Slowing Domestic Growth Is the Message of Bonds, Yield Curve

Repeating for emphasis.

The spread between the two- and ten-year U.S. notes has fallen to 68 basis points -- that's the lowest print in ten years and if history is a guide it is signaling a potential domestic economic slowdown.

The flattening in the yield curve is happening despite a likely continued Federal Reserve tightening and a rise back to December levels for overnight index swaps (OIS).

It was back in 2004 -- as the Fed started its tightening cycle (that concluded in Summer, 2006) -- that both the curve flattened and the five year OIS rose.

At the conclusion of the tightening in the middle of 2006, a deep recession followed by about fifteen to eighteen months later.

Nine years of low interest rates have pulled forward demand -- in housing, autos and elsewhere in the US economy.

C&I loan demand is already falling off and banking loan loss provisions are beginning to rise (after a multi-year decline) as delinquencies have begun to increase.

Hope for tax reform is high -- but, as currently constructed, it seems to this observer to be another "trickle down" dream that will fail to catalyze growth.

Meanwhile, industry after industry is being disrupted -- sowing the seeds for "Peak Employment" and a reversal of the nice gains in the jobs market over the last several years.

The bullishness on both top and bottom line results (as well as a consensus view of synchronized global growth) seem misplaced at a time in which valuations have moved above the 95% decile -- aided and abetted by the proliferation (and popularity) of passive investing (ETFs). There is persistent buying of risk parity and volatility trending strategies (who are agnostic to value, income statements and balance sheets) and the inherent dangers of (implicit and explicit) global short volatility bubble.

In light of recent domestic and geopolitical events:

Consider reward vs risk and upside vs. downside in individual stocks, sectors and markets.

And, listen to the message of the bond market.

As Grandma Koufax used to say, "Matzahs dont grow to the sky."