V Shaped Recovery? More like N Shaped Recovery (Part 1).

The narrative on main-stream media and popular networks such as CNBC continuously perpetuate that the economy is great, that Initial Jobless Claims are declining, and that the stock market is at an all-time high. Everything is good in the world, right? Well, not necessarily.

I would first like to bring in question the 10 year Treasury security yield.

The usual complacency taking place on CNBC and other mainstream media networks is, to no surprise, that the US economy will create a 'V' shaped recovery, one that has a sharp decline, then suddenly rebounds. This is simply not the case. This chart clearly depicts that. The 10 year Treasury security yield had its last print at 0.6930. If real growth was in fact evident, we would see a rise in inflation which would subsequently cause yields across the curve to increase. This is not happening. Yields are staying flat near the ZLB, and are likely to stay relatively close to the 0% threshold for quite some time, disproving the fallacy that the "economy is better than ever".

You must realize that there is more to the market than "stocks".

I would also like to bring in how the Federal Reserve literally said that they would let their inflationary target run higher than the usual 2%. This will perpetuate extremely high inflation in the future, which is already being shown by a extremely bullish move in commodities, as well as a devaluing dollar.

I will expand more upon inflationary expectations and the Federal Reserve balance sheet in other posts in an effort to keep this post short.

I would also like to add that there is considerable downside risk even from here for the 10 year yield. For example, the 10 year Bund (German bond) is trading with a yield of -0.394%. So, there is approximate downside of -1.087%. The ECB tried to fix this problem, and BoJ tried to fix this problem, by massive stimulus and the purchasing of high yield/ investment grade ETFs using unlimited funds, but with no success. The United States might be the next victim of negative rates.

In summary, there is still considerable downside in the 10 year Treasury security. It would be wise to lighten up on Treasury fixed-income exposure, taking down your net Duration measure on your portfolio to reduce exposure to interest rate risk. However, I think keeping an overweight asset allocation to treasuries in a risky portfolio would be wise (depending on the core index/factor model you are using).

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