The Morning Line

The Morning Line

One Last Turn of the Screw, then REAL Pain

The bullish gap on the chart holds ominous implications for the global economy, since it removes almost all doubt that interest rates on U.S. Treasury Bonds are headed significantly higher. The rally looks nearly certain to reach 4.81%, the target of the pattern shown.  The red line through which the gap occurred last Thursday is a ‘Hidden Pivot midpoint resistance,’ and it is where we look to get a firm handle on trend strength. When it is penetrated as easily and decisively as it was last week, this almost invariably results in a continuation of the trend to the target, in this case a 48.14 level that corresponds to a 4.81% rate. A tradeable corollary is that a swoon to the green line would be merely corrective, and that bond bears, far from being scared out of their positions, could double down on their bets with confidence.  The equivalent rate for the Ten-Year Note would be 4.68%.

Historical Downturn

You should jot those numbers down, since they will allow you to tune out the din of pundits and economists arguing about how high rates are likely to go. With the economies of China and Europe already sinking into recession, and the U.S. about to do so when the inevitable bear market in stocks gets rolling, another turn of the interest-rate screw threatens a downturn that will be one for the history books.  It will feature above all a strengthening dollar that will not only catch economist and policymakers by surprise, but also crush everyone who owes dollars. A ruinous debt deflation is coming, and it will make us nostalgic for the pesky consumer inflation that has ruled our economic lives since the wildly reckless credit-stimulus of the Covid years.

A Stroll Down Disinflation Lane

[Last week’s commentary on the gathering economic storm elicited a light-hearted reminiscence from our friend Richard Charles of Alpine Capital.  You’ll find his recollection of some notable deflationists enlightening, and there’s also a new word — screwflation — he has coined to describe a phenomenon that has yet to gain traction with eggheads at some of our finer universities. RA]

Must have been something stimulating in that New Jersey aquifer we drank from, before saltwater and tritium from the Salem County nuclear plant made Bourbon the safer beverage. Since the Great Depression, an ever-inflating Fed made houses the number one wealth engine for the middle-class American Dream. Our Palo Alto home accidentally saw unbelievable nominal appreciation exceeding the original price tenfold — or a hundredfold if you run the numbers with 10 % down on an adjustable-rate, fixed-payment, negative amortization at sixteen percent that everyone, especially the mortgage broker and realtor, told us was cuckoo.

Merrill’s all-American asset manager back then in the mid-1980s, pipe-smoker Stanley Salvigsen, was a deflationist who actually shorted his home and made money. He was invited to leave Merrill for Comstock Partners before he died at 53 of a heart attack in the mid-90s. His offense: staying too short for too long.

Bucking Merrill Lynch

Gary Schilling had a similar experience in the mid-70s with Standard Oil,  the San Francisco Fed, Merrill Lynch and White Weld. His complaint letter to Don Regan, Merrill’s CEO and former U.S. Treasurer, attested that Schilling’s disinflationary views did not comport with Merrill Lynch’s bullishness on America. This is despite the fact that his unconventional ideas made money for the investment firms’ clients.

Back in Silicon Stanford Valley, the biggest bond bull-market in history bailed us out with rates that ultimately fell almost to 2%, freeing yours truly for a journalism stint at Oxford Blue, the digital student newspaper, and a move to Lake Tahoe before remote workers fleeing the Covid lockdown infected one of Mark Twain’s favorite places with yet more real estate madness.

Then, things began to change in ways that not one in a million, to paraphrase Baron Keynes, understands: screwflation. It is the hot mess that has resulted from having no debt ceiling, a hawkish central bank and high energy prices. The combination has set the stage for wealth destruction on an enormous scale and the death of the American Dream. Homeownership is imploding, along with access to affordable healthcare and a college education for everyone who wants one.

Our suspicion is that what has gone up will come down even more quickly, not necessarily stopping at the old low. Trades in volatility and bullion might make more moolah for the time being, perhaps until Gen-Xers and Millennials get off the government’s matrix and/or parental payroll. That has certainly been the case for our family.

