Almost Daily Grant's

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Tuesday, December 4, 2018

So much for the honeymoon

From Reuters:
 
Brazil’s Supreme Court said on Tuesday it had authorized a federal investigation into allegations that the incoming chief of staff for far-right President-elect Jair Bolsonaro had taken illegal campaign donations.
 
The investigation is the second graft allegation made against a top member of Bolsonaro’s incoming government, a thorny issues as the leader was elected on a law-and-order platform a vow to end widespread political corruption exposed by the sprawling “Car Wash” investigation and other probes.
 
Bolsonaro’s presidential inauguration is scheduled for Jan. 1, 2019. 

Curve sketching

Big doings in the government bond market.  Today, the spread between the 2- and 10-year Treasury yields briefly fell below 10 basis points, the narrowest since 2007. That follows the first partial inversion of the Treasury curve since that same pre-crisis era yesterday, as the 2- and 3-year yields both topped the five year. While the long end has contributed to the latest round of curve compression, the 2.92% 10-year still sits higher by almost 50 basis points year-to-date. Instead, a sharp leg higher in short maturity yields has accomplished most of the heavy lifting.  
 
 
ZIRP no more. Three month Treasury bill yield. Source: The Bloomberg
 
What gives? By most metrics, the economy seems to be humming along just fine. GDP grew by an annualized 3.5% in the third quarter and has averaged a 3.1% real growth clip over the last four quarters, while the November Manufacturing PMI printed at a brisk 59.3, the 23rd consecutive monthly reading north of 55 (a reading above 50 denotes expansion). 
 
Although just a partial inversion thus far, the rise in short rates above those of longer maturity is a significant development: Each of the past seven recessions have been preceded by a fully (meaning the three-month yield outpaces the 10-year for 10 consecutive days) upside down yield curve, with an average lag time of 311 days, according to Jim Bianco, founder and eponym of Bianco Research.  
 
But as the current inversion is just a partial one, recent history implies we can expect the real McCoy soon enough. Bianco notes that going back to 1970, each time the 2-year vs 5-year curve inverted, the 3-month vs 10-year differential (which Bianco dubs “the economist curve” due to its frequent use in academic studies) soon followed suit, concluding: “It may take a while, but once one curve inverts, they eventually all invert.” 
 
Bianco has a theory about what’s driving the flip: An aggressive Fed tightening cycle contrasting with an uncertain inflation outlook:
 
Assuming inflation actually returns, all is well. The Fed is correctly leaning against the markets. However, this is not always the case. . . By our count, the Fed has engaged in nine rate hike campaigns. Since 1980, inflation has been in a downtrend. PCE has rarely exceeded 2% since 1997. Each time it has, the Fed aggressively hikes, the curve inverts and a recession ensues about a year later.
 
The move in the curve has got the attention of at least some in the Fed, as Dallas Federal Reserve president Robert Kaplan said in a Texas speech Monday that the prospect of curve inversion “tells me that it’s wise to be patient here,” seemingly hinting at a more dovish tilt from the non-voting member (he regains his vote in 2020).  
 
Kaplan’s concerns have yet to be priced into the market, however. Interest rate futures currently assign 79% odds of a rate hike of a 25 basis points or more at the Dec. 19 meeting, up slightly from a 75% probability a month ago.  
 
At the same time, there is no allowance for surprise: As far out as December 2019, futures currently assign 0.0% odds of a rate cut. We’d be so bold as to suggest that figure should be a little bit higher. 

Recap Dec. 4

The recent rally ended in abrupt fashion, as stocks were splattered to the tune of a 3.2% drop in the S&P 500, with the industrials and financials groups each losing more than 4% while the NYSE FANG+ Index sank by 3.9%. Treasurys were bid across the curve with the yield on the 30-year long bond sinking nearly 9 basis points to 3.17%, its lowest since mid-September, while the VIX enjoyed a mid-day surge to close back above the 20 mark.
 
One relative bright spot was in commodities, as energy prices managed a flat finish with WTI crude settling just under $52 a barrel.  Gold enjoyed another solid bid, closing at $1,238 an ounce, its best level since mid-July.
 
Both the stock market and the bond market are closed tomorrow in observance of the national day of mourning for President George H. W. Bush. 
 
- Philip Grant

Friday, May 22, 2020

Angel eyes
Misery loves company.

Recap May 22

Thursday, May 21, 2020

Yellow ledbetter

Wishing well
These coins must have fallen through the couch cracks.

QE progress report

Recap May 20

Wednesday, May 20, 2020

Risk management 2.0

Paper pushers

Northern exposure
Now they tell us.

Recap May 20

Tuesday, May 19, 2020

Pounded dough
The mouse is out of the house.

57 days later
The undead are dancing.

Recap May 19

Monday, May 18, 2020

Noises off

Depreciation day
Grading on a curve, writ-large.

Correction:

Recap May 18

Friday, May 15, 2020

Shelf life
Today, biotech company Sorrento Therapeutics, Inc.

King me
Debt monetization is here.

Recap May 15

Thursday, May 14, 2020

She said it

Rock center
It's good to be king.

QE progress report

Recap May 14

Tuesday, May 12, 2020

Some type of synergy

Liquid courage
A brave new world.

Recap May 12

Monday, May 11, 2020

Bed check

A ripple in the desert
This morning, the Kingdom of Saudi Arabia announced

Recap May 11

Friday, May 8, 2020

He said it

Break on through
A step closer to the other side.

Recap May 8

Thursday, May 7, 2020

Mr. Market's Wild Ride

QE progress report

Recap May 7

Wednesday, May 6, 2020

Learning by doing

Solar city
From the counter-cyclical chronicles:

Pressed juice
What's old is new again.

Recap May 6

Tuesday, May 5, 2020

Green thumb
A closer look at "whatever it takes."

Just add water
The Mortgage Bankers Association

Recap May 5

Monday, May 4, 2020

Model X
Call it Uber diets.

Recap May 4

Friday, May 1, 2020

Thanks for nothin'

Codependency credit
Torrents of red ink down Mexico way.

Recap May 1

Thursday, April 30, 2020

Credit check

Security master
This morning, the Federal Reserve announced it will expand the scope

QE progress report

Recap April 30

Tuesday, April 28, 2020

State of nature
Yesterday, New York governor Andrew Cuomo

Recap April 30

Monday, April 27, 2020

Liquidity check

Something shiny

Smoke 'em if ya got 'em
On April 17, Howard Willard, CEO of tobacco giant Altria Group

Recap April 27

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