.com or at @StanphylCap on Twitter.

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Disclaimer: This letter was not reproduced in full. I own Tesla call and put options, as well as ARKK call and put options. QTR is long various gold and silver miners and has both long and short exposure to the market through equities and derivatives. I have no position in Mark’s funds. Mark is a subscriber to Fringe Finance via a comped subscription I gave him and has been on my podcast. The excerpts from Mark’s letter, above, shall not be construed as an offer to sell, or the solicitation of an offer to sell, any securities or services. Any such offering may only be made at the time a qualified investor receives formal materials describing an offering plus related subscription documentation. There is no guarantee the Fund’s investment strategy will be successful. Investing involves risk, and an investment in the Fund could lose money.

As if the automotive industry didn’t have enough to deal with in the semiconductor shortage and supply chain issues, the skyrocketing price of oil may also wind up contributing to an already volatile year for the sector.

In fact, one sell side analyst thinks the conditions are ripe for a “buyer’s strike” in autos. 

Morgan Stanley analyst Adam Jonas wrote in a note on Friday morning that, per his conversation with auto dealers, initial signs of demand destruction could start to materialize in lower income customers buying “gas guzzling trucks”.

In fact, Jonas says that the U.S. car market is “not a car market at all. It’s a truck market,” according to a Bloomberg wrap up of his note. Feedback from dealers is suggesting “extremely low levels of new and used inventory” still, Jonas said. 

Jonas also believes that inflation, in addition to the rising price of oil, would help drive a buyer’s strike.

A buyer’s strike would obviously help prices potentially descend from their recent zenith. Recall, we wrote just about a week ago that used car prices, may have started to level out. 

Companies have struggled with supply chain congestion, bottlenecks, and the inability to adequately re-stock certain items that roiled the automotive industry, we noted. This, combined with increased demand, is what drove prices sky high to begin with. 

On Feb. 9, we outlined a major inflection point for the Manheim Used Vehicle Value Index, a wholesale tracker of used car prices, possibly topping as peak supply chain constraints had passed and more parts would be readily available for automakers to restart and or increase output for new vehicles. At the time, we said this could reverse used car prices. However, we also noted that this inflection point might lead to false positives if supply chain congestion persisted.

Then, on March 22, to possibly validate peak supply chain constraints was Goldman Sachs’ Jordan Alliger, who told clients last less than two weeks ago that high frequency weekly supply-chain data for the week ending Mar. 14 showed signs of bottleneck relief. 

As bottlenecks subsided, the Manheim Used Vehicle Value Index declined 3.8% in the first 15 days of March compared to the full month of February. The used car index was still up 24.1% compared to March 2021 at around 222.4. Though momentum and rate of change indicators show soaring used car price trends are drastically slowing as supply chains crunches resolve. 

The analyst did say there’s possibility congestion will “re-emerge as inbound traffic arrives in March into a still congested U.S. logistics system; and container shipping rates – which are part of the index – could see some impact from the Russia/Ukraine conflict,” though supply chain congestions are subsiding.  

Similar to JP Morgan’s belief in early February that supply chain constraints have passed their climax, Goldman’s analyst points out peak congestion might have passed as well. 

“While our base case for more extended supply-chain easing does not arise until sometime midyear-2022 (at the earliest), we do think some slight easing on the ocean side is possible as we move further into 2022, as we approach seasonal post-peak shipping for container ships due to the length of time it takes to move from Asia to the U.S.,” Alliger said. 

Authored by Mike Shedlock via MishTalk,

Some reports say Putin backed down on his demand for rubles for energy. Those reports are essentially wrong.

Understanding Putin’s Clever Tactic

Russian president Vladimir Putin demanded rubles for energy. His concern was that new EU sanctions that would freeze euro-denominated accounts of Russian energy suppliers.

One of Putin’s fear stems from the fact that payments for gas shipped in April get paid later in the month or in May, depending on the contract. A second fear is European sanctions on Gazprombank.

