March 2019 War Room for HiddenLevers, showcasing the Fed's random dovish turn and discussing the supposed waning significance of yield curve inversion

1. Fed’s Dead
27 March 2019
War Room

2. War Room
Idea Generation
Macro Coaching
Scenario Updates
HiddenLevers runs on SCENARIOS like Instagram runs on PHOTOS

3. NEW
The Skinny
Anatomy of a Rate Hike Cycle
Economic Headwinds + Tailwinds
Scenario – Fed’s Dead
Fed’s Dead

4. HiddenLevers
THE SKINNY

5. Fed’s
Random
Pivot
Inverted
Yield
Curve
Oil
Prices
Rising
Fed’s Dead – Why Ripe?
Political Agenda

6. See it on HiddenLevers
Fed’s Dead – Let’s Take a Look

7. Fed’s Dead – Takeaways
Mind the Gap between
Yield Curve Inversion and
Recession
Fed Chair Powell admits to watching stock market
Debt Mountain
Unsustainable
Current US economic picture
doesn't justify Fed dovishness

8. HiddenLevers
ANATOMY OF A RATE HIKE CYCLE

9. Effective Federal Funds Rate
ANATOMY: Rate Cycle Comparison
sources: HiddenLevers,sources: HiddenLevers, Federal Reserve
Rate Hike
Start
# of
hikes
Hike
length
(months)
Rate
Move %
Delta
12/2015 9 39 0  2.5 2.5
6/2004 17 24 1  5.25 4.25
6/1999 6 11 4.75  6.5 1.75
2/1994 7 12 3  6 3
3/1988 10 12 6.5  9.75 3.25
FED raising rates 3x slower than usual  Markets may have time to absorb hikes
Market volatility spikes  FED slowing/pausing rate hike

10. ANATOMY: Yield Curve Inversion History
sources: HiddenLevers 1, HiddenLevers 2
Rate Hike Start
Yield Curve
Inversion?
Start of Inverted Yield Curve Start of Market Correction Lag Time (Months) S&P 500 Drawdown
Aug 1977 ✔️ Sept 1980 Nov 1980 3 -27%
Mar 1988 ✔️ Dec 1988 July 1990 20 -20%
Feb 1994 -- -- -- -- -5%
Jun 1999 ✔️ Feb 2000 March 2000 2 -49%
Jun 2004 ✔️ June 2006 Oct 2007 17 -57%
Yield Curve
Inversions
Market
Corrections

11. ANATOMY: How We got to Inversion
sources: HiddenLevers, Federal Reserve Economic Data
10y rates have not risen in tandem with rate hikes, causing inversion

12. ANATOMY: Historical Analogy to Current Fed 180
sources: HiddenLevers, FOMC
Abrupt Fed Dovish Turn
Summer 2007
Equities rallied post yield
curve inversion, then
crashed to generational
lows
Why is this important?
Markets can post a head
fake rally after Yield Curve
inversion takes place
Some amazing returns
possible between Yield
Curve Inversion and
Recession StartDoubleTop
Fed went from tightening bias to
emergency rate cut in 2-3 weeks

13. HiddenLevers
ECONOMIC HEADWINDS + TAILWINDS

14. ECONOMY: Mixed Signals in 2019
ources: HiddenLevers 1, 2, 3, Atlanta FED
Economy strong  Fed Hawks
Wage Growth +3.4% YoY
OIL +38% since Dec
Economy weak  Fed Doves
Initial Jobless Claims rising from lows
Falling CPI / Retail Sales / PMI
Aug 2018 Peak

15. Economy: Oil Rebound Since Fed Dovish Turn
sources: HiddenLevers 1, Federal Reserve
Dec 2018
rate hike
“[t]he recent drop in oil prices is likely to push headline inflation lower
still in coming months.“ – Jerome Powell, Fed Chair Jan 30 2019
Oil strong,
Why No Hike?
OIL Prices (WTI Crude)
+38% since Dec low
+10% since Jan FOMC

16. ECONOMY: Growing USA Debt Not Sustainable
sources: HiddenLevers, HiddenLevers 1, HSBC BIS, Yahoo Finance
73.9% of GDP = $14.9T
US Corporate Debt
2x US Mortgage Debt
10x Student Loan Debt
US Corporate Debt as Share of GDP (Non-financial)
WW2 Today
Debt to GDP
- Despite recovery, NOT falling
- Fed Chairman Powell’s biggest concern

17. ECONOMY: Does the Yield Curve Still Matter?
sources: HiddenLevers, Richmond + NY Fed Reserve, Seeking Alpha
Negative Term Premium
10 Year Treasury Term Premium
Richmond Fed Researchers
• Term premium measures how much more interest
investors require to hold longer term bonds
• When this is negative, yield curve inversions are
more likely, irrespective of the economy
US-German Bond Spread
• Nearing historically high levels
• German 10y yields currently negative
• Puts a ceiling on US 10y treasury rates
Bulls argue that the yield curve can be disregarded this time around

18. ECONOMY: Fed Beholden to Market / Politics ?
sources: HiddenLevers, Federal Reserve, St. Louis FRED
After one rate
hike, Yellen pauses
for 10 months
before raising
rates again
Market volatility
forces a 3-month
rate pause so far
"We think about a broad range of financial conditions ... it’s the stock market, it’s
credit availability, it’s many, many factors.“ – Jerome Powell, Fed Chair Jan 30 2019

19. HiddenLevers
SCENARIO: FED’S DEAD
NEW

20. NEW SCENARIO
sources: HiddenLevers, BBC
New Fed Hawks Fed’s Dead
April 2018 March 2019

21. Healthy Inflation
Revives Hawks
BASELINE
GOOD
S&P 500
1830
-35%
US GDP
-0.1
S&P 500
3125
+11%
US GDP
3.30
S&P 500
2350
-17%
US GDP
0.8
Decelerating
GDP Growth
UGLY
Double Top +
Recession
YIELD CURVE INVERSION
FOLLOWED BY RALLY AND
THEN RECESSION,
JUST LIKE OLD TIMES
MILD INFLATION AND
STRONG WAGES MAKE
FED PAUSE A NON-ISSUE
FLATTER YIELD CURVE
MAKES INVERSION LESS
SIGNIFICANT THAN BEFORE
SCENARIO: Fed’s Dead
CPI
0.9
CPI
2.00
CPI
1.40

22. Fed’s
Random
Pivot
Inverted
Yield
Curve
Oil
Prices
Rising
Fed’s Dead – Why Ripe?
Political Agenda