Who Will Buy Baby Boomers’ McMansions?

Can the Wall Street Journal‘s headline writers save America’s juiced-up economy from going bust?  They are certainly trying. Check out the lede atop Friday’s editions: The Fall in Home Prices May Already Be Over.  Fancy that!  With mortgage rates headed toward 8%, many readers must have done a double-take when they scanned this seeming howler. Your editor wondered why the copy desk had not punctuated the headline with three or four exclamation points, lest the story fail to goad potential buyers who have been sitting on the sidelines into action.

However, the article itself, written by one Nicole Friedman, had a somewhat more nuanced take on the housing market. Although she gave Realtors an opportunity to do some boisterous cheerleading for the industry, she did not allow them to claim that residential sales are strengthening. For how could they be? It turns out that prices are no longer falling because transactions have all but dried up. Few homeowners are listing these days because the price of any home or apartment they might move into would be just as pumped up.

Although there are probably millions of Baby Boomers who would love to downsize in order to free up more money for retirement travel and other pleasures, it seems increasingly unlikely there will ever be buyers for their homes at today’s insane prices. Millennials and Gen-xers are already so tapped out that they can’t even pay back student loans, let alone buy their parents’ 4,000-square-foot McMansions in the suburbs, or keep Social Security and Medicare solvent. Our kids will eventually inherit the homes, even if they are unable to afford upkeep and taxes. It is predictable that lawns will go to seed and that the amenities of suburban towns will wither for lack of property-tax revenues.

What AAPL Is Saying

Here’s another ‘Ray-rah-sis-boom-bah!’ headline from WSJ weekend editions: Earnings Estimates Are Rising, a Welcome Sign for the 2023 Market Rally. Considering that share prices have been rising for the last six months on lousy earnings, one could almost imagine S&P valuations inflating by half again if earnings were actually to turn strong for a few quarters. Even so, investors would be wise to hedge their bets with Treasury bills, bonds and notes, since the latest, extreme yield-curve inversion has already signaled the near-inevitability of an equally extreme recession. AAPL shares, which plummeted 14% last week, have already figured this out, even if the pundits who purported to explain it have yet to stumble on the simple reason.

Some Scary Shit

I let it all hang out in the interview I did Friday with USAWatchdog‘s Greg Hunter. Do I actually believe the U.S. economy is headed into a condition of barter? Yes, I do.  It will be that bad. And global. Americans in particular will face a long period of severe hardship when these boom times end. That’s because the USA is where credit excesses and wealth-effect hubris have been at their most visible and disconcerting. Presumably, the cataclysm required to wreck the banking system would occur in the late stages of a bear market that has always been inevitable.

I don’t mean to imply that the damage would necessarily take a long time to complete, however. Indeed, it is likely to happen with shocking speed. Imagine it as the collapse of a financial black hole, powered by the implosion of more than $2 quadrillion of  derivatives backed chiefly by gaseous vapor. When the initial rumbling is felt, portfolio managers, including sovereign funds and the biggest investment firms in the world, will urge investors to keep their cool. Some will, at least for a short while. But mounting waves of redemptions will eventually force BlackRock, Fidelity, State Street et al. to dump the shares of clients desperate to raise cash in order to meet margin calls or worse.

What Is Your ‘Plan C’?

Who will the buyers be in this avalanche?  That is a question for which there can be no comforting answer. In the meantime, we should be thinking through what my colleague Charles Hugh Smith refers to as ‘Plan C’.  This doesn’t mean hunkering down in suburban cul-de-sacs, hoping for the best. Rather, it might require moving to a town or locale with sufficient human and material resources to reduce dependency on distant providers of food, water and energy. The goal is not self-sufficiency, he points out, but rather the forging of communities able to cope with the hardest times imaginable. Since the collapse will be fundamentally a deleveraging event, you can forget about making a pile of money on the way down. Holding onto just a fraction of one’s current net worth will pose a severe challenge even for financial geniuses. Warren Buffett reportedly has been cashing out of stocks and buying T-bills in a huge way. Shouldn’t all investors be doing this — i.e., buying stuff that has been shunned for years?

