Trump economist Larry Kudlow says you can ignore record low long-term bond yields, but they're a leading indicator of a stock market crash.
Larry Kudlow – Donald Trump’s top economist – says you can ignore crashing bond yields. An inverted yield curve is often a leading indicator of a recession ahead, not to mention a concurrent stock market crash. That’s because investors are fleeing risk markets for a safe haven.
Long-term Treasury bond yields crashed below short-term bonds before the 2008 financial crisis that caused the Great Recession. Yields also inverted before the 2001 recession that went hand in hand with the dotcom crash.
But Larry Kudlow says there’s no reason to be alarmed. In a televised interview Friday, CNBC’s David Faber asked about the lowest long-term bond yields markets have ever seen:
What does the 30 year all time low yield of 1.89% say about this economy and the perception of it?
And the National Economic Council director downplayed the bond market’s warning:
I just think, in general, I would be very careful to put too much emphasis on what bond rates are doing, what interest rates are doing.
Or even in the short, short run, the stock market. I think you have a lot of mood swings here and I don’t think it reflects the fundamentals.
While 10-year Treasury bonds sink, and the 30-year Treasury bond yield hits an all-time low, the stock market is closing out the week on a note of alarm.
The Dow Jones Industrial Average ended the week with a loss after two consecutive days of decline. After losing 128 points Thursday, (with a 400-point intraday free fall), the Dow lost over 227 more points Friday.
Larry Kudlow calls this a “mood swing.”
In his view, the stock market is reacting emotionally to transient, short-term events that won’t impair the economy’s strong fundamentals.
But after last year’s inverted yield curve scare subsided, and as the stock market charted bold new records in recent months, Kudlow didn’t say to ignore the emotions of euphoria at play and turn your attention to the fundamentals.
Instead, he stoked emotions by teasing more tax cuts.
Besides, Kudlow is cherry-picking fundamentals.
In the CNBC interview, he says:
America is working and there is a blue-collar boom. This a fundamentally very sound economy.
He’s right. Job growth remains strong, and unemployment is still hovering at historic lows. But there are still other fundamental systemic risks that threaten continued economic growth and forebode a major stock market crash ahead.
Chief among these is the recession-level federal deficit.
Peter Schiff, CEO and chief global strategist for Euro Pacific Capital, says it’s proof the economy is not as strong as the job numbers suggest.
And another round of tax cuts will make it worse.
Then there are record levels of housing and household consumer debt.
David Rosenberg, chief economist and strategist for Gluskin Sheff & Associates, says the economy’s apparent strength is fundamentally driven by “turbo-charged” debt.
He thinks it’s unsustainable and will end “miserably.”
Finally, there’s the “Buffett Indicator,” which is the total capitalization of the U.S. stock market divided by U.S. gross domestic product. In other words, how much does the stock market say America’s companies are worth, relative to how much they’re actually producing.
It’s about as fundamental as you can get.
Today it’s at a record high of 158%. It was 146% when the stock market crashed in 2000, and 137% before the Great Recession toppled the stock market in 2008.
The Buffett Indicator and Treasury bond yields are the fundamentals.
And they are not very sound.