Tuesday, February 20, 2018

$258B in Treasuries

The stock market usually could care less about how much Treasuries are up for auction in a week.  But since the biggest worry these days is about rising interest rates and big budget deficits, it is catching investors' attention.  Since when did investors care about the T-bill auctions?  It's a sad state of affairs for the US government, when they are so reckless with deficit spending and tax cuts that it actually scares the bond market.  The bond vigilantes were dead for the last 30 years, and somehow they have been brought back from the dead, in an economy with such low growth.  What a mess.

For the stock market, along with rising 10 year yields, it doesn't help that the dollar is strengthening over the past couple of trading days.  No, the US is not that much different than the rest of the world when it comes to weak currency/strong stock market.  The correlation works just as well for the S&P 500, because the global stock markets have just become a mercantile index, measuring how much extra companies can make from exports with a weaker currency.  Just like Japan and Europe.  The currency is the only variable that actually changes from time to time, thus its effect on the stock index.  The domestic markets aren't a changing variable, because there is hardly any growth. 

I know the current news headlines are all about inflation and higher growth, massive Treasury debt supply coming, and rising interest rates.  But the growth is just not that high, and actually weaker than what we had in 2014.  The market needs to latch on to a story that it can run with, and since there's nothing else to talk about now, with tax cuts and the budget already passed, it gets all the attention.  Unlike the pundits who believe there was almost no inflation for the last 10 years, I actually see how prices have changed.  The biggest expense for most people is housing, and that has not seen low inflation as many claim.  Same goes for medical expenses.  Really the only thing that hasn't gone up in prices are commodities and electronics.  The price for services and education is way higher as well.  The CPI and PCE are a joke, and using those figures to determine inflation is playing right into the government's goal, of being able to suppress interest rates by pretending inflation is low, and also reduce payouts for CPI indexed entitlements. 

We have a rare gap down after a 3 day weekend, so close to that V bottom from less than 2 weeks ago.  This market just doesn't seem like it wants to break 2750 until the bond market settles down.  Bonds were strong on Friday and stocks followed.  Today, both are weak.  The negative stock/bond correlation is broken.  It makes for a more unpredictable stock and bond market.  A nightmare for risk parity funds.  This too shall pass, but it probably stays with this market till we hear explicitly (not Congress spoon fed babble on Feb. 28) from Powell at his first FOMC meeting on March 21. 

Still waiting to short, didn't expect the sellers to come out so quickly on Friday and beat it down after the 3 day weekend.  Any bounce in the bond market should provide an opportunity to short the S&P if it bounces towards 2750-2760 again this week.

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