So let me get this straight…


US Government Treasury bonds are the safest asset in the world today. They are implicitly guaranteed to get you your principal back at the maturity of your bond. Economists and investors commonly consider yields on Treasuries to be the ‘risk-free’ rate; meaning rates on Treasuries are the smallest amount of return an investment should provide.

Higher expected growth in the future means longer term bonds will have higher rates. Similarly, if lower growth is expected in the future, longer term bonds will have lower rates relative to shorter term bonds. A common metric quoted in financial news is the “ten to two”, i.e. the yield on a ten year US Government bond minus the yield on a two year US government bond. The ten to two measures the steepness, or slope of the yield curve. Note: slope is also used as a rate of change, i.e. velocity, in calculus (think, economic growth).

Here’s the yield curve today versus a year ago:

Screen Shot 2017-11-21 at 10.11.33 AM.png

The yield curve was steeper last year than it is today. We’ve realized some massive growth over the last year (see table below), and the Treasury market is beginning to temper it’s enthusiasm on future growth.

Screen Shot 2017-11-21 at 10.44.26 AM.png

Note that as home prices rise and wages do not, they’re financed with debt not cash. *cough* 2007 *cough*.

The 10-year Treasury yield minus the 2-year Treasury yield is at it’s lowest level in 10 years. That includes November 2007, right before the market went nose-fuckin-down.

Screen Shot 2017-11-21 at 10.47.17 AM.png

Disclaimer: the ten to two was already on its way up in November ’07, after inverting in March ’07.

It’s pretty much written in stone that money follows performance. Top performing Morningstar funds are given five star ratings. According to this WSJ article, five star rated funds attract massive amounts of assets, only to underperform their past performance: “Only 58, or 14%, of the 403 funds that had five stars in July 2004 carried the same rating through July 2014…”

So let me get this straight, we’ve seen massive performance in the last year. We’ve seen the ten to two at its lowest level in ten years. Why are equities still going up?


  1. The cost of money, i.e. interest rate on loans, is so low that arbitrageurs are borrowing to buy stock, because stock market returns are stable and greater than interest rates on loans. This is called leverage, and is a product of financial engineering. This could be huge once stocks start to fall. (Note: Check leverage levels in the market, thoughts on where to look readers?) Housing growth is also being fueled by easy money, just like last time.
  2. Quantitative easing loaded banks with cash and they’re using it to purchase assets, like money market accounts. Note: I’d like some clarity here, not sure if this is even fundamentally correct. Banks are paid for their excess and required reserves at 1.25%, which is about the same as a 5-year US Treasury bond (1.30%). Why would they get rid of their cash if they’re making 1.25% on every dollar per year; IT’S FREE MONEY FROM THE FED?
  3. We’re hitting the euphoria stage of markets. (See: This is Your Brain on Investing). Markets continue to push all time highs, and the financial media is eating it up. If markets continued at this clip for the next 3 years, both the Nasdaq and the Dow Jones would DOUBLE again (Sauce: Rule of 72). If yearly performance of the Nasdaq and DJIA continued, this is how it would look in November of 2020, does that look right to you?


Good luck, thanks for reading,

– tommander-in-chief

What I’m reading? Wealth, War & Wisdom – Barton Biggs



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