Oh, It’s Probably Nothing…

By David Stockman  |  October 23, 2018

So it must seem today, as the yield on the 10-year U.S. Treasury note eases back to 3.13% from as high as 3.25% a couple weeks ago…

Folks, this is not about “good” or “bad.” Indeed, even 3.25% is still ridiculously low (read: “easy,” or “accommodative”) by historical standards.

What is important is a change in the long-term trend. And this one has been big.

Consider: Over the last year or so, the yield on the 10-year U.S. Treasury note has risen by more than 40%.

Here’s some context: In early October 1987 the yield on the 10-year hit 10.23%. That’s obviously stratospheric by today’s standards. Just 13 months earlier, in September 1986, the 10-year was around 7%.

In that brief interval, the carry cost of benchmark debt rose by 45%.

The market rolled over shortly thereafter, plunging by a heart-stopping 22% on Black Monday, October 19, 1987.

The 10-year is, of course, a big deal. It’s the global benchmark for the risk-free rate of return. It’s been noisy the last couple of weeks, sure, but there’s also a lot of signal. It’s saying “easy money is over.”

David Rosenberg offers more insight into U.S. Treasury yields:

Don’t look now but the long end of the Treasury curve has broken the bearish trendline intact for most of this year. Bonds are not buying into the pro-growth view espoused by the Fed and the shills on bubblevision.

So much to unpack here…

David Rosenberg is that rare bird on Wall Street: a serious truth-teller.

That’s probably why Merrill Lynch fired him – before it imploded and got re-animated by Bank of America (NYSE: BAC) as the collapse of the U.S. real estate bubble metastasized into the Global Financial Crisis.

He’s now chief economist for Gluskin Sheff + Associates. That’s a Canada-based firm. And it houses Rosie’s none-of-the-bluster-but-all-the-moxie approach to preserving capital in this mixed-up market of ours really, really well.

This is the money quote: “Bonds are not buying into the pro-growth view espoused by the Fed and the shills on bubblevision.”

While the futures were pointing to a 400-point gap down for the Dow Jones Industrial Average at Tuesday’s open, CNBC’s Eamon Javers had a chance to ask Larry Kudlow whether a he still thinks a selloff this morning is a healthy thing.

Here’s Kudlow: “When I checked this morning, we were down 5% or so from the peak. Not much, not much.”

Kudlow is now Director of the National Economic Council. We worked together in the Reagan White House.

Javers also asked Kudlow if Trump’s trade policies have anything to do with the market weakness. Here’s how Kudlow answered: “I think the stock market is worried that Congress will change and overturn these pro-growth policies. The so-called correction… has to overcome the uncertainty of the election.”

Like a lot of us, Larry’s lost a little off his fastball. Unlike a lot of us, Larry once again has the ear of the most powerful elected official on Earth.

In other words, he’s a shill on Bubblevision.

But the story is evolving in real time: CNBC is now lamenting the fact that Wall Street’s day-traders and robo-machines are no longer rewarding “good” earnings reports.

Well, components of the S&P 500 Index carry $7 trillion of debt. A mere 45 basis points of additional yield on the 10-year U.S. Treasury note will leave a massive mark.

It’s going to cost about $50 per share, after taxes, in 2019. In 2017, they spent less than $20 per share to service their debt.

Is that kind of hit to earnings “priced in” at these levels?

No. Not even close…

This rout, when it gets real, is going to be orders of magnitude more traumatic than anything we’ve experienced.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR