The Important Action Is Not In The Stock Market

The important action is not in the stock market. That was true this week. But it was true last week, and the week before that. In fact, for weeks the really important action hasn't been in stocks.

Still, stocks dominate daily media. Stocks always dominate talk about markets. The stock market is the darling of Wall Street. It's the Great Diva of the main stream financial media. All other comers are pikers.

For example, Gold and Precious metals: You'll get an occasional nod to this venerable asset class. But even a nod comes only once in a while.

But it's only natural, right? Stocks should always be the bulk of most folks' portfolios, right? Well, here's a little (or big, depending on your point of view) factoid. Since 2007, had you held Gold alone, you would have gains equal to Stocks. You wouldn't know this if your only source of intelligence about Gold is the corporate media. 

Now, this doesn't mean you should have or should now only hold Gold. But the point here is that Gold has treated its holders quite well, thank you.

But back to that "important action." It's been in bonds. Bond yields have risen at rates that haven't been seen in decades. Check this out:

Interest rates have jumped sometimes daily lately. A jump of 15 basis points in a day is big for bond yields. It's abnormal. But lately it's not abnormal. An example:

30-year US Treasury Bonds yielded 4.20% less than one month ago. As of the end of September, the yield was hovered around 4.8%. As of yesterday - a mere week later - the rate rose to 4.95%. These are historically strong rises in yields. We haven't see anything like this since the late 1970s, when people were afraid of hyperinflation.

A similar rise, percentage-wise, occurred in the 10-year Treasury.

Rates increases of this magnitude in an economy that's leveraged as is ours (i.e., laden with debt) pose a danger of the system breaking in some fashion. One specific note about something just about everyone is familiar with: Mortgage rates are based on the 10-year yield. And mortgage rates have therefore continued to rise, week after week. What does this/will it mean for the housing market?

We'll leave it at that. Just know there are and will be consequences that we have not even started to see yet.

Something's up.

Oh, and, yes, such increases in yields will put additional pressure on stocks. 

But, again, bonds are the real story. 

With that, it's likely that rates have risen so much so fast, a correction or pause would not be a surprise. Just know that the bond story has just begun. The fall in yields that began around 1980 ended sometime between 2020 - 2022. That was one of the biggest bond Bull Markets. It's all over now. Indeed, the opposite - a great Bond Bear Market - has likely begun, to last...well, who knows. But we need to consider years. If the Bear imitates the previous Bull, we could be talking decades.

Enough about bonds for now.

Sometimes it's interesting to look back a predictions to see how they panned out. Here's a selection of comments by one of our Brain Trust sources at the beginning of September. The month has passed. Here are the comments:

-   Negative market forces will exert themselves in September

-   Speculative sentiment now sky-high

-   Re Trading Options: Only use these as a hedge.

-   Consumer buying power will now diminish.

-   Big investment flows into tech ended start of this year – Outside of “Magnificent 7” inflows of majority have declined.

-   Carefully Review 2 Alternative Scenarios for rest of this year/2024 – Alternative #1 based on Fed policy helping party in power, which could lead to a temporary big surprise for Bears. Alternative #2 based on similarity of chart patterns to year 2000 and forward.

-   Alternative #1:

-   Fed has raised rates a lot in a short period, but this is not tightening

-   Unless Fed changes policy, next year will see new highs in the rate of inflation. But markets could rise instead of decline because stocks become inflation hedges in a climate of good liquidity.

-   Consider therefore that the Fed continues to raise rates, but not reduce ability of banks to make loans – that was what happened 1978 – 1980 – kicked off a surprising upsurge in stocks and big rise in inflation.

-   Possibility of a repeat

-   Fed “tightening” is a fairy tale – Bank reserves are plentiful. Fed has done little to withdraw liquidity from the banking system – reduction of their balance sheet miniscule compared to $5 Trillion created during COVID, so still nearly double what it was pre-COVID.

-   For 2024, seems agenda is to have a growing economy. If so, Fed will not actually tighten lending but only hike interest rates. 2024 would then be a good year for stocks – Stocks would then become inflation hedges as they were in 1978-early 1980.

-   Eventual end of an inflation-driven bull market would be very painful

-   Alternative #2:

-   Based on charts – compares with Dotcom bubble of late 1990s – now looks like period around 2000 – stocks plunged March-April, similar to what happened 2023 February-March – then rose until September 2000 in strong Bear Market Rally – Then fell, starting Phase 2 of the Bear Market decline, typically the most severe decline.

-   NB: The Bear Market 2000 – 2002 wiped out the entire Bull Market of 1998 – 2000.

-   Both Alternatives giving a warning – depends on what the Fed does or doesn’t do.

-   Alternative #1 would present opportunities for experienced speculators- Sectors such as AI and/or commodities would do best.

-   Consumers are running out of COVID money – Will Fed step on monetary accelerator to counter this?

-   New Homes sales are surprising analysts with their strength

-   Major trends in liquidity can tell the future of markets and the economy at major market turns, vs. fundamental metrics.

-   USD: could be strong for next year or so, as major safe haven

-   At today’s rates, borrowing money still free after factoring in inflation – Smart, wealthy investors know how to play this game.

When it comes to predictions, these are pretty good.

 

SPECIAL BONUS:

For those of us who are puzzled (to put it mildly) not only be recent "revisions" of the BLS jobs reports, this article tries to set things straight.

(https://www.zerohedge.com/markets/inside-todays-jobs-report-885000-full-time-jobs-lost-offset-1127-million-part-time-jobs)

BONUS #2:

If you're not sure about the competence or credibility of the current crew in D.C., here's another article - this about the "We need Wall"-"Didn't really mean it that way" comments from the guy in charge of such things. A real head-spinner.

(https://www.zerohedge.com/political/too-freaking-late-mayorkas-finally-admits-acute-immediate-need-build-border-wall-texas)