Last Friday I spoke to a number of money managers. One of the attendees was Linda Bradford Raschke, a professional trader, who used to trade on the Pacific and Philadelphia Stock Exchanges, founded a number of hedge funds, well you get the idea. She has written a book, which she signed and gave to me, titled TradingSardines, with the byline “Lessons in the markets from a lifelong trader.” I asked her if she knew where the term “trading sardines” came from and she responded, “No, but I have heard it all my adult life." Subsequently, I told her the real story:
"While gold was first discovered in Alaska during the 1870s, the 1890s have come to be known as the Yukon-Klondike Gold Rush days, as thousands of rugged individuals swarmed to the northern climes to find fortune and glory. Unsurprisingly, during the winter of 1896-97 the Alaskan ports were frozen solid and therefore closed to all shipping traffic. Food became very scarce and very expensive since new supplies had to be brought in over land at great hardship. Reportedly, a can of sardines that had cost $0.10 in New York could be priced at 10 times that amount by the time it reached the gold miners in Alaska. Still, there was great demand even at such inflated prices. For instance, in one remote mining town the price of a can of sardines was sold at rapidly escalating prices from $10.00, to $30.00, then $50.00. Finally, one desperately hungry miner paid $100.00 for a can of the highly sought after sardines. He took it back to his room to eat. He opened it. To his amazement he discovered the sardines were rotten. Angered, he found the person who sold him the tin and confronted him with the rotten evidence. The seller was amazed and shouted, 'You mean you actually opened that can of sardines? You fool; those were trading sardines, NOT eating sardines!'”
Last week, however, nobody was talking about trading sardines, but rather the slowing economy and the yield curve. Those worries came to a zenith on Friday with the slowing global growth data and the alleged inversion of the yield curve. The Eurozone Markit PMI Manufacturing Index for March came in worse than expected at 47.6 versus the estimate of 49.5, which was lower than the previous month’s 49.3. That’s the fastest contraction in six years. Speaking to the yield curve, all the talking heads are looking at the wrong yield curve; they talk about the 2- to 5-year T’notes, the 2- to 10-year T’notes, and last Friday it was the inversion of the 3-month T’bill to the 10-year T’note. These are NOT the right yield curves. I have had extensive conversations with Ned Davis (Ned Davis Research) about this and the REAL yield curve is/was/and will always be the 3-month T’bill to the 30-year T’bond and it is nowhere near inversion. So anyone that tells you the yield curve has inverted has no concept of history. So much for myth number one about inversion. As the good folks at Bespoke write:
"When investors hear yield curve inversion, they automatically think 'recession.' That’s because every recession since 1962 has been preceded by an inversion. But, not every inversion has been followed by a recession, so keep that in mind."