Normalizing the reversal of the short- and long-term interest rate gap as of today.

Now, after 784 days of waiting (the T10Y2 phase), the short- and long-term interest rate difference (US10-year interest rate – US02-year interest rate) has finally been normalized.
The dot-com bubble collapse in 2001 and the Lehman crisis in 2008 took place after the normalization of the short- and long-term interest rate gap, and since then, there has been a major stock market decline of at least spx -20% to -50%.

In general, the mechanism is explained by a decrease in loans due to a decrease in the loan-to-deposit margin or reverse margin, a recession due to depletion of liquidity in the market, and an increase in unemployment. The stress on banks is the cause of the stock market crash. Because of this, I have continuously checked data whenever data on banks are released. However, I haven’t seen any data on the bank as dangerous.

The results of the Dodd-Frank Act Stress Test (DFAST), which the Fed conducts annually on large banks under the June 26 Dodd-Frank Act of 2024, show that all 31 large banks participating in the test have more than doubled their capital ratio (4.5 percent) even under a very negative scenario (including a 40 percent drop in commercial real estate prices). According to the pilot analysis, all large banks can withstand a financial crunch in a severe recession, and the G-SIB has been assessed to be able to withstand a surge in interest rates due to worsening inflation prospects and a fall in interest rates due to a recession in major economies. (Data released on July 5)

That’s why those who talk about triggering a subsequent recession seem to focus on excessive U.S. administration debt rather than banks’ side. But no one knows what kind of black swan will come out of this. Will there be a recession because of low U.S. administration spending? Wouldn’t it be possible if we take the narrow path of inducing growth while lowering interest rates? Yes, the 8/5 black Monday incident caused by the last N.Carrie trade unwinding issue was surprising, but cooperation between the U.S. and Japan was quite good in the subsequent remediation process and played a role in dispelling market concerns.

On second thought, if the data doesn’t clearly show the course of bank insolvency, liquidity decline, recession, and unemployment increases in the normalization after the commonly said reversal of the short- and long-term interest rate, it’s hard not to think, “Why on earth are you so sure that the stock market is crashing?” That may be why Powell was mentioning unemployment, too. (For that reason, now that Nvidia earnings are over, 9/6 non-farm is the most important thing.)

If the signs of recession are clear, it’s enough to run away.
The most expensive horse in the world is said to be ‘different this time’.
However, looking at the normalization of the reversal of the short- and long-term interest rate gap, I can’t find a reason to run away from it yet.