It is Tuesday night, do you know what your President is tweeting? This is the new economic analysis. It is the only thing the markets are really waiting for and paying attention to. Jobs reports, unimportant. Earnings, so last month’s news. Inflation, doesn’t matter. If the tariffs stay on or not determines inflation. Seldom in human history has so much power been given to one man. Is that man going to be proved right? Time will tell. We have discussed his plan or my opinion of his plan for some time now. Trump crashes the economy, oil goes lower, and he gets to refinance that debt. He saves money on interest expense, he saves money of defense cuts, Doge gets some savings on federal spending cuts, and the tariffs will add some money to the federal coffer. Trump has even been floating the idea of a higher tax rate on rich folks. Raise revenue Donald, raise revenue. But all is not well in orange combover land.
I was tempted to write about this on LBLF this weekend. Its was just a little bounce, my left eyebrow kind of reacted on its own like I was Dwayne Johnson or something. On Friday, the stock market sold off obviously. Stocks sold off and closed near the lows, but bonds did not. Bonds rallied from their mid-day lows and finished a healthy 14 basis points off their lows on the 10-year Treasury. Maybe it was profit taking going into the weekend. Maybe not. That brings us to Monday when the volatility really started kicking into the markets. Huge selloff Sunday night and into the open, Asian markets getting wrecked and treasury yields sold off initially and then they started rallying and rallying and rallying. The stock market got the fake news that Trump might do a 90 day pause on the tariffs and the stock market rallied and rallied only to sell off again, but Treasury yields? They finished way up, almost 15 basis points and that time 30 basis points off the low from Friday and then Tuesday happens and the stock market was up and then sold off again, but Treasuries again go up, this means bonds are down as they move in inverse. This means bonds down, stocks down. Hello 2022 all over again. As I write this the 10-year treasury is at 4.30% and 45 basis points higher in 3 days and higher overnight meaning bonds down again as the stock market futures are down another 1-1.5%.
The Dow dropped 2,231 points on Friday and Trump played golf. What a great headline that was over the weekend. He seems unconcerned and Scott Bessent, the treasury secretary, seems to like reciting that 10% of the population have 88% of the stocks and another 40% have 12% and the rest have none. Why keep saying this? Unless you are going to bludgeon someone with stocks? I’ve been saying that I think he might have a plan, but after the tariff rollout and math behind that that a retarded 4th grader might do, I am beginning to wonder if this isn’t just Trump being Trump. The tariffs start tonight, and the messaging is already out there. This from ZeroHedge, “President Trump’s targeted reciprocal tariffs on countries with which the U.S. runs its largest trade deficits will take effect at 12:01 a.m. ET on Wednesday. In anticipation of the next round of tariffs, U.S. memory chipmaker Micron Technology plans to impose a tariff surcharge on customers.” That doesn’t sound like China paying a tax or Vietnam or Japan. It is just more expensive if you want to buy what you were already going to buy. Apple flew in 5 airplanes full of iPhone so they could avoid a price hike. China’s 104% tariff hike starts tonight at midnight. What are the chance prices are higher at Wal-Mart in a week? These people getting taxed are not the stock owners Treasury Secretary. Oops update, the 10-year Treasury is up to 4.33% now and rising.
Who wants to buy the bonds and at what price? This has been our mantra for years now. Right now, well let’s say last Tuesday, the US was running approximately at 6% deficit as a percentage of GDP. This has been consistent with the last couple years and the highest in peacetime since WWII. It’s outrageous. 4.34% and rising people. The world was willing to buy our debt historically with the dollars that we paid them to buy things that we imported. 4.35% people and rising. Then comes a huge stock market selloff and the chances of a recession in the US have become a likely scenario officially although we know we have been in a recession for some time. The market knows what happens to budget deficits when recessions happen, they get lots bigger. Our two trillion-dollar deficit might turn into 4 or 6 trillion even. No add that to the debt that Bessent has to refinance and Houston, we have a problem. Not just Houston, Chicago, New York, and LA we got a problem. So, when I see headlines like this it makes me nervous. This from ZeroHedge, “Ahead of today’s closely watched 3Y auction, many were wondering if we would see the fingerprint of a Chinese treasury boycott and/or liquidation in the results from today’s sale. Well, here is the data that the Treasury released moments ago.
