The Crash Of 2024
Is this some new kind of seasonality? Well August has historically been weaker than July, but the delineation has been notably sharp two years in a row. Last year July was relentlessly bullish all the way through the last day of the month, with the first day of August beginning sharply lower. Deja vu.
Readers who have been following along may be by now bored silly with my long repeated assertions, last repeated just a few days ago, that the most timely danger of an inverted yield curve is when it begins to uninvert, and that the corporate-media-promoted narrative of Fed-rate-cuts-are-bullish-for-stocks is mere marketing aimed at unloading stocks to “retail” investors at premium prices. And further that Treasuries, not Fed funds, are the rates to watch.
But I believe them about to be once again validated. One year Treasury yields last peaked on April 30 at 5.25% and have been zig-zagging their way lower since, closing over 50 bp lower yesterday at 4.73%.
Anyone following the media coverage however would have thought the most important rates question was – multiple times a day for months on end – how many times the Fed would cut this year. More recently would it cut in September. Or maybe July … or whether there would be any cuts in 2024 at all. Pity the naive investor following this confusing media propaganda when he could have just followed market fact. The equivalent of more than two Fed rate cuts in real world markets happened while media were seized with pointless speculation.
That’s just the tip of the market media smokescreen (to mix metaphors). Endless distractions with questions about “recessions”, “soft landings” and other economic waste do investors a deep disservice. Wall Street could care less about whether Joe or Jane lunchpail is unemployed. Fear of “recession” is purely of one on Wall Street. The word “unemployment” is just a less obviously mercenary way of lobbying the Fed for easier money, most of which goes to Wall Street, while Joe and Jane are beset with inflation and declining living standards.
Meanwhile as I’ve also reiterated endlessly in these pages, there was never any planet on which consumer price inflation would be brought to heel while asset prices continued inflating at double digit annual rates. Either asset prices come down or consumer prices rise to meet them. Or some messy combination of both. The official Ostrich School of Economics, where inflation is exclusively a consumer price phenomenon and asset prices live in their own separate world, notwithstanding.
So enough ranting about the poor excuse for financial media, Finster, where’s the “market outlook” you teased?
Okay, well in this information age, the key step in finding the needle is tossing aside the hay, eliminating the useless “information”. With that out of the way, this decline-in-one-year-yields needle remains standing as pointed as any. Nosebleed stock valuations, especially in sexy, highly hyped areas, are another. As I commented earlier this week, I’m overweighting USD (cash), UST (bonds) and gold, underweighting stocks and non-gold commodities.
This is emphatically not a long term view, especially with regard to cash and bonds. It’s valid only while short term rates are falling. However shallow or deep it goes, expect another inflationary bazooka of monetary and fiscal folderol in response. At that point allocations can then return to the inflationary posture appropriate for most of this decade, with ample allocations to stocks, gold and non-gold commodities.
The one year Treasury printed at 4.62% today. This is a full 63 bp of rate cuts in just three months.
The ten year yielded 3.99%. So the yield curve, as measured by the Financology standard 1-10 year spread, is not yet uninverted, though it is inching in that direction. Our USD-UST mix performed like a champ. AU was down 35 bp in dollar terms, yet still smartly outperformed stocks at -189 bp.
Postmarket futures show further losses in stocks (not citing numbers here because they would be outdated before I could hit Post Comment), as even the mighty Amazon reported disappointing results and the once mighty Intel announced it was suspending its dividend. Gold is gaining, hovering just below the $2500 mark it briefly pierced last night.
But let’s not get too caught up in one day’s trading … markets are exquisitely unpredictable in the short term. Any victory lap would have to wait at least until we can profitably close our trade…
Wall Street’s wailing about the Fed’s failure to yet give it the rate cuts it demands is touching, but misplaced. The Fed erred all right, but in supplying too much hot money and inflating out the wazoo by not timely withdrawing its explosive monetary ease way back in late 2020 – early 2021. Monetary recklessness has its costs … always, if not immediately.
Rare positive commentary on gold from the mainstream:
Gold Shines, Defying Historical Relationships
Koesterich, like many others, admits to some puzzlement over the apparently broken link between gold prices and real interest rates, and turns to other factors to explain its outsized performance.
Those other factors may be making legitimate contributions, but the link between gold and real interest rates is intact as ever. Despite its being invoked as commonly as curse words, most analysts citing “real interest rates” have no idea what they are, because they have no idea what the real rate of inflation is, not to mention what it will be in the future where yields live.
But wait … there’s more …
“Maybe I Should Own Real Money”
Our tendency to emotionally anchor in a nominal world makes market moves like this feel bad. Just about everything is nominally “down” in a month that is only two days old. But it is very good news on the inflation front, because this whiff of deflation means our dollars are reversing a bit of their purchasing power losses of the past four years.
This silver lining has a limited shelf life however, because for all the talk about quelling inflation, once success is at hand, it is regarded as an economic emergency that requires “corrective” action. Defeat will be snatched from the jaws of victory.
Prepare for the possibility of emergency Fed rate cutting, revving up the printer, and an encore performance of the stimmy check show. The next round of inflation could be worse than the last.
Wow what a month in markets. And it’s only two days old. In $, stocks (VT) are down -3.60%. Gold (IAU) down -0.52%. Copper (CPER) -1.41%. Bonds were spectacular, with even the boring widows-and-orphans Treasury index fund (GOVT) up an astonishing 1.71%.
So finally my bullish Treasury call is being met with a response. Alas, it was so early – about two years ago – a more accurate characterization would be “wrong”. And even now, it’s living on borrowed time … yes there is probably more ahead, but the secular trend is now down, merely being temporarily eclipsed by a cyclical rally.