‘AI’ Just Another Wall Street Scam

A handful of tech moguls already control the global flow of information, but their influence over our lives will only expand and deepen if Congress doesn’t do something soon to pry their greedy hands from the ultimate fruits of AI development. I say this while recognizing the irony of casting our elected representatives as the good guys here. Many if not most of them are in cahoots with the industries they purport to regulate, and some on Capitol Hill could rightly be described as allies of giant companies run by power-hungry men who bend too easily toward the enticements of fascism.

So what have the evil titans of the digital world been up to?  For one, they have gone all-out to convince us they’re gung-ho for open-source development of AI code. Who could object to that, especially since they’ve seeded the project with enough money to ensure the kind of breakthroughs that will pay off financially. And for two, they’ve rolled out industrial-strength AI platforms online that can be downloaded and used by nearly anyone. Many subscribers are paying up for bells and whistles that can help their businesses operate more efficiently. Law firms, for instance, have been axing paralegals in droves, since it doesn’t require a human brain to churn out boilerplate that no one reads. And students either too lazy or too stupid to think for themselves, let alone think critically, have gained more time to do the things they really enjoy and care about, such as hook up on Tinder and play beer pong. Such a gift!

There Are Strings

But there are strings attached, and this is where motives and possible outcomes get sticky. The strictures that a handful of AI poobahs have placed on the creators of chat bots are more than a little troubling. Look no further than The Company Formerly Known as Facebook (TCFKAF) to discover how controlling AI’s deep-pocketed sponsors can be. For starters, reports Wired magazine, “the data required to train advanced models is often kept secret. Second, software frameworks required to build such models are often controlled by large corporations. The two most popular ones, TensorFlow and Pytorch, are maintained by Google and [TCFKAF], respectively. Third, computer power required to train a large model is also beyond the reach of any normal developer or company, typically requiring tens or hundreds of millions of dollars for a single training run. And finally, the human labor required to finesse and improve these models is also a resource that is mostly only available to big companies with deep pockets.”

Thanks, but no thanks. “The way things are headed,’ the Wired article continued, “one of the most important technologies in decades could end up enriching and empowering just a handful of companies, including OpenAI, Microsoft, [TCFKAF] and Google.” Enriching the few, indeed. More openness could help remedy the problem, but don’t expect Congress to ride herd on it after TCFKAF’s Zuckerberg is finished bamboozling lawmakers on Capitol Hill with his impressive command of weasel words.  (Full disclosure: Your editor thinks the current obsession with AI is 90% hubris and 10% twaddle. Or are we to believe that the same geniuses who gifted mankind with the wretchedly stupid ‘autocorrect’ are about to improve the world with algorithms whose total store of knowledge is unlikely to surpass that of a single human cell?) AI’s supposed potential to make this a better world is just another Wall Street scam, amped up so loud that one could almost be persuaded that it will keep the good times rolling.

Thoughts on Rent, the Fed, and Bonds

[The following was sent out to clients in late July by my friend Doug Behnfield, a wealth manager and senior vice president at Morgan Stanley Wealth Management in Boulder, CO. Long-time followers of Rick’s Picks will be familiar with Doug’s work, since his thoughts have appeared here many times. I have always considered him not only one of the smartest investors I know, but also one of the smartest guys. I am grateful to him for allowing me to share the insightful report with you.  RA]
On July 12, the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) for the 12 months ending in June came in at 3% inflation. This annualized inflation rate represents a drop from 9.1% in June of last year, which was the peak in this cycle. The interest rate on long-term bonds correlates very closely with CPI, so it is unusual that bond yields have not followed inflation down in a meaningful way so far.

