so far this cycle is eerily eerily similar to what happened in 2007 not just with September 18th not just with the 50 basis point cut not just with coincidentally going down to the exact same number 4. 75 but also the price action or the yield on the 10-year treasury what's really weird too and something that's fun to think about is the most important interest rate for the economy is the 10year treasury cuz that's what filters straight through to mortgages as an example and to most of the interest rates and oh some of the interest rates are more short-term but most of the interest rates in the real economy are going to be kind of a derivative of the 10-year treasury so what's ironic is what may have happened prior to the GFC is because the market got so optimistic on their future growth and inflation expectations from the FED dropping rate so aggressively the 10-year treasury like we said goes up which causes even more havoc in the economy that was already suffering and that could have been the straw that broke the camels back that brought on lhan be Sterns the GFC again this is not a prediction it is something I think that we need to be cognizant of that this cycle could play out almost the exact same way where everyone gets so euphoric about the economy that longer-term interest rates actually go up while the FED is dropping rates to try to get ahead of the recession and those interest rates going up are actually the Catalyst to the hard Landing because that's what pushes the unhealthy economy just right off the edge I mean it's really unprecedented what we're seeing right now in the yield curve I went back and looked at all these Cycles going back to 1980 and I couldn't find a cycle where the curve reined after the FED started dropping rates I couldn't find it we don't know what it means but I'm guessing it goes back to the view of the mainstream media that the underlying economy is extremely healthy while at the same time we have oil prices increasing as a result of what's happening in the Middle East and uh a lot of the experts and let's just say talking as the market seems to think that those higher oil prices if sustained could trickle through the United States and lead to higher rates of inflation so when you have that combined with what we were talking about prior to the break with this Euphoria around the health of the economy that means inflation and growth expectations increase which would make sense when you see the yields going up on the yield curve especially the 2-year treasury going up a lot faster than the 10-year which has created this incredibly rare unprecedented uh reinversion of the curve and we were talking about the CME Group and they just do kind of like the betting odds if you will based on different market indicators for the next fed meeting as to you know are they going to cut 50 are they going to cut 25 and just last week the debate was between 50 and 25 right at the top of my head I think it was maybe like 20% for a 50 and 80% for a 25 now as of today the 50 is at 0% it's not going to happen well the 50 basis point is completely off the table 0% chance they do that next meeting and the 25 basic point cut I believe is at 80 % and no cut no cut at all is at right around 20% odds so this is really crazy stuff and what's frustrating I think for the average person is when they juxtapose what they're hearing from the Federal Reserve and from these data points to what they're seeing in their own life yeah at the food store at the gas pumps exactly their purchasing power is declining they're finding it hard to maybe get a job or find a different job if they want to Rel locate they're talking to their friends and their friends are saying the exact same thing and they're looking around them themselves and just saying booming economy I don't huh like how are you coming to this conclusion and I think they're right the guy in the street is absolutely right that would be my base case and I think that over the next 6 months or maybe over the next nine months you never know how to time these things that the average Joe and Jane that are watching your program right now saying to themselves no the economy is not doing well it's actually doing very poorly they're going to be the people that are proven correct and by the way this exact same thing happened not with the UN inversion of the curve but with the interest rates the exact same thing it's almost scary that uh it's just a mere image or kind of a a carbon copy maybe it's a better way to say it as to what happened in 2007 so I don't know if you know this Kim but the last time that we had a 50 basis point cut was in 2007 prior to the GFC and you know at the date was On That September 18th is the exact same day and by the way you know what they dropped the rates to no what 4. 75 if you guys aren't following me here uh this last rate cut that we got from the FED which started their rate cutting cycle was September 18th and the FED dropped to 4.
75 the exact same thing the exact same day as 2007 and then we had the great financial crisis yeah but let's focus for a minute on what happened to interest rates as far as the long end of the curve because see what we've been talking about this reinversion that has to do with the entire curve but if we actually look at what happened at the long end let's focus on the 10year treasury to keep it what we're seeing right now is literally exactly what we saw during 2007 when they started cutting rates back then so but I'm going to go to a quick chart it's a reference point and uh before I do let's just for the audience they can maybe make a mental note the First Rate cut in 2007 like we said September 18th 50 basis points dropping their overnight rate to 4. 75 the next one Kim was on October 30th and this was 25 basis points and then they dropped another 25 on December 11th now I'm only going to go over two more but these are very important then moving into January of 2008 they had an emergency meeting January 22nd where they dropped by 75 basis points and then just one week later one week later at January 30th they dropped by another 50 basis points so in January of 2008 within a span of one week they dropped by 125 basis points so 1. 25% so you would think that if the FED is dropping this aggressively that this would be a signal to the Market that the economy is really suffering and the economy is quite frankly going off a cliff and therefore you would expect the 10-year treasury to go down in fact you'd expect the 10year treasury yield to plummet but what's fascinating is if we'll pull up a chart here of the actual 10-year treasury going back to that time frame but we can highlight these specific dates we just referenced so if we start at uh let's say September 8 18th over the next so September 18th the 10year treasury is trading right about 4.
5% what we see moving into the first couple weeks of October October 12th it was actually trading 20 basis points higher exactly what we've seen so the FED drops by 50 and the 10year treasury goes up by 20 basis points and then they have the October cut which brings the 10-year treasury yield back down but then they had that emergency meeting remember that in 2008 so that was January 22nd of 2008 they have the emergency meeting they dropped by 75 and then a week later remember the 30th they drop by another 25 or excuse me another 50 basis points bringing it to 125 well at this time the 10year treasury is trading right around 3. 5% okay what's unbelievable is we fast forward another let's say 6 months so take it to June of 2008 and the 10-year treasury was trading at 4. 27 so it went up it went way up so now let's go to a chart of the actual uh fed funds so we can get kind of a a better visual but we can look at January right here we're right around call it 3.