One year rates have utterly collapsed. -29 bp today alone. In two days, -40 bp, and since April 30, -92 bp (nearly four Fed cuts’ worth in three months), finishing the week at 4.33%.
Ten year rates are now down -19 bp today, -29 bp in two days, and -89 bp in three months, coming to rest this week at 3.80%.
The 10-1 year spread is now -53 bp, considerably uninverting (steepening) just since yesterday’s -63bp.
Because of the evolution of the yield curve, the economic and political data it reflects, and market valuations, I think this trend has legs; at least two or three months’ worth. But in the shorter term, it may have gone a bit too far too fast and could back and fill a bit before continuing; eg a bounce in stocks wouldn’t be the least bit surprising next week. In any case the markets are in for a rollicking few months.
The Sahm Rule is making the media rounds this week. It’s not a new thing, but this is the first I’ve heard the name applied to it. In a nutshell it makes a “recession” call whenever the three month moving average of the unemployment rate rises by more than 0.5%.
Like much of conventional economics, it’s a semantic construct, bereft of fundamental insight. Economists coined the word “recession”, and they can define it however they like. The most widely accepted current definition of recession is whenever the NBER says there is one. (?!?) Other common meanings include two consecutive quarters of GDP contraction.
Claudia Sahm herself is downplaying the significance of this week’s “triggering” of her eponymous rule, calling attention to the unusually large expansion of the labor force due to unusually large immigration.
Much of the media are desperately clinging to the “soft landing” story. It’s an increasingly strained exercise in denial, however, likely to continue until the NBER issues its formal declaration, which is often so deferred the “recession” is over before its beginning is even acknowledged. So is there, or will there soon be a “recession”?
Finsterian Economics doesn’t give a flying f$&@. The state of the economy is a dynamic, multidimensional continuum, and any attempt to reduce it to a simplistic binary variable is a dumbing-down unworthy of any pretense to science.
You see, we deal in facts. An “economist” might say that the conditions for [insert term here] are fulfilled if three of the four conditions A, B, C, D are met. If A, B, & D are true, then we just say A, B & D are true and drop the terminological sophistry.
That said, the triggering of the Sahm Rule is hardly out there by itself. It comes after nearly two full years of deep yield curve inversion. By whatever name you want to call it (I hereby define it as a “brglfnk”), debt is rising, unemployment is rising, interest rates are falling, and the stock market is too. While media debate semantics, these are facts.
The BoJ rate hike and yen carry trade unwind are also making the news, having contributed heavily to the market selloff. This is a $20 trillion dollar market, so its influence is undeniable. But the factors cited above – the yield curve, the decline of short rates, market valuation, rising unemployment, etc – were in motion before the BoJ action and are an ongoing weight on the markets. This is a case that has been building for months, eg
Is The Yield Curve Obsolete?
Market Update
And Then There Was One
Earnings Are When They Tell You How Much Money You Made
The Yield Curve Is Still There
Bottom line: I believe what we’ve just seen is the high volatility opening act of a bear market.
So “Turnaround Tuesday” brought the relief rally in stocks my Friday comment anticipated … after a Monday Mauling.
Patience may serve well investors underweight stocks … buying dips may still be fruitful, but rationing out the dry powder over at least a few months wouldn’t be the dumbest strategy imaginable.
Gold and bonds sold off nicely today, after outperforming stocks over their previous three day rout. There may be a bit more where that came from, to the benefit of investors looking to buck up their positioning for the coming storm.
The post-mini-crash rally extended this morning as the BoJ promised its masters never to be bad again.
It committed to refraining from tightening monetary policy when markets are “unstable”. The argument is superficially sensible, but overlooks the tendency of policymakers to refrain from tightening policy when markets aren’t unstable. The BoJ missed ample opportunity to do so and boxed itself into a corner from which the least bad option was the one it chose.
As previously noted, the yen carry trade is a twenty trillion dollar market. It’s interruption cost some big players big money. This is an inevitable side effect of years of ultralow rate policy … it creates powerful constituencies that profit from it and demand it continue. Easy money created a Frankenstein monster that now calls the shots. Putatively independent central banks lose their independence.
The resulting conflict of interest presents policymakers with the competing objectives of keeping their new offspring happy and keeping the general public safe from pernicious inflation. The concentrated interest prevails over the general interest and the result is persistent inflation.
It’s far from consequence free. The Japanese people are losing hope for the future to the extent they’re losing interest in bringing children into the world and the population is shrinking. It’s no coincidence that this is most notable in Japan where ultra-easy monetary policy has gone on the longest. The rest of the world’s “developed” economies are just further behind on the same road. It’s a time-honored tradition … monetary debasement was a prominent feature of the Roman Empire’s civilizational suicide.
The latest action indicates the near term stock market risk has faded. Nevertheless, considering the economic and financial factors mentioned thus far, and the political setup both domestic and foreign, caution about the seasonally iffy next few months remains.
Longer term a sector issue arises that hasn’t had much press: Computer chips rapidly depreciate and grow obsolete as newer designs emerge. Companies making massive investments in very expensive high end chips will find them even more costly as their effective service life diminishes. Sellers of said chips are indirectly impacted as buyers grow reluctant to shell out big bucks for products that are going to be second rate by by next year … Nvidia for example has already accelerated its upgrade cycle to every year, a short enough time for sales of next year’s model to begin cannibalizing this year’s. Put that together with the prodigious energy consumption of AI and it’s likely it will be much more costly than is currently priced in.
Meanwhile treasury and gold prices continue to show signs of vigor. Treasuries appear to have bounced off a reverse head and shoulders bottom while gold probes record territory. If a context of economic weakening continues to build, they are differentially poised to benefit relative to stocks from monetary stimulus.
WisdomTree must be reading Finster:
Cutting Rates Without the Fed
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