[Editor’s note: At this point the report displayed a chart showing bond yields increasing into late October and then going sideways. However, just after the report went out in late July, yields exploded upward in a manner unforeseen herein. Here is a chart that shows this. If it has changed Doug’s outloook, we will share his thoughts with you at a later date.]  One contributing factor to this sideways action is that long-term bond yields also correlate very closely with the Fed’s interest rate policy and the Fed has continually raised the Fed Funds (overnight) Rate since inflation peaked last summer. In June 2022, the Fed was still at 1.5% on Fed Funds, but since then they have hiked rates by 4%. The Fed has also hiked rates by 2.25% since October, even as long bond rates have declined from 4.4% to 3.9% currently. Clearly, Fed rate policy is driven by factors other than current inflation readings.

It seems clear from the chart of CPI above that the rise from 0% at the Covid lows in 2020 to the high of 9.1% last year after the economy reopened has a lot to do with the historically steep drop in CPI that has occurred since the peak. There is much discussion about where CPI goes from here, with some believing that it will continue down into modest deflation while others believe that it will be “sticky” from here, potentially halting or reversing the current slide. While some of the discussion is based on speculative assumptions of what the future holds for prices in the economy, there are a few things that enter the discussion where the handwriting is on the wall.

One of those items is the ‘Shelter’ component of the CPI, which includes rent, and a survey-based calculation of the cost of home ownership, which is called Owner’s Equivalent Rent (OER). Surprisingly, survey respondents have demonstrated an accurate understanding of what their homes would rent for, so rent and OER have a 99% correlation.

Shelter (Rent and OER)

Shelter represents the largest single component (almost 34%) of the CPI, so a thoughtful understanding of it is essential when attempting to understand inflation. Food and energy together make up less than 21% and other goods and services make up the remaining 46%. In addition to the sheer size of shelter as a CPI component, it is reported in CPI with long and well documented lags. This is because of the long duration (1-3 years) of lease terms. As a result, current data (as opposed to CPI data on shelter) provides a much less speculative view of its future impact on CPI than any of the other components. CoreLogic is an organization that provides some of the most current and comprehensive data on home rentals and many other components of the housing/shelter market in the United States. Their methodology for gathering rent data includes:

“Median rent price data is produced monthly by CoreLogic RentalTrends. RentalTrends is built on a database of more than 11 million rental properties (over 75% of all U.S. individual owned rental properties) and covers all 50 states and 17,500 ZIP codes.”

According to CoreLogic, the rate of inflation in single family home rents peaked in April 2022 at an annual rate of 14%.  The most recent data was reported on July 18 and includes data through May 2023. At the end of May, rent inflation had declined to only 3.4%.

Shelter data in the current CPI report is generally believed to have a lag of 12-18 months. There is a good reason for this. As mentioned, when leases are signed to rent a home or apartment, the term of the lease is typically 1-3 years. However, current data on new lease rates can confidently be expected to eventually be reflected within this accepted lag period. Shelter inflation as reported in the CPI peaked in April at an annual rate of 8.2%. In the most recent June CPI report, shelter had only declined to 7.8%.

The important consideration in the current rent data as it relates to the inflation outlook is that base effects suggest that shelter data inputs into CPI for the next 12 months or so will exert a powerful disinflationary impact. Said another way, it will bring the inflation number down.

As mentioned earlier, predicting the price of food, energy and other goods and services going forward is highly speculative and heavily dependent on whether the economy falls into recession. The impact of real-time disinflation in shelter, the single largest component of the CPI, is not.

Fed Interest Rate Policy

The two economic elements that most closely correlate with the yield on long-term Treasury bonds are Fed Interest Rate Policy and Inflation. (Surprisingly, federal budget deficits and foreign buying or selling of Treasuries have very low correlations). Because inflation has come down so dramatically, Fed Policy has become one of the most important macroeconomic factors currently determining bond yields, and therefore bond prices, by default.

Over the last 12 months of plummeting inflation, the Fed has maintained a “hawkish” tone while continually hiking short term rates. Their rationale has been centered on concerns about ongoing “tight” labor market conditions, sticky “core” inflation data, and relatively strong spending by the consumer. They have downplayed leading indicators in the economy that have traditionally foreshadowed a recession and are contained in the Conference Board’s Index of Leading Indicators. The Conference Board highlighted the extreme readings of this index in their most recent report:

“The Leading Index has been in decline for fifteen months—the longest streak of consecutive decreases since 2007-08, during the runup to the Great Recession. Taken together, June’s data suggests economic activity will continue to decelerate in the months ahead. We forecast that the US economy is likely to be in recession from Q3 2023 to Q1 2024. Elevated prices, tighter monetary policy, harder-to-get credit, and reduced government spending are poised to dampen economic growth further.”