The sale of $58 billion in 3Y paper priced at a high yield of 3.784%, down from 3.908% last month, but massively wider than the When Issued, which at 3.760%, meant we had a 2.4bps tail. As the chart below shows, there were only two bigger tails previously: Covid, and the 2023 SVB failure/banking crisis. So yeah, superficially, this was not a good auction… Bottom line: this was a very ugly auction, with just Covid and SVB 3Y auction uglier, although the silver lining is that while Direct demand collapsed, at least the foreign bid was in place for now. The question how much longer foreigners will keep funding the US budget deficit is not going away any time soon.”
Foreigners were still buying today but the directs didn’t. The directs are the broker/dealers, the big banks, the ones that have to step in and buy and we have the worst direct participation since Covid and a banking crisis? Why, those banks have been just a little bit busy trying to satisfy a lot of activity at the trading desks, like margin calls gentlemen. With a selloff this big, people are having to cough up positions. The old adage means during a big crash all correlations go to 1. Meaning everything gets sold. The Duke brothers need to get back in there and sell sell.
The good news is that America is in better shape than many countries because we have more access to credit, but what if that was to go away. What if China sells their bonds? More supply on the market, interest rates go up to get a new buyer? America’s debt goes up, further into recession, the deficit gets wider, that’s called a debt spiral, and I think we are on the precipice. I’ve thought we were slowly skiing down toward it, checking the snow on every turn, making sure we didn’t slide off the cliff. Then this hot rod orange haired strutting rooster comes flying by in a toboggan and says hold tight Americans! He actually said that, like we are supposed to be on Space Mountain in the financial markets.
Traders Bill Ackman, Stanley Drunkenmiller, Ken Griffin, and even Jaime Dimon have come out and said that they think this needs to stop. Hell even Elon Musk is saying the tariffs have to stop and he is called Peter Navarro the Tariff czar an idiot. Why? They are all losing money. Trump is over in crypto land with his crytpo bros and the one thing you can count on Trump to do and that is look out for hisself.
So whether you are for him or against him, it is important to try and understand him. It’s also imperative to understand what he is doing. He is wrecking the savings of a lot of rich and powerful people. That’s not so bad. He is putting the largest tax on ordinary Americans since 1968, that won’t be so good. He is trying to save the economy which we said all along would be really difficult to do. We said the Fed has had no good options for 3 years and counting. Trump is just fast forwarding the ending on us. That’s why I am waking up and checking the 10 year Treasury bond all through the night. I’m dreaming about it.
Denitsa Tsekova writes for Bloomberg, “JPMorgan Chase & Co. says recession fears in stocks acutely tied to America’s economy have spiked to nearly 80%, while credit investors remain sanguine even as funding stress threatens to build.
The small-cap focused Russell 2000, which has been battered in the recent selloff, is now pricing in a 79% chance of an economic downturn, according to JPMorgan’s dashboard of market-based recession indicators. Other asset classes are also sounding alarms: the S&P 500 is pricing in a 62% chance of an economic downturn, while base metals show a 68% chance and five-year Treasuries indicate a 54% chance. By contrast, recession odds in the investment-grade credit market are at just 25% — though that’s still up from zero in November.”
Credit markets will be what gets Jerome Powell to move most likely. The Fed is sitting and saying, hmmm. Higher prices and we don’t have inflation tamed, that isn’t good. Universities and schools laying people off due to funding freezes, fed workers laid off by the doge load, and now the private sector is going to get hit with a huge tax hike. The 10-year yield is telling us something that we need to pay attention to. Be safe. I want to go back to sleep because even a rising 10-year yield in my dreams is going to be prettier than this. 4.35% and holding. Who’s going to buy the bonds and at what price?
Sincerely Yours,
C Thomas Printer
Also born on this date… one of the greatest character actors in history, Ward Bond.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.