The EU said no to his demand. Yet, the gas will still flow. This prompted misguided reports that “Putin backed down.”

What’s Really Happening?

• German Chancellor Olaf Scholz agreed to Vladimir Putin’s clever way around the problem of rubles payments. 

• The EU will pay in euros and via a separate account at Gasprom, the euros are immediately converted to rubles.  

Putin Says Russia to Keep Supplying Gas Amid Shift to Rubles

Please consider Putin Says Russia to Keep Supplying Gas Amid Shift to Rubles

When Putin first announced the ruble-payment demand last week, European officials rejected it, saying the move would violate contract terms. But the Kremlin Thursday published a presidential decree outlining the mechanism to allow foreign buyers to convert their dollars and euros into the Russian currency through a state-controlled bank.

The Kremlin decree mandates that deliveries starting from April 1 be paid for in rubles. Foreign buyers need to open special ruble and foreign currency accounts at Gazprombank to handle payment, which can be done remotely. Buyers transfer foreign currency to pay for the gas into their accounts, Gazprombank converts the funds to rubles on the Moscow Exchange and transfers rubles into the buyer’s ruble account for payment on to Gazprom. The payment is considered complete when the rubles reach Gazprom’s account.

Putin said the goal of the new mechanism was to prevent western governments from attempting to seize the payments in foreign currency or the accounts through which they went.

“If gas is supplied and paid for under the traditional scheme, new dollar and euro payments can be frozen,” he said.

“I think ultimately Russia wanted to send a message that as long as its gas is being paid for in time and in full (irrespectively of which currency is used), the gas will continue to flow,” said Katja Yafimava, ​Senior Research Fellow at the Oxford Institute for Energy Studies. “If Europe were to lose supplies of Russian gas it would be not because of Russia cutting them off but because of Europe not paying for them.”

Another motivation may have been to protect Gazprombank, one of the few major Russian banks that’s so far avoided the most severe western sanctions, from future restrictions, she said.

Avoiding Sanctions

This workaround highlights the silliness of the debate that one needs dollars to buy oil or gas despite dollars being the pricing unit.

In this case, Russia demands rubles and get them via immediate conversion from euros or in some cases US dollars, depending on the contract.

Given that currencies are fungible (sanctions aside), it does not matter what the pricing or payment unit is. 

This entire process is about avoiding sanctions and getting paid. 

The EU could default one time given the payment lag, but then would be cutoff from oil and gas.

So despite reports to the contrary, this workaround that Scholz agreed to effectively satisfies Putin’s requirements: Russia gets paid and Gazprom is protected from sanctions. 

Ruble Impact is Minimal

The impact on the ruble is limited because Russian corporations are already required to sell 80% of their foreign-exchange earnings for rubles under the capital controls imposed by Western nations after Russia invaded Ukraine.

This new maneuver means energy suppliers will have to sell 100% of euros and dollars to the Russian central bank for rubles.

European sanctions have so many holes they are mostly useless in practice. Thus, talk of reducing the EU’s dependence on Russia is all hype and no reality.

Understanding What Happened

• The Russia Central Bank gets euros. Exactly as before. The entire thing is essentially a mirage. It really makes no fundamental difference if the euro for ruble switch happens by Germany, somewhere in the middle, or at the back end by the Russia central bank. 

• Whether by the EU, some middleman, or later on the back end by Russia, the Russia central bank gets euros. Gazprombank gets rubles from the Russian central bank in exchange for euros. 

• Aside from sanctions, currencies are fungible. This is always the case and a point most simply fail to understand in all this oil priced in something other than dollars nonsense. Hopefully now people can see it. 

• One slight difference is the Russia central bank gets 100% of the euros instead of 80% of them. This benefits Putin but he could always demanded that. It now happens immediately instead of perhaps later.

• However, Putin extracted a mechanism and thus an implied promise from Scholz to not sanction Gazprombank. And he gets bragging rights that Scholz agreed to a maneuver that gets rubles to Gazprombank.

