Looking Backwards
LB #1
A lot has happened since we wrote about the Treasury market. Sure enough, right after I published Tuesday night the market zoomed passed the 4.35% at the time of writing all the way up to 4.50%. The 30 year bond reached 5%. Then “something happened” and it settled down overnight and dropped back about 15-17 basis points and then in the morning during US trading the yield started to rise again. This is while stocks were tanking, right at the lows from the 7th. There was talk of a potential bad treasury auction at 1pm following the Tuesday auction which we saw was awful. The auction was pretty good and then Trump repealed tariffs on the world sans Chian and the market ripped leading to one of the biggest short squeezes of all time. Bonds rallied and yields back off down to the mid 4.30 range. Then we opened Thursday and the selloff in bonds began anew and the yields kept rising and rising. This is a nightmare for Scott Bessent and Trump for their plans are to refinance the debt. They just had to bail on tariffs and all that revenue that was going to pay down the debt, they announced a huge new defense budget of over $1T and Doge seems to be spinning its wheels finding any real savings in the government other than firing people. Which is good. The problem is the recession is already here and the effects are coming to roost. There is a special basis trade which is blowing up as these special trades are prone to do when we get lots of volatility. Which is what Donald Trump specializes in. The basis trade is essentially buying cash treasuries and selling swaps or future prices of treasuries with lots of leverage to make little bits of money turn into great big amounts of money. People call it picking up pennies in front of a steamroller. It fits but there are lots of pennies and these are some of the biggest funds in the world. They are offsides this trade with the voloatility and there was even an article in ZeroHedge about this trade possibly blowing up two weeks ago, long before the tariff announcement from Trump. I will attach the link. The long and short of it is that banks are having to sell lots of treasuries into the market unwinding the trade and this is pushing up supply and when there is too much of anything the price goes down and the inverse for bonds is yields rise. Who was buying the bonds? It turns out the huge Hedge Funds were buying and leveraging the holy shit out of them. Trump and Bessent have been saying we will prioritize main street and not wall street this entire term. Do they mean it or will they kneel to these uber billionaires? Trump had to pivot which bailed them out for a day, but now the Treasury yield is right back at 4.5% on the 10 year. The dollar is tanking, which Trump wants so we can more easily export whatever we make abroad so will he let this run or will Jerome Powell and the Fed have to step in and save the credit markets. This is beyond wild. I was actually looking at the market on Thursday and I said oh, well the Nasdaq is only down 400 pts, it was like a 2% move. What have I become? Immune to to Trump market gyrations? Please no! This is not good, this is very risky, this is where I wish we had Joe Biden back. Ok, that is taking it entirely too far. We don’t joke around about that.
LB #2
This from ZeroHedge on Sunday night when the market was tanking. “Another trader said: “I can’t bring myself to short this market…”
“I know all the reasons it’s going down – we’ve betrayed our allies, screwed our trading partners, the world hates us, tech companies are going to get fined, DeepSeek, valuations, yada, yada.”
The 12mth forward P/E is around 18x on the S&P 500; it was 14x at the 2018 low and 15x in 2022. And of course, if the tariffs stick, earnings are going to get marked way down. GDP too.
“The minute I get short, he’s going to screw me just like he does everyone, with some policy U-turn that rips my face off.”
By Wednesday afternoon, I had to go back and find that article because it was the most insightful thing about Donald Trump I had ever read, and boy was it timely. Donlad bailed on the tariffs for everyone else because he helped break the bond market with his volatility. Now this thing has been broken for awhile so it wasn’t all Don, he just fast forwarded the move on us. It might have taken Kamala 3 years to bring about the destruction Donald has done in 3 months, but breaking the economic system and trying to implement another was always going to be bad. The question is how bad?
