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October
09
2023

Market Insanity
David Haggith

The idiots on Wall St should definitely be in stocks and bonds ... made of wood and iron.

The bursting of the bond bubble that I’ve been writing about has now reached a level that Bloomberg says is one of the biggest bond busts in history:

The bond-market sell-off that's sending yields soaring is starting to eclipse some of the most extreme market meltdowns of past eras.

Bloomberg reported losses on Treasury bond with maturities of 10 years or more had notched 46% since March 2020, while the 30-year bond had plunged 53%. 

Those losses are nearly in line with stock-market losses seen during the worst crashes of recent history — when equities slumped 49% after the dot-com bubble burst and 57% in the aftermath of 2008.

Compared with previous bond-market meltdowns, long-term Treasurys are seeing one of the most extreme undoings in history. The losses are over twice as big as those seen in 1981 when 10-year yields neared 16%.

That was the famous Volcker tightening during the great inflation that started in the seventies and ran through the early eighties. Volcker bravely pushed the Fed Funds Rate, its bargain-basement rate for interest, up to nearly 20% before he fully destroyed inflation above the Fed’s 2% target. (He, of course, retained the 2% level of inflation the Fed likes in order to pinch consumers into purchasing today because prices will only be worse tomorrow.)

The market mongers are making up reasons for the madness as they go

With all of the recent actions in bonds and jobs news today that practically put a kiss on the promise of additional Fed rate hikes, the stock market rallied in a drunken delirium with some market mongers trying to analyze the insanity in such ways as, “The market rose because yields fell,” which was blethering balderdash because yields were higher than yesterday all day long. All yields did was soar upward and then fall from their spike to merely higher than they were just before the spike. The 10-yr “everything rate” now sits right on the cusp of 4.8% as I am writing this, having spiked briefly upon the jobs news to 4.85%. That compares yesterday to an an intraday spike to 4.77% and a close of the day at 4.72%

So, it is up, up, up with interest rates everywhere because nearly everything hinges on the 10-yr Treasury bond. Soaring bond yields now that the bond market finally got the memo of “higher for longer” from the Fed, which must have fallen on the floor when delivered months ago and only been found recently, have been causing stocks to tremble and crumble. Perversely, stocks soared today because a rocking jobs report yelled out that the Fed is all the more certain now to take rates higher for longer because jobs and unemployment, which didn’t fall at all, assure the Fed will remain the Foo Fighters of inflation. Oh, the Nirvana of them to keep at the battle.

Before I go too far along some sort of rocky rabbit trail here, I’m going to let Zero Hedgeexplain that grossly-distorted-and-badly-misconstrued-as-always jobs report by the BLS, which turned negative raw jobs numbers into massive positive numbers for Boss Biden. They point out in great detail how distorted, distended and dishonest the info is from the Bureau of Labor Statistics, which I have, in the past, called the Bureau of Lying Statistics because its revisions and adjustments ALWAYS boost things for Biden (and for all administrations they serve, but now more than ever). Now that the Biden Boosters have hit the “more than ever” level of lying, I think I’ll “adjust” their acronym to standing for “Bunch of Lying $h!+.” 

While the ZH article linked to below lays out the huge distortions that make this sound like a strong economy, the fact that it is all fabrications of “seasonal adjustments” run amok, doesn't change the fact that the report will press the Fed hard into its “higher for longer” stance because the BLS has long lied, and that has never been detected by the Fed in the past. The Fed never cares that the vast majority of the jobs, according to ZH’s math, are part-time jobs taken up by people who already have two jobs because they are pressed to do so to keep up with inflation.

Summarizes an article in Reason,

The Debt Crisis Is Getting Real

Rising bond yields mean the national debt is going to be a lot more expensive in the next few years, and we just keep adding to it.

Regardless, another article says,

Stocks rallied Friday even after the release of stronger-than-expected U.S. jobs data and a pop in Treasury yields.

And look at the market mongers as they bend over backward to explain the stock market’s rise as if there was some sensible reason for it:

Traders were unclear of the reason for the intraday turnaround. Some noted it could be the softer wage number in the jobs report that made investor [sic.] rethink their earlier bearish stance. Others noted the pullback in yields from the day’s highs. Part of the rally may just be to do a market that had gotten extremely oversold with the S&P 500 at one point this week down more than 8% from its high earlier this year.

There is an easier explanation that makes more sense of it: pure greed and insanity. The market couldn’t find any narrative to make sense for the bull case any longer, so it just did what it wanted anyway, and the mongers are trying to make up a new narrative to make sense of it. That’s why traders struggle to make sense out of it. There is no sense to be made. Yet, everyone still in stocks desperately wants to make it sound as if the market had some good reason for its moves. 

