A Warning from the Bond Market
A part of the Treasury yield curve has just seen its steepest inversion since 2000 as bond markets flash recession warnings
Back in May 2022, I posted a warning about the end of the Bull Market in assets and the beginning of an end-of-cycle deflationary collapse. It appears as though the second leg down has begun and the Mainstream is beginning to admit that a financial emergency is upon us, or soon will be. In short, the Fed is making a cataclysmic mistake by raising rates into a highly financialized global economy already teetering. A few notes of clarity are below:
1. Global Debt has risen $200T+ since the 1980s - even slight increases in the cost of capital (higher interest rates) will destroy massive amounts of wealth quickly
2. Bond Markets cannot cope with higher interest rates so bond yields are rising around the world (Europe + US + Asia)
3. Housing Markets cannot cope with higher mortgage rates so housing and real-estate prices are falling, purchase cancellations are rising and much lower prices are imminent
4. Household Balance sheets cannot cope with higher rates so consumption is falling and to make matters worse energy costs are rising so discretionary spending will fall flat
5. Global Exposure to US Stocks is at an all-time-high - US stock market capitalization is +60% of global stock market capitalization (Lynn Alden - "Capital Sponge") - that suggests little upside buying power is left
6. Corporate Balance sheets have been inflated for decades based on rising stock prices and buyback programs, which are now reversing. Layoffs have picked up as a result, more are coming
7. Consumption is about 70% of US GDP, which is completely unsustainable as interest rates rise. Lower consumption will be compounded by stock market declines since household exposure to stocks is at all-time highs
8. The Value of the Dollar (DXY) will continue to outperform against other currencies as asset prices fall and there is a flight to safety into USD
9. Inflation will likely remain high in food (groceries) and energy (esp. oil) even as the Fed raises rates because of supply chain disruptions, shortages in oil and gas, and higher input costs (fertilizer) due to geo-political conflicts
10. Global growth is slowing or contracting, especially in the US and China, the 2 most important drivers of global growth
This is just the beginning, or perhaps the end of the first act. The Fed is disastrously committed to raising rates. Continue to raise cash, avoid or reduce exposure to financial markets and prepare for an acceleration of selling and falling asset prices. Be safe!
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