LB #3
Speaking of tariffs. I needed to educate myself after seeing Trump’s retarded math so I found out according to the International Trade Administration that Vietnam has “In addition to significant drops in tariff rates when Vietnam first joined the WTO in January 2007, tariffs have decreased steadily over the ensuing years. Thus, most U.S. exports now face tariffs of 15% or less. However, in recent years, Vietnam has increased applied tariff rates on several products, and although the rates remain below its WTO bound levels, foreign businesses have been affected by the increases. Most of the products for which tariffs have increased are produced by Vietnamese companies.” The tariff rate for Vietnam was 46% or half of the 92% tariff that they put on us. How ridiculous. I was watching David Rosenberg talk about @5 tariffs in Germany and France and now we responded with 20%. Ok, Ok I get it non China countries are back to 10%, but the credibility of the United States took as bit a hit under Donald Trump as it did under joe Biden with his freezing of the Russian foreign reserves. Do not forget that this whole charade was stupid and factually incorrect. The whole world thinks we are fools. Which is ok, I don’t really care what they think of us, but we had damn well better be ready for how they treat trade with us. You think they are going to want to buy our products, hell no. You think they want to travel here, hell no. You think they want to hold our treasuries as the safest collateral in the world hell no. And now you know why gold just goes up $100 an ounce every day now.
Looking Forwards…
LF#1
This from Ben Werschkul at Yahoo Finance, “Donald Trump stunned markets Wednesday with another quick pivot on trade, announcing he would authorize a 90-day pause on his reciprocal tariff plans for all countries except China and telling reporters he did so because people were getting “yippy” and “afraid.”
“They were getting a little bit yippy, a little bit afraid,” he said Wednesday, referring to the market unrest that unfolded following his “Liberation Day” tariff announcement a week ago. The benchmark S&P 500 roared up over 9.5% in the biggest increase since 2008.
It was a move that Trump says came together early Wednesday morning after he had been considering it in recent days…It was another chaotic move in Trump’s ever-shifting tariff plans and came less than an hour after Treasury Secretary Scott Bessent told reporters that the president’s decision had nothing to do with the turmoil in both the stock and bond markets of the past week, saying that “this was his strategy all along.”
Trump was pressed on the apparent contradiction and how many aides had previously said this was not a negotiation by saying “sometimes it’s not a negotiation until it is.”
I don’t know what yippy means and I have no idea what sometimes its not a negotiation until it is means and I have read the Art of the Deal. Let me break it down for you. Yippy means, that Trump soiled himself when he awoke and found out what the bond market was doing and sometimes its not a negotiation until it is means that he was told that you are going to have to stop this or there will be a Jan 6 coming into the White House by Sunday.
WE have more signs of what we have been watching right here. From ZeroHedge, “ Destiny USA, New York’s largest mall and one of the biggest in the U.S., has defaulted on a $300 million mortgage, according to Syracuse.com.
Its owner, Carousel Center Co., failed to secure an extension when the loan matured on June 6 of last year, according to recent financial filings.
The Syracuse.com report says that after failing to extend its loan maturity, Destiny USA’s $300 million mortgage is now in default, with the full balance of $325.2 million—including $25.2 million in deferred interest—immediately due, according to an independent audit.
The lender terminated its forbearance agreement, raising the threat of foreclosure, as seen with two other Pyramid-owned malls last year.
Pyramid is negotiating a deal to extend the loan to Dec. 6, 2025, in exchange for a $1.1 million “consent fee,” but auditors warn there’s no guarantee of success. As they put it: “These conditions raise substantial doubt about the company’s ability to continue as a going concern.”
We know that when the two words going concern drop it is all over but the Lizzo singing.
But this situation is so much worse than just commercial real estate. This situation we are facing is much much bigger than the Great Financial Crisis. The bubble in stocks, bonds, and real estate are the biggest in history of the world. Let’s not forget about this. Hank Paulson literally took a knee (supposedly) and kissed Nancy Pelosi’s ring and said there will not be money in ATMs in two days if you don’t pass this bill. Warren Buffet jokingly, (hopefully) said he was thinking about flying to the middle of nowhere. This was real then and it is worse now. Trump is literally throwing a football around inside a house made of glass and if anything gets broken, a financial neutron bomb goes off.
