07 December 2018

Topsy Turvy

Well, as predicted some times over the last couple of years, the rate inversion is happening. Cue the disco ball!! Here's a quote:
It passed with little fanfare, but the spread between the 2-year and 5-year Treasury notes went negative yesterday, the first inversion of the yield curve since 2007.

There is a host of other punditry to read. Not seen or heard by Your Humble Servant in these punditries is a discussion of what, exactly, drives such an inversion. Recourse to a banking metaphor, as in the article cited, is misleading. Yes, the description of how community banking works is accurate on its face: borrow short and low; lend long and high. But that's not what drives Treasuries and other such instruments.

Treasuries are instruments of Big Holders, and are the instrument of last resort: when Big Holders, aka corporations and the .1%, can't figure out how to generate real returns on real capital investment, they turn to free money from Uncle Sugar. As the real capital alternatives dry up, either because technology doesn't progress or the CxO class can't find any, Treasuries become the instrument of choice. Of note is the plain fact that corporates took all that extra moolah from the Tax Giveaway and bought back shares, pumped dividends, and chased Treasuries. Same thing as under Dubya.

It's only when real capital generates large real returns that fiduciary returns can climb. That pesky Law of Supply and Demand sends ever more moolah chasing Treasuries when there's nothing else to do. Or, to put it otherwise, it's a matter of opportunity cost. Treasuries looked good for the same reason that an ugly guy looks good at closing time: any port in a storm. The Fed can't manufacture superior real capital investment.

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