Markets are in a state of utter confusion. It’s blind optimism, if you ask me.
The light at the end of this tunnel is the train that is getting ready to slam everybody in the face.
The 10-year Treasury has come close to hitting 3%. I’m very confident real rates will continue to rise uncontrollably, despite the Fed’s decision to raise or keep rates steady. I expect Jay Powell to go into full protection mode of the bond market to prop up bonds, boosting the stock market with them.
Historically, we are incredibly far below the averages of where interest rates should be, and this has distorted everything from spending and asset prices to overly optimistic employment and trickled into many indirect bubbles that most have yet to truly comprehend.
10 Year Bond
After spending 5 minutes looking at the above chart, it really starts to explain how almost everything economically can be attributed to what we have seen from 1980 until today. We will be witnesses to the most sensitive market in history as this chart continues to reverse.
Disregarding the Fed, Rates are on Their Own
Sure, the Fed is discussing rates, and officially, there might be 1 or 2 rate hikes this year in hopes of possibly 3, but I highly doubt there will be more than 2. Regardless, the market is doing the work for the Fed as of lately. Free market rates are rising, and the servicing of the debt that is about to be faced by the public and private debt markets has yet to be realized. In fact, the general sentiment is that rising rates are a sign of strength for the economy.
10 Year Bond Over Last 6 Months:
We just got word that total household debt rose by $193 billion last quarter, to an all-time high of $13.15 trillion at the end of 2017. And as interest rates rise, I expect this number to balloon until there is a debt purging that takes place, which I anticipate to be very destructive.
Listening to James Bullard talk out of both sides of his mouth is becoming the norm as he describes his economic outlook from the perspective of “people.” “I think people are optimistic and hopeful that we’ll have another good year in 2018… However, the idea that the Fed would need to raise the policy rate by 100 basis points in 2018 seems like a lot to me.”
These people running the Fed have intuition. Despite having only one hand that they are dealt and have to deal with, they know deep down that something is brewing.
The false excitement of the economy “past” full employment and stock market gains is completely disregarding everything it took to get to this point and the results of the unwinding that will inevitably settle in as a result.
The unwinding of the balance sheet and a “return to normal” of QE and interest rates is the exact thing this economy can’t afford, and it makes me sick thinking about how egregious these policies are.
The unwinding of this balance sheet to $2 trillion will add inflationary pressure and dead weight on the stock market, which will make the newly introduced 1,000 point drops in the equity markets a new norm.
The first time the Dow Jones fell 1,000 points in a day, it shocked markets and was all over the headlines. The next time won’t be as shocking, but it will be every bit as damaging.
Don’t be overly exposed to the everything bubble, and be sure you brace yourself for volatility.