Behind the Yield
Sentiment Isn’t Noise Anymore. It’s a Signal.
When Everyone Is Anxious, It's Not Random, It's Systemic
Sentiment surrounding the economy is generally a mixed bag; some are stressed, some are indifferent, and some don't even know a survey was conducted.
But in this case?
It's like the entire country looked to the heavens and, all at once, acknowledged their concerns with the economy at the same time.
That almost never happens.
When sentiment decreases spans income levels and geographic regions as well as bipartisan affiliation, it's like the smoke detector is beeping, the dog is freaking out and the lights are flickering.
You don't care what the p-value is for significance, you're going into the kitchen to figure it out.
This is not sentiment that naturally occurs.
This is sentiment born of a shared state of anxiety that has finally seeped into the statistics.
Prices Went Up. They Aren't Coming Back Down. And People Know It.
Economists like to say inflation “slowed.” Consumers hear, when someone leaves a doctor's office after surgery, “It went great except for everything that went wrong.”
Consumers hear: Slower inflation does NOT mean: • groceries got cheaper • rent got cheaper • insurance got cheaper • childcare got cheaper
It means they became more expensive at a less furious rate.
No one believes their grocery bills will ever go down to pre-2019 levels. No one assumes their insurance renewals have been given the chance to turn back time.
Everything just increased and stayed increased. Permanently.
When people feel permanently squeezed, they change their habits. Not drastically. Not immediately. More like a slow tightening of the belt on the next loop that ultimately becomes status quo.
That's what's happening.
Households Change Before The Numbers Do, Every Time
Economists always say that sentiment doesn't foreshadow recessions.
That's because they only report what's happened, not what people were going to do before it happened.
But the signals to warn us are already there: • people downgrade brands • “later” is chosen over “now” • upgrades are passed over • cars are driven “one more year” • vacation plans are quietly scrapped • rotisserie chickens replace dining out • people do math at the gas pump
But no one thing means much.
Yet when 150 million households all do their take of these little pullbacks? That’s a deceleration well in advance before it hits GDP.
We’re just experiencing it in the interim, that “behavior has shifted, but economists haven't caught on yet” period.
Policymakers Are Stressing About Decimals. Households Are Scraping Together Dollars.
Markets are divided on whether core inflation was 0.27% or 0.31%.
Households are unmoved.
They’re faced with: • a $400 increase on insurance costs • a $300 increase on groceries • a $200 increase on utilities • rent increased by $250 • wages increased by... 2%
When fixed expenses outpace the time it takes to live, families go on the defensive.
It doesn't matter how many times the Fed says “transitory.” People are living “permanent.”
THE TRUE Risk is Cumulative Uncertainty
Recessions rarely give warning. They happen silently, officially non-evaluated but personally evaluated, felt from the comfort of one's living room.
It's akin to the national equivalent of: "Whooooa.... let's just pause for a minute."
But it's not that Americans have a financial strategy and pause. Instead, they're all pausing because something is askew, a dock slightly shifting under one's foot enough to trip.
One person tripping is noise. An entire country tripping is signal.
And then, it finds its way into markets.
Okay, But What It Means for Bonds?
Where sentiment is more than sociology, it becomes yield curves, credit spreads, and duration trades.
Which is how a confidence recession manifests in fixed income before it manifests elsewhere:
The yield curve flattens as household consumption recedes. (This is what's happening now.)• Credit spreads widen unevenly, especially anything related to the consumer.• The BBBs that rely upon discretionary spending are quietly then seriously cheapened.• HY dispersion widens, the canary gets ruffled.• Long-end Treasuries become more sentimental and more headline-driven.• 5–10 year Treasuries are the outperformer (the “safest place on the curve”).• Mortgage duration extends as housing grinds to a standstill.• Munis start to be influenced more by state-level stress than stress on a national level.
The bond market has always been the economy's earliest smoke detector.
Right now it's flashing yellow, not red, but it's the yellow that gives you reason to ease off the gas.
The Bottom Line
We're not having a recession.
We're having something softer, slower, less perceptible, the kind of thing that economists say we've had in hindsight.
We're having what's inevitable when households quietly take a step back but the lead story in the Times indicates that everything is fine and dandy. We're having the narrative on newsprint trailing behind but the newsprint of our lives has started to turn. We're having families choose which bills to pay this month while politicians decide how many tenths of a percent will best boost the economy.
We're having a confidence recession that won't be reflected on the scoreboard. It will be reflected in the stands, in the uncertainty, the fear, the awkward silence.
And right now, that silence is overwhelming.
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