“We’re seeing a little bit of a give back in yields from where we were around 4.8%. [With] them pulling back a bit, I think that’s helping the stock market,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. “We’ve had quite a bit of weakness in the market in recent weeks, [and] some oversold conditions.”

By technical measures, the market may appear “oversold,” but based on the reality this market is now facing outside of its own chart lines, this market is just falling out of a position of being grossly overbought compared to economic reality and the financial realities that are still coming, so it has a lot further to fall. It is not close to oversold by those measures. So, the attempts at explaining this as anything other than an attempted resurgence of greed are risible.

“There is likely enough good news from wage growth and the unemployment rate to keep the Fed from returning to rate hikes. While market expectations about what the FOMC will do have shifted a bit after digesting this morning’s report, there is still a strong expectation that rates will remain unchanged in November,” DeAntonio added.

Others, who are not as caught up in the delirium, see it a lot differently.

U.S. job growth surged in September, suggesting that the labor market remains strong enough for the Federal Reserve to raise interest rates this year, though wage growth is moderating.

Nonfarm payrolls increased by 336,000 jobs last month, the Labor Department said in its closely watched employment report on Friday. Data for August was revised higher to show 227,000 jobs added instead of the previously reported 187,000.Economists polled by Reuters had forecast payrolls rising by 170,000 jobs. Estimates ranged from 90,000-256,000 jobs. The larger-than-expected increase was despite the tendency for the initial September payrolls print to be biased lower because of seasonal adjustment issues related to the return of education workers after the summer break.

Aside from those scratching to turn a big intraday spike into good news on the sole basis that it turned out to be a spike and settled back to a level only slightly higher than it was the moment before the spike, there are plenty who saw the jobs report today for what it was (except Biden who immediately capitalized on it for boasting about his great successes in building jobs, albeit while the Fed is trying to take them down in order to take down inflation). Here are some summary statements about what today’s jobs report really means for further tightening from various individuals:

• “Not only was this kind of a blowout hot number, basically double what the Street expected, but there was a couple of really interesting items to pull from the report…. yields are just going to continue to ratchet up."

• "We had already been given hawkish comments from some Fed officials this week. Add in today's numbers and I think [Fed] consensus will be for another hike by year end. If we get a stronger inflation report next week it could be a difficult time for the markets."

• “The immediate [bond] market reaction was a massive further jump in rates. What this does is continue to increase the fears that higher interest rates are going to slow the economy…. We'll see how much tightening the market does for the Fed, but I think a run at the 5% mark in 10-year yields may be inevitable if the data continues to hold up like this."

• “All of this potentially is inflationary. This may encourage the Fed to raise interest rates again."

• “This is a big surprise. It can always get revised down and we won’t know that for another month. We’re at a point the Fed is slowing their rate increases. This may cause it to change that strategy and increase rates again.”

• “it's not the worst outcome on this report we could have seen. But it's probably going to still be perceived [by the Fed] as a strong report that keeps pressure on the Fed to keep on the table for consideration a rate hike in November."

• "It really feels like the labor market is flat lining overall and to see over 300,000 jobs created is just a big surprise."

Insanity is never a reason for a market to rise; yet, it seems to be the only reason at play right now, all other reasons being obvious attempts to make something out of nothing — a midday blip in bond rates that should have just scared the eyeballs out of the market and not become cause to celebrate just because it settled back down some. Therefore, today’s stock rise will have no holding power because it has no clear narrative to support it. The market should have plummeted after the rate-hike-promising blowout jobs report like this (truth beneath the numbers not withstanding because the Fed always takes the Bureau of Lying $h!+ at face value). So today’s attempt at levity will not hold.

Said another among the list above,

“At least wage gains came in tepid. The rest was hot. The revisions to back months is shocking, showing the first print is grossly unreliable. If the Fed is data dependent, they’re flying with a broken instrument panel.”

And who has been saying that all along? The jobs numbers are the most broken numbers the Fed has on its instrument panel, yet they are the ones it tends to look at the most outside of inflation, itself. That, I started saying when jobs didn’t recover properly after the hugely damaging Covid lockdowns and the Fed’s inflation orgs, is exactly why Powell is going to crash this plane. He is going to tighten us right down into a horrible recession because almost no one has any concept that labor is notstrong. It is incredibly weak and broken. Half of the jobs are held by the same people who hold the other half of the jobs who took on another part-time job as their way of fighting inflation, but the part-time jobs get counted as full jobs, not in PT equivalents, and labor is in short supply, finally barely recovered from where it fell three years ago.

