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History Doesn't Always Repeat, and Keep Tech in Your Portfolio: Market Recon

"Anyone who believes you can't change history has never tried to write his memoirs." --David Ben-Gurion

This Time It's Different

Bill Gross of Janus Henderson has launched a warning in his monthly newsletter. A warning against a reliance upon using history as guide to foretell future economic performance. Gross cites the yield curve as a possibly broken indicator of the economy's trajectory. Sometimes, I do not agree with Mr. Gross. But this makes sense, gang. The Fed often relies upon historical models, and the yield curve has been consistent. A wider spread between short-term rates is usually taken as a signal of confidence, while an inverted curve would be taken as as signal that recession was a near-term reality.

Gross writes, "Over the last 25 years, the three U.S. recessions in 1991, 2000, and 2007-2009 coincided nicely with a flat yield curve between the three-month Treasury Bills, and 10-year Treasuries." This morning, the spread between the two-year, and 10-year stands at 0.892, while the three-month/10-year spread is now 1.117. Flattening? Yes. Anywhere close to predicting a recession? No.

That is, unless the perversion of the free market has rendered the historical model inadequate for predicting future economic performance. Globally, central banks have force fed $15 trillion into their economies. Negative interest rates have become a long-term reality for investment-grade bonds. If interest rates are prices -- and they are indeed prices for credit, risk, and time -- and those prices are artificial, then how can manipulated outcomes be used as any kind of guide to forecast the future? It's an unknown.

Take the Phillips Curve, for example. The FOMC still clings to this simplistic model as if a lower-and-lower unemployment rate has to eventually produce higher-and-higher inflation. Those of us who grew up in the reality of an evolving world, and not behind a textbook, already know that government policy forced a lower level of participation on the labor force, as well as decreased demand for full-time employment. On top of that, the disruptions of e-commerce and reduced dependency upon fossil fuels have changed the price points where supply and demand intersect.

I am not calling for...


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