What’s going on with the market this week? Well, the accepted narrative keeps shifting — first we had trade war panic as Trump announced new tariffs last week, then celebration as those tariffs were delayed to ‘save Christmas’, and the market is overly obsessed with the high-level game of chicken being played by Trump and Xi (I say “overly” because it’s an unknowable variable with extremely unpredictable participants, not because it’s unimportant).

Then once the “trade war delay” settled in this week and became a cause for optimism, the market noticed that the yield curve had once again inverted… and since that has been a signal of recession in the past, panic ensued again.

I don’t really care about the yield curve, other than in acknowledging that changes in the curve have a huge impact on some businesses (like banks and mortgage REITs), and that’s mostly because I think the past “signals” given by the inverted yield curve had a lot more economic intelligence in them than the current signal does. In the past, an inverted yield curve was an indication of recession because bond investors — widely seen as the “smart money” — were willing to accept lower returns in the future due to expectations of a weaker economy. With the bond market now thoroughly manipulated by global central banks, who are driving yields ever lower, I don’t think we’re really getting a clear “signal” about the economy here… we’re just getting a signal that the market now believes the central banks will continue to support risk-taking by pushing rates lower, in a continued global effort to inflate asset prices and try to get people buying stuff and generating inflation.

I don’t know whether it will work or not, I’m guessing that lower rates will not cause any additional economic stimulus… but unless consumer confidence collapses in the US (so far so good as of this week’s report), we don’t really need stimulus except as flailing attempt to get ahead of the global recession that seems destined to begin in Europe and flow through both Asia and the US at some point in the next couple years.

The most likely outcome seems to me to be a continuing currency war as the US, China and Europe all try to bring down the value of their respective currencies, with the wild card that the Euro might really implode ...