My main website server is down. So I will be posting more on this website until it is resolved. Free to the public for a short while.

I mentioned in my last e-mail update that I just initiated a small short position, meaning I am betting the market is topping again here. I do not make trading recommendations because I am a macro investor who does not make changes often to my recommendations.

My point in mentioning it was I was seeing signs of a top, but it is not confirmed yet. We live in dangerous times to be shorting the stock market. Every time the set up is the best, the central banks intervene, otherwise known as manipulation and distortions, to save the market from seeking normalized pricing.

I think the bank failure interventions were not purposely trying to saving the market, but the liquidity shot to banks lately has had a similar effect as QE with one exception… this was not free money, it came with a high interest rate. It saved the banks from deposit runs to money market funds, but banks profits will take a hit.

If you do not have a life, you may have noticed that Moody’s rating agency finally got around to downgrading a bunch of banks. Fitch did one better and downgraded US Treasury debt. Of course, those at the top whined about this but have they not looked at the disaster barreling our way with high interest expenses for the govt and corporations.

Until recently, I could care less about the currency markets. And for the most part, I still do not care until something happens. But if you are looking for the next central bank intervention to screw your short position, look no further than Japan.

It was October of 2022 when the Yen’s devaluation accelerated and made the Japanese govt nervous. There was an intervention that had the following effect: The Yen pulled sharply back, the US stock market bottomed, and Treasury yields pulled back.

I bring this up because the Yen is rallying back to the point the Japanese intervened. I do not know when they will intervene again and they may not unless the Yen devaluation accelerates… I think they are okay with a slow devaluation. But we also see US yields about to hit market cycle highs again. And this is when I think the stock market will begin to sell off in earnest.

I’ve also been talking about the baked-in lower inflation ending and the baked-in higher inflation starting. By the end of the year, headline inflation will be above 5% again. The subtraction of lower energy will reverse to the addition of higher energy costs. The subtraction of goods disinflation will end. And the large component of services CPI remains in the 6-7% range.

The smart money knows this and is simply selling into the headline narrative. The rest of the market still needs to wake up to higher for longer interest rates. But do NOT call them “high” interest rates…

…interest rates are near if not still slightly below “normalized” rates. If inflation settles out at 4% down the road where I think it will, then the 10-year Treasury should stay above that level at least at 5% and 30-year mortgage should be closer to 7%. And what do you know, mortgages are just now reaching normalized levels.

Back to the stock market…

If you look back at the first chart, you will see “mega” as in the mega cap stocks that have soaked in all the inflows into to the stock market. The magnificent seven have done most of the work pulling the 500 stock index called the SP500 (TSP C fund) up during this rally.

Never mind they have declining revenue and hold double the valuation of the rest of the SP500. They should do fine as long as interest rates return to negative 3% real rates early next year. In other words, be careful. It ain’t going to happen.

If you have not yet, you can sign up below for emails of when I post to this site. And I may be posting more articles like this one if my other site remains down.

Cheers,

Michael Bond

Categories: Perspectives