• The threat is if the EU sanctions Gazprombank, then Putin shuts down the gas. Yet, this was really the case all along. So actually, other than getting an agreement from Scholz, there is no difference. But with Gazprombank now on the cannot sanction list, Putin can likely play some games there with euros even though they are technically central bank euros.

• Putin can trade those euros to China for sanctioned US parts through Gazprombank.

• Bottom line is there is no real change technically. But Putin gets to brag he honors his contracts and he has a commitment from Scholz for the EU to do the same. 

• It also makes it harder for Biden to pressure the EU to sanction Gazprombank or Gazprom.

• This is a victory for Putin.

Sanctions Don’t Work

Here’s a twelve-word synopsis of the above post Misguided Souls Still Do Not Understand This Simple Truth: Sanctions Don’t Work

The last three of those twelve words emphasize the key point.

Meanwhile, Biden Doing Everything Possible to Drive Up the Price of Oil, Some of It’s Illegal

Finally, US Sanction Policy Drives China Into Russia’s Loving Arms.

The Ruble Regains 100% of Its Loss After Russia Invaded Ukraine, Why?

For more discussion of energy for rubles and the currency itself, please see The Ruble Regains 100% of Its Loss After Russia Invaded Ukraine, Why?

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Following this morning’s stagflationary signals from a tumble in unemployment (opens window for Fed hawks), surge in earnings (inflationary pressure building), and slump in ISM Manufacturing (production & new orders down, prices paid spiking), the market has been quick to price in a more aggressive Fed this year (now expecting at least 9 more 2bps-rate-hikes by year-end)… but at the same time, pricing in a dramatic rate-cuts in the following year…

The message – loud and clear – is The Fed’s anti-inflationary actions will guarantee a recession, and that will ensure rapid de-escalation from The Fed and a return to QE.

While few are mentioning it in public – and President Biden just told us just how awesome he is by gloating over the surge in job gains (which merely represents people being allowed by the government to get their old – pre-COVID-restrictions – jobs back) – but a recession is coming faster than the regular asset-gatherers and commission-rakers would care to admit.

BofA’s Michael Hartnett was recently brave enough to state that he expects a recession to strike by H2 2022, and just this morning, no lesser Wall Street giant than Goldman Sachs raises its recession risk for the following year to 38% (with some far more ominous details under the surface of their model)…

On their own, various segments of the curve that have each been relatively reliable recession indicators historically are implying very different probabilities of recession within the next 24 months. This unusually sharp divergence in the probabilities implied by curve segment is another indicator of the unusual structure of the current yield curve: very steep at the front of the curve, but flat/inverted further out.

Combining indicators into a single model unsurprisingly improves the ability to predict recessions and implies that the market is currently pricing recession probabilities that are broadly consistent with the shape of the curve—close to no chance of recession in the next 12 months, but a higher risk of recession (38%) in the following year.

So what does the market say about all this? Nothing good.

The 2s10s spread has collapsed into inversion this morning…

And 5s30s spread is now dramatically inverted…

And 2s30s has inverted for the first time since 2007…

And for all those trying to distract by forcing your attention to the 3M2Y spread’s steepness, here is what the yield curve looks like now… and in one year…

Which leaves the 2s10s curve inverted by 50bps in one year according to the forward curve…

Goldman hedges in its conclusion of course, unwilling to scare its AM clients, explaining that their US econ team has also noted that while they see the risk of a US recession this year as higher relative to an average year, a recession if it were to occur would probably be mild by historical standards as the economy lacks major financial imbalances that would exacerbate a slowdown.

Still – a recession is a recession, and you can’t be half-pregnant… and even from Goldman’s table above, the US equity market is completely decoupled from this risk of recession, blinkered in its desire to keep the dream alive (and offering all those talking heads the constant refrain of “well, how can we be on the verge of recession when stockjs are so closs to record highs?”) Do we really need to show you where stocks were in 2000 (ahead of that recession), 2007 (ahead of that recession), and early 2020 (ahead of that recession).