So, with labor tightness and unemployment as the Fed’s broken altimeter and vertical-air-speed indicator, Pilot Powell is going to crash us right into the ground. On that basis, let me reiterate that my prediction that the Fed’s tightening ends in a terrible recession that is rapidly approaching as a second and deeper dip to the technical recession we saw in 2022 along with a second and deeper dip into the banking crisis we saw this spring is not reliant at all on economic indicators of the moment. It is all based on the cause-and-effects in bonds and stocks and housing of Fed actions. We are already in one of the “worst bond busts in history” and in the middle of a bear market in stocks that simply saw a huge bear rally because it is going to turn out to be one mammoth grizzly bear of a market; and the bond bust still CLEARLY has a ways to fall still because, as today’s jobs report should have told everyone and as the Fed has constantly restated, the Fed is in this for longer.

“We haven't found a bottom yet to the selloff (in the bond market). I'm not sure it makes a huge difference with the short-term rate hikes. We're coming to the end of short-term rate hikes probably either way - whether it's one more or not. The bigger concern is that as the yield curve steepens, if we start to have longer-term rates that are above these short term rates, it's going to have the same effect as if they did raise rates.”

"It's one of the problems in a managed economy that the Fed isn't necessarily able to dictate all the moves in the bond market. Their biggest control is really just on the front end."

Even Mohamed El-Erian, who has been resistant all year to the idea that we are going back into a recession, admitted this week that it’s looking different now:

The US may no longer avoid a recession

The economy is likely to weaken as markets internalise the significant likelihood that rates will stay higher for longer

An intense period of rising interest rates, high oil prices and a stronger dollar is pushing the financial market consensus on US economic growth away from the comforting notion of a soft landing. By my count, this will be the sixth time in the past 15 months that conventional wisdom shifts for the world’s most influential economy. It is a pivot that, unfortunately, is likely to stick for longer this time around…

Pushing yields up in an increasingly disorderly manner is the combination of markets recognising that the higher policy rates set by the Federal Reserve will be here for a while, and the need to absorb a significant supply of Treasury bonds due to large budgetary deficits. Adding fuel to this fire are high prices for oil amid solid demand, continued production cuts by Opec+ and heavily depleted inventories. There is a material risk of this leading to higher inflation for a broader range of goods and services….

These are developments that the economy and markets do not enjoy. They damp growth and increase the threat of stagflation….

For well over a year now, I have argued that the US is able to avoid the 2023 recession that many were repeatedly calling. I am now less confident about what’s in store for 2024 given how the recent surge in rates compounds the erosion in financial, human and institutional resilience….

My confidence is also shaken by a Federal Reserve that is yet to realise that its forward policy guidance … need to be rapidly adapted to the reality of a changed economic paradigm.  Indeed, the world’s most influential central bank has yet to sufficiently embrace the fundamental change in the basic characterisation of the economy from a world of insufficient demand to one in which the supply sector is a lot less flexible for several years. The longer the Fed takes to adjust, the greater the risk to economic wellbeing.

That last part really caught my eye, as no one has been realizing what I’ve pointed out as the biggest risk of all — that we are in the middle of an environment characterized by inflation that is fed, not just by abundant money supply, but by supply shortages all around the world, creating scarcity that drives up prices. As El-Erian says, the Fed has yet to fully conceptualize that (as far as he can see and certainly as far as I can see). In my view, the supply sector inflexibility means the Fed could actually create worse supply problems as it tightens down on labor (also chronically in short supply since Covid) by crushing production down even further. 

The Fed’s impossible Gordian knot, in that case, is that all Fed actions raise inflation: 1) Letting inflation go by not continuing QT and keeping rates, at minimum, where they are for a long time, risks letting inflation run back up again. 2) Tightening down harder, creates worse shortages so that scarcity drives inflation up again. I don’t know if that is the situation the Fed has entered, but there is clear evidence of that in the existing-homes market, as laid out in the Gordon knot story. If it spreads to other markets, the Fed is trapped by its own devices.

If congressional dysfunction spreads further, and if the Fed continues to drag its feet on changing key underpinnings of its policy formulation, the turn in US economic surprises will not be pleasant for either the domestic economy or the rest of the world.

I would take those two conditions as being practically givens and say we are simply in for some really ugly surprises.

I’ll explore some of the other aspects of the jobs report and today’s odd actions and this week’s rush in Treasury yields in this weekend’s “Deeper Dive.”

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Seeing the Great Recession Before it Hit

My path to writing this blog began as a personal journey. Prior to the start of this so-called “Great Recession,” my ex-wife had a family home that was an inheritance from her mother. I worked as a property manger at the time, and near the end of 2007, I could tell from rumblings in the industry that the U.S. housing market was on the verge of catastrophic collapse. I urged her to press her brothers to sell the family home before prices dropped. The house went on the market and sold right away — and just three months before Bear-Stearns and others crashed, taking the U.S. housing market down for the tumble. Her family sold at the peak of the market.

 

 

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