Treasury

All Burst, No Follow Through

By David Stockman  |  November 14, 2018

The bulls sure broke with abandon this morning…

But they were all petered out by noon.

Maybe it’s inflation.

At first, it looked like this morning’s update from the Bureau of Labor Statistics on October’s Consumer Price Index might finally be the stuff to get the Federal Reserve to pause its normalization” campaign.

Investor’s Business Daily’s headline described the “core” measure as “tame.”

But MarketWatch hit the wire with the “headline” number, which posted its “biggest jump in nine months.”

Maybe it’s Maxine Waters.

Presumptive Speaker of the House Nancy Pelosi and her people said “strengthening democracy at home” is their initial focus.

But the incoming Chair of the House Financial Services Committee put the kibosh on any more easing of banking regulations as January 3, 2019.

It’s all cherry-picked Bubblevision nonsense, fit to engage and entertain rather than to challenge and inform.

Nobody knows anything, especially when the process of price discovery is rigged… from the very top down on to the very bottom, you might say.

The reality is inflation pressures – including tariffs and Trade Wars – are starting to show up in a way that supports the Fed’s current theory of the case.

The Donald, of course, is doing everything he can to get his man in the Eccles Building to stop raising the federal funds rate.

Chair Jerome Powell knows his true brief, though. And he probably doesn’t care who it is that may have simply had the temporary authority to hand it to him.

Powell, you’ll see, is a trusted acolyte of Keynesian-style monetary central planning.

That does not mean, “All easy money, all the time.” It does mean, “Preserve the Fed’s power.”

Interest rates are actually backing up a bit at the longer end of the curve. The 30-year U.S. Treasury bond, for example, is down to 3.35% from 3.46% in early November.

And the widely watched 10-year yield is at 3.12%, down from 3.24% as recently as last Thursday.

But the shorter-term stuff is actually rising. The yield on the 6-month T-bill is up to 2.53% from 2.49% on November 1. The 2-year note at 2.89%, down from 2.98% last Thursday but up from 2.84% at the beginning of the month.

That’s the kind of action that leads to a “flattening” yield curve. And a flattening yield curve is one indication the market is not exactly bullish… Indeed, a flat yield curve often signals recession.

They’re actually using the word “inversion” a lot more lately on Financial Twitter, too…

We’ve been talking about how weak and how old this “recovery” has been. Well, it has been hard on Main Street, certainly, despite what you’ve been asked to believe.

But Wall Street is waking up to the reality that, as lackluster as it’s been, this expansion too shall pass into history.

The Fed is not going to play ball… until it finds just the right time – if it can find just the right time – to save the day.

And it risks the Mother of All Yield Shocks…

Better Than MAGA

The history books will record that the Donald peaked on September 21, 2018.

On that day, the S&P 500 Index reached 2,940.91, its all-time high.

Right around then, the Tweeter-in-Chief went all in on the Trump Economy as “the greatest” of this and any other generation, or some similar nonsense.

Alas, his embrace of the Everything Bubble at the top has translated into endorsement of easy money on the way down.

Now, this is the Trump Bubble…

Note, too, that late September marked as well the 10th anniversary of the first failed “TARP” vote in the House of Representatives.

By a 228-to-205 majority on September 28, 2008, the House of Representatives – led by two-thirds of the GOP – voted for honest capitalism in America.

It voted to let a Wall Street grown rich riding a giant bubble fostered by the Fed enjoy its just deserts.

The 700-point, 7% decline for the Dow Jones Industrial Average that day should have marked the beginning of a long-overdue financial purge…

But, on September 29, 2008, Imperial Washington gave in to Wall Street’s tantrum. After that, the Fed stepped in with all sorts of extraordinary measures, including “quantitative easing,” to suppress interest rates and prices.

And that’s the Rubicon of our age. Wall Street was desperate for a bailout and got it.

Main Street got MAGA.

Here’s a better plan: The Stockman Letter and “The Stockman Model.”

Our strategy includes an investment model with specific asset types and allocations by percentage. It’s intended to be flexible to suit your approach to the market.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan.MORE FROM AUTHOR