In this report they mentioned deteriorating Capital Spending, Housing, Employment, and Consumer Spending intentions (all of which are Current or Lagging Indicators) as the source of the weakness.

There is a running debate about why the Fed would be focused on Lagging Indicators rather than Leading Indicators. The Fed has a history of raising rates too far, for too long and helping cause a recession. Alternatively, Wall Street analysts and experts have a history of being too hopeful that the Fed will engineer a “soft-landing” by raising rates just enough to quash inflation while avoiding a recession. The Fed’s track record during the post-WWII period is quite poor and the current recessionary indicators in the economy are at the more extreme end of the spectrum.

In fact, the Fed warned the public that their policies would lead to job loss and “pain” last summer at the Jackson Hole Symposium and the Fed Economics staff recently published a report in which they predict a recession in this year’s 4th Quarter. However, “financial conditions” have remained quite easy, considering the magnitude of the rate hikes and the recent bank failures that have led to more restrictive lending conditions. The strength of the stock market in particular and to a lesser degree, the resilience of the residential real estate market is primarily to blame for financial conditions being of great concern to the Fed.

The Fed’s efforts to slow down the pace of rate hikes has led to a chorus on Wall Street suggesting (alternatively) an economic soft landing or no landing at all. Still, the stock market has rocketed up primarily on the back of a small number of companies that stand to benefit from Artificial Intelligence (AI). As was the case in previous periods of transition from expansion to recession, the stock market has rallied to approach a “double top” based on enthusiasm that the Fed “pause” would lead to a new expansion in the economy and that the recession would be avoided.

Jay Powell and many other Fed Governors have expressed a commitment to keep rates “higher for longer” until the “job is done” in terms of vanquishing inflation. This suggests that they have grave concerns that inflation can come roaring back unless they create financial conditions that are so tight that financial leverage in the system comes down dramatically from current levels. I have referred to this in the past as “taking the punch bowl away.” This is a quote from a former Fed Chairman in the 1950s (when punch bowls were common). As long as the public remains of the opinion that the asset markets go up in linear fashion, they will not leave the party unless someone makes them. This is a big part of what the Fed has taken on as its mission, even though it is something they would prefer not to articulate too strongly. At the same time, it is reasonable to consider that one condition of a pause and the eventual pivot to rate cuts is a cyclical bear market that sobers everyone up. This is akin to Alan Greenspan’s “Irrational Exuberance” warnings back in the late 1990s. In such a circumstance, it is possible that the Fed’s intention is to sacrifice a “soft landing” in favor of a more powerful long-term inflation accomplishment.

Mike Wilson, Morgan Stanley’s Chief Investment Strategist, continues to anticipate that the “profits recession” that we have been in for several quarters will intensify. The stock market rally from the lows last fall has been accompanied by declining corporate earnings combined with a dramatic increase in valuations. Although he admits that his bearish call this year has been “wrong” so far, he makes the case that profit declines are likely to persist. His focus is also on disinflation, in that corporations are receiving lower prices for their unit sales. This is reducing revenues and profits which he expects will worsen in dramatic fashion as the year progresses. This leaves a fundamental case for the type of market decline that could impact the Fed’s view of the inflation risks that remain.

The Bond Market

As mentioned at the top of this report, interest rates on long-term Treasury bonds have been declining in irregular fashion (and prices have been increasing) since last October. This is true of long-term municipal bonds too. However, during this nine-month period, the Fed has been aggressively hiking short-term rates, causing the yield curve to invert to unprecedented levels. The reason this inversion has occurred is that bond market investors believe the more the Fed raises short-term rates the more likely it is that we will have a recession (and possibly a severe one). If a severe recession occurs, the Fed will be in a position to cut Fed Fund rates dramatically. The yield on long-term bonds will drop commensurately. This bullish scenario for bond prices has caused bond market participants to support the long end of the market in the face of rising short-term rates. As the Fed gets closer to a definitive “pause”, long rates typically accelerate their decline. The Fed will eventually cut rates in a recessionary environment and that is typically the period where long bond yields drop the most.