75% roughly and then they drop all the way down over the next 6 months to 2% so Kim let's think about this they go just to keep the math easy they went from roughly 3. 5% all the way down to 2% and at the same time the 10year treasury yield went up and every indicator you're saying by these cut cut cut cut cut is signaling that the economy is in terrible shape right but what happened back then it was the exact same narrative that we have right now is it every single time the FED cut not every time but a lot of times when the FED is cutting doing these emergency rate cuts and everything the Market takes that is oh great the fed us out the fed's bailing us out we've got nothing to worry about because even if we were headed toward a recession well now that they've done all these emergency Cuts econom is gonna be great now everything's going to be great because even if we were going into recession now we don't have anything to worry about because they've cut so much there's no way that we can go into a recession or hard Landing now so are you saying that now they don't even have to cut anymore because they already have that narrative that the econom is great are they going to continue to cut but my point is that's what happened back in 2008 it's exactly what happened is the economy was on fire until it wasn't and then that's when you get the Wy coyote moment where he runs off the edge of the cliff and he's fine until he looks down everyone knows what's happening or knows what happens so I I'm not saying that this time is an exact replica of 2007 and therefore we're going to have a GFC 2. 0 I don't think they can stop the banking crisis they might be able to paper over it and just kind of where a bank fails here they can kind of contain it maybe but this still has to play out and uh you know going back to your earlier question you know can the FED basically engineer a soft Landing it's possible but we have to look at probabilities and what I can tell you is going back to 1950 they never have they never have not even once so I would encourage your audience to pull up a Fred chart of the FED funds rate and look at the FED hiking cycle and then just look at those gray shaded areas which represent a recession and show me the last time the Fed was able to just gradually bring down interest rates we're just going to do 25 basis points every quarter and you're never going to know the difference and we're just going to wake up in 5 years and wouldn't you know it the FED funds rate is going to be at 3% and the economy is going to be booming if that's so easy why haven't they ever ever ever been able to do it what you see is the exact same cycle every single time and then sometimes people point to the mid1 1990s they say oh well the FED had a rate hiking cycle there and then they were able to you know slow it down we didn't get a recession right the curve wasn't inverted I mean come on let's be honest the banks weren't giving you that signal that the stuff is going to hit the fan they were still lending into the real economy they were providing a lot of that liquidity and by the way there were no Bank Reserves effectively uh there were no Bank Reserves back then so you're comparing apples to oranges there the entire curve was not inverted but if you look at the typical cycle and again you just your viewers can look at a Fred chart of fed funds and they'll see what I'm talking about it goes up up up up up and then it flattens out and then the next move is always down but it's not just down slightly like taking the stairs down it takes an elevator down because the FED is always behind the curve and they're always responding they're always reacting they're always responding to a crisis and that's also why the PSM rule is definitely applicable and when you see unemployment go up by I think I think it's Claudia she came up with a great observation where she said okay if you got a 3- month moving average where the unemployment rate goes up by 50 basis points relative to its lowest point over the last 12 months you're not only in or headed toward a recession but we've never seen the unemployment rate just flatten out just oh it went up to 4.
5 oh no problem it's going to hover around 4. 5 then it's going to go right back down to 3. 5 no if it goes up and it breaks the P rule then it just goes parabolic and that's the stuff hitting the fan that's always what the FED is responding to and that's what the yield curve sniffs out that's because the banksters know about it first I mean let's sit back and just ask ourselves we know how greedy the Jamie Diamond types are the George Soros I call them the financial insiders are you going to sit here and tell me that Jamie Diamond doesn't have any Insider information as to what is happening with the global economy or the US domestic economy and I'm not saying it's illegal Insider information but he definitely has access to info with all these multinational corporations and these CEOs that come out on CNBC he's having dinner with these guys every single night so they're going to level with him and he's going to say hey you know what do you think about the economy I saw you on CNBC today saying that it's great and then they sit down and have a couple whiskies and like no Jamie you don't understand it's bad it's real bad and then he goes out what does he do he buys 10year treasury he because he he doesn't want to take the risk which inverts the curve so it's again I think they're just placing bets based on this Insider information and that's why the curve has such incredible predictive Powers it's not just magic it's not fairy dust it's not just uh happen chance the reason it's so accurate I believe I believe is because it's a representation of financial insiders that have Insider information placing Bets with their own money not just what they say on CNBC or Bloomberg this is the idea that somehow the yield curve itself creates the recession like somehow the yield curve is what is impacting the market and it's not a representation of what the market participants are actually doing so they actually get it wrong they get it backwards it's the dog wagging the tail not vice versa but this argument let's just tackle it head on here that the yield curve is dead I like the fact that as they're saying this the yield curve is playing out in the exact same way that it's done in every single cycle so what am I talking about I'm talking about the uninversity macro econ guy speak for say a bare steepener is when the curve steepens out as a result of the long-term interest rates going above short-term interest rates so an example of this would be right now the 10year treasury is trading right around 4.
2% we got fed funds it caught 5. 2 so if we saw the 10-year treasury go up to five up to six up to seven this would be a result of a bare steepener and that actually would be healthy that's what you would want to see in a healthy economy now it could be the result of the market predicting High rates of inflation which obviously would not be good but if we actually had a booming economy this is what you would see why because then the banks and the financial institutions they're not buying treasuries which makes the price go down the yield go up because they're taking that balance sheet capacity and they're lending into the real economy because the risk reward makes sense but now let's fast forward or let's move over to the bull steepener now the bull steepener is where the front end of the okay so let's go like this we got the 10year at 4.
