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Raoul Pal: This Is Concerning…The Charts Are Out of Character!
#raoulpal #investor #economy
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Raoul Pal, the founder of Real Vision, and Global Macro bombarded twitter with a series of tweets on the Yield curve and his concerns on the future of the markets. A yield curve is a curve that shows the interest rate associated with different contract lengths for a particular debt instrument. According to Raoul, the yield curve seems to be out of character which can lead to a significant recession.
In his first tweet, Raoul states:’You will label this as chart crime but the YoY change in 2 yr rates is absurd.” The steep curve highlights the sudden rise in bond rates in 2 years, which leads to stimulation in the economy. Steep yield curves have historically indicated the start of an expansionary economic period; however, it also indicates that long-term yields are rising at a faster rate than short-term yields. Hence, he terms it to be “absurd.”
He further stated, “If you did fix in 2 year rates in the crisis and took on leverage, the cost of servicing it is up… a lot. If leverage is high, the absolute level of rates isn’t what matters 100%. This might not be the biggest factor but it is important in terms of economic impacts over time.”
The tweet shows Raoul’s concerns that even if there is a possibility of recovering from the high bond yield, the high leverage that it would result in may have a huge economic impact over time.
By comparing the current yield curve to one that occurred in Japan in 2010, Raoul predicts that the system is either out to correct the market defects, or we may be looking for similar circumstances such as Japan’s yield curve in 2010 which the country hasn’t still recovered from.
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