The Fed has a dual mandate from Congress. It consists of “Stable prices and maximum sustainable employment.” The Fed’s intentions for the long-term implications of the “stable prices” part of their two-part mandate appears to take precedence over the second part, (which is “maximum employment”) in the Jay Powell Fed. In any case, the Fed has historically raised rates during tightening cycles to the point of being forced to cut rates abruptly due to a recession appearing rather than the “soft landing” that becomes consensus. In fact, in the post-WWII period, there have been 14 Fed tightening cycles and so far, 11 have ended in recession because they have gone too far. Current economic and financial conditions are more common with those that did end in recession, particularly from the perspective of the inverted yield curve and the decline in the Index of Leading Indicators. When combined with the added downward pressure on inflation indicated by shelter costs going forward, it is reasonable to expect that the Fed will be pausing well before year-end and possibly cutting rates. This would, in turn support bond prices breaking out of their sideways performance so far in 2023. [For a gonzo perspective on our deeply troubled world and the stock market’s rabid madness, click here to access my latest interview with Howe Street’s Jim Goddard. RA] 

T-Bond Plunge Ahead?

Is Mr. Market about to deliver the coup de grace to bond bulls? It certainly appears that way.  They’ve been getting schmeissed regularly since a frightening few days back in March 2020.  At the time, investors were struggling to decide how covid would affect their financial lives. The wild gyrations near the top, followed by the subsequent collapse of Treasurys as yield soared, attests to the fact that they all got it wrong — and so did everyone else who subsequently jumped in.

In technical terms, TLT, an ETF proxy for T-Bonds maturing in 20+ years, is on thin ice. It tested a key support two weeks ago when it came down to the red line, a ‘midpoint Hidden Pivot support’ that must hold if TLT is to avoid a further fall to the 80.84 target. Although the line has yet to be penetrated decisively, it looks to be giving way. A two-day close beneath it would likely send TLT down to at least 88.05, a last-ditch support. Beneath it lies an abyss that portends a rise in long-term rates to at least 5.5%  (as noted here earlier) from a current 4.27%. If there is a bright side to this scenario, it lies in the implication that an all-but-certain debt deflation much more destructive than any consumer inflation we are likely to experience is going to be yet a while longer in coming.

AAPL Takes the Lead…Lower

Last week’s commentary said the first big correction of 2023 had a ways to go, and that is still the case. If there were any doubts about this, Apple’s swan dive Thursday on punk Q2 earnings released after the close should have dispelled them. The most valuable stock in the world fell by nearly 5%, shrinking the global ‘wealth effect’ by around $144 billion. This is unlikely to weigh on yacht sales as summer heads into the final turn, but it could impact them eventually if the stock, and few others favored by portfolio managers, fall to the worst-case targets on some of my charts.

Goggle Porn

It was word of a third straight quarter of falling revenues that upset investors, and innovation alone is unlikely to arrest the decline. That’s because without Steve Jobs, the company has been unable to innovate its way out of a Glad bag. iPhone improvements have come mainly in the form of improved cameras and better batteries, but the wow factor has been lacking. The company took a stab at it with the introduction of a pair of $3500 virtual reality goggles a few weeks ago, and although the technology was impressive, consumers still seem to have doubts about whether it’s cool to turn on, tune in and drop out with your head in a plastic shell.

If and when the Visual Pro goggles are tweaked to deliver a satisfying sexual experience to perhaps three or four of our five senses, that’s when sales will take off no matter what the price. In the meantime, AAPL stock will continue to fall, taking the broad averages down with it until its deep-pocketed sponsors sense that sellers are exhausted. Then the gaseous wafting cycle will begin anew as short-covering and gap-up openings circumvent the need for capital or even bullish buyers. For more on how this hoax works, click here to access my recent interview on Howe Street’s This Week in Money.