This was a market rally for the ages so the whole crowd of dip buyer sis still out there. In fact, Trump tweeted it’s a great time to buy that morning. Then he pulled the Houdini. He probably went to sleep feeling so smart. Well Thursday took back half of that rally as the Dow jones Average closed down over 1,000 points (ho hum, yawning) and the bond market is right back to where it was. Now what Don? Are you going to lower the tariffs on China next? That’s exactly what he did. Apple and Tim Cook got to him because he lowered tariffs on all electronics. What is the next part of your plan because we are about 50 basis points from the expense on the debt being larger than the social security payments and having our interest expense be the single largest line item in a bankrupt country budget.
LF#2
Here is something from Annie Lowery in the Atlantic, “Last month, Nicholas Gilbert received a delivery of grain for the 1,400 cows he tends at his dairy farm in Potsdam, New York, 20 miles from the Ontario border. The feed came with a surprise tariff of $2,200 tacked on. “We have small margins,” he told me. “I had a contracted price on that grain delivered to my barn. It was supposed to be so much per ton. And they added that tariff right on top because it comes from a Canadian feed mill.”
Gilbert cannot increase the price of the milk he sells, which is set by the local co-op. He cannot feed his cows less food. He cannot buy feed from another supplier; there aren’t any nearby, and getting it from farther away would be more expensive. When he got the delivery, he stared at the tariff for a while. Shouldn’t his Canadian supplier have been responsible for paying it? “I’m not even sure it’s legal! We contracted for the price on delivery! If your price of fuel goes up or your truck breaks down, that’s not my problem! That’s what the contract’s for.”
But the tariff was legal, and it was Gilbert’s responsibility. The dairy farmer is one of tens of thousands of American business owners caught in a spiraling trade war, and lives in one area of the United States that might already be tipping into a recession because of it. Businesses near the Canadian border are particularly vulnerable to the rising costs and falling revenue caused by tariffs, and are delaying projects, holding off on hiring, raising prices, letting workers go, or wondering how they are going to keep feeding their cows as a result.
President Donald Trump kicked off his long-promised trade war by applying levies to steel, aluminum, and goods from China, Canada, and Mexico soon after he took office—insisting, incorrectly, that foreign companies would pay the tariffs and that American growth would surge.”
When this realization kicks in, and it is already. Farmers are going to have to have another bailout just like they did during Trump’s first term. Who chooses who gets these bailouts? Anyone with a truck that is less than 3 years old should be ineligible. There go the farmer’s bailouts. The sentiment shift will be interesting to watch. I think we will see people go from drain the swamp to send me a check in less than 18 months.
LF#3
Lastly today I want to talk about potential as in where this can potentially go. I have a chart that I will link to the article and put on the website, but we need to know what is possible here.
Why are consumer discretionary trading at 24x and energy a vital necessity trading at 14? The chart is from Compustat, Factset, IBEs and Goldman Sachs investment research and shows how the consumer discretionary sector is trading at a 24x P/E multiple, discretionary mind you. While the energy sector is trading at just a 14x multiple. The entire S&P was trading at a 28x multiple before the sell off began in February and the historical long-term average is 14x. However, we have inflated earnings estimates in our denominator so it could easily fall more than that. We reached 20% last week and Tuesday and by historical math we could go lower than 50% and just revert to the historical average.
I simply leave you this week with a note from Goldman Sachs Trader John Flood via ZeroHedge, “We came into last week knowing it had the potential to be a crazy one, but as top Goldman Sachs trader John Flood highlights in a brief note to clients this morning, it exceeded all expectations on the crazy front.” That was last week. This one was even crazier.
Sincerely Yours,
C Thomas Printer
The Dow Jones finished trading …at 40,212 .
The 10-year Treasury bond is at …4.49%
The price of Brent Crude is … at $64.68 per barrel .
The price of gold is … at $3,237/oz.
The price of silver is … at $32.01/oz.
I leave you with this from the information superhighway, What creature is smarter than a talking parrot? A spelling bee.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.