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Dear Fellow Trader,
I’m no conspiracy theorist.
I’m an economist. But I’m also definitely not a person who believes in coincidences. Last year, the financial markets experienced a dramatic downturn heading into September. At the time, our Momentum Signals were negative. Most people couldn’t quite determine why the market was going lower…
But it was. We didn’t ask. We never should.
All we knew was to get out of the way. And when the smoke cleared at the end of the month, a crisis revealed itself.
It turns out that the British pension system was on the brink of insolvency. Pension systems — desperate for cash — were dumping Gilt bonds at a breakneck pace, driving yields up and bond prices down.
And the British central bank had to make a quick decision…
Either allow the economy and assets to break… or begin a new process of quantitative easing. The bank chose the latter — to buy assets and continue raising interest rates at the same time.
Something significant broke.
Did the same thing just happen in America? Let’s take a look.
In October, we saw the biggest sell-off in U.S. bonds by China in four years as it attempted to prop up its currency. But the selling continued across Asia. At the time, the 10-year bond pushed to 5%, and markets remained in a freefall into oversold conditions.
With interest rates at 5%, we had a serious problem within the banking system. Bank of America Corp. (NYSE: BAC) had hundreds of billions of dollars in unrealized losses, something that spilled across the entire system. While most banks aren’t selling and abandoning their posts, there was something else that happened.
The U.S. government’s interest levels surpassed the annual amount of money that we spend on the military. At the time, we saw a rush of short covering on bonds, with many U.S. buyers and institutions locking up 5% rates.
But something else seemed odd about the situation. At the time, the narrative began to accelerate that the Fed would need to start cutting rates to address the underlying economy.
Coincidence? Did something break? Was there too much leverage on bonds at 5%… and what exactly would happen if that selling pressure had accelerated to say 6%?
At 6%, Bank of America’s leverage would be incredible to calculate, and many financial institutions would face stress on their balance sheets as more cash piled into money markets and their increasing interest rates.
Higher rates would suck even more money out of depositor accounts at a time when banks are already under pressure. We are at record levels, and hints of impending rate cuts would stop that tide and possibly make it recede.
Here’s the thing: The Fed’s core inflation number is still very high compared to its inflation target. And I must wonder if the Fed has done what many economists suggested it should do: accept a higher inflation target of 3%.
Such an acceptance — even off the record — would be a lightning rod for the equity markets. In addition, it would act as a similar type of action that the Bank of England embraced.
Right now, these markets are melting up, and shorts are aggressively covering single short stocks. Given the overbought territory, it’s feeling like this Santa Claus rally should stop…
But monetary policy — and monetary inflation — won’t let it.
Chat soon,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
P.S. Lance’s No. 1 Stock for 2024 Is…
Lance Ippolito has been trading the market for a very long time, and he’s seen more than his fair share of all-time highs and lows.
And if there’s one piece of advice he said he’d pass along, it would be this…
Don’t listen to what people say…
But rather, watch what they do.
In the last couple of days, we’ve heard the Fed and Chair Jerome Powell say all sorts of things…
But Instead of listening, Lance is watching…
And in particular, he’s watching the insiders…
Because right now, they’re buying shares at the fastest rate in over a year…
A lot of folks don’t know this, but insider buying often aligns with short-term bottoms…