First Big Correction of 2023 Has a Ways to Go

My ‘Chipotle indicator’ suggests that CMG, along with other high-fliers and the broad averages, could fall by at least 27% from recent highs before the bull market resumes later this summer. We last visited the burrito vendor’s chart in early May, just after a short-squeeze powered by feverish buying speared the red line, a ‘midpoint Hidden Pivot’ resistance at 1968. This stood to be a formidable impediment, especially since it closely coincided with the structural resistance of a key high at 1958 recorded 19 months earlier. But buyers, mostly bears scrambling to cover bets against the stock that were exploding in their faces, gutted the resistance with ease, managing to hold the stock effortlessly aloft for three months. Last week, however, it dove through the line in a shakeout that was stage-managed just as effectively as the gaseous rally. DaBoyz evidently had decided there was not sufficient buying power to keep the stock moving sideways indefinitely, so they pulled their bids, letting it plummet toward levels where they eventually will be able to accumulate shares once again with a thimble-rigger’s confidence.

A High-Odds Bet 

If the selling should exhaust itself near the green line at $1582, that would trigger what in Hidden Pivot parlance is called a ‘mechanical’ buy. As longtime subscribers to Rick’s Picks could attest, such bets seldom lose when they follow steep, powerful rallies such as the one that occurred in this stock during the peak covid years 2020-21. Ordinarily, we should expect the rally to reach the ‘D’ target at 2739. Stocks nearly always achieve ‘D’ when the midpoint pivot, in this case 1968, has gotten shredded on first contact.  Assuming Chipotle eventually hits its mark, the bull market in stocks would have significantly higher to go, since CMG and a handful of other world-beaters would pull the broad averages higher in sympathy. The bounce would be all but certain to reach p in my estimation, but I would no longer regard more upside to p2, let alone to D=2739, as a sure thing. I still view a finishing stoke to D as no worse than an even bet, however, in part because the ‘no recession!’ story has only just begun to percolate into the simian brains of portfolio managers, and to entice the usual bozos into buying heedlessly.

A Few Trillion Here, a Few Trillion There…

Last week’s commentary predicted that rates on the Ten-Year Note, currently around 3.8%, will hit a minimum 5.5% before inflation lurches into reverse and the U.S. begins a hellish descent into a full-blown debt deflation. The following, insightful response came from our friend Richard Charles at Alpine Capital:

Well done, Rick, for highlighting the crux of markets today. On May 19, the Ten-Year Note broke a triple top to new highs and we were off to the races with our mutual 5.5 % target, which broke several boutique banks parking capital in Treasuries. Long-term T-Bonds now target an even more ferocious 6.75%. Having conjured some $14 Trillion in M1 deposits since 2020 to fight debt default deflation of $294 Trillion in unfunded US debts and liabilities, it’s no surprise there are bond vigilantes who don’t quit but get less vocal.
Not everyone kens the contracting market signal of M2 savings losing over a trillion in the past year to monetary heaven (or is it hell?) Any wonder, then, that BRICS sell US Treasuries and plan gold-backed currencies while Western banks salivate for central bank digital control fiat with endless war profits on passive populations?


Are the millions of military age men and trafficked children finally on the border political-radar with [the smash-hit movie] Sound of Freedom? Are political candidates really ready to bomb the cartels? Martin Armstrong blames neocons running Uncle Joe and thinks markets may not resolve until 2032 after war demands drive Jim Grant’s predicted decades-long bear market in bonds. We are not so sure.
In any event, energy, food and precious metals remain undervalued assets, while commercial/residential real estate and their mortgages (a.k.a. death pledges) decline and default with little media awareness yet. The Old Testament tells us to retire debts every sabbatical. By that calendar we are at least a Jubilee (7X7 = 49 years) behind. Things getting very interesting indeed. Will all the king’s horses and men be able to put Humpty Dumpty back together again?