Smoke & Mirrors

The yield curve talk over the past two months has dominated media news.

A couple of key concepts to keep in mind are:

  1. Since October of 2011 when Bernanke created QE2, markets have been an artificial construct. Supply and demand in the economy are of little significance as the FED pushes things around to create their favorite picture.
  2. This phenomenon has accelerated since April 2020 when Powell took off the gloves and made everyone flush with Funny Money. Corporations and individuals had two choices; a) accept government handouts, or b) acquire low interest loans, or do both. The end result, money is everywhere, the only group that didn’t get a handout were retiree’s. Just look at all the huge SUV’s flying around.
  3. Inflation had to be the result and the FED does genuinely want to stop it, but it does not want to do what would stop it, and that is to sell off the Balance Sheet and raise interest rates well above recent levels.
  4. That brings us back to the yield curve. Why would it be telling us anything significant. A yield curve residing within an artificial construct can only provide artificial or manipulated results. Who actually ran the trades that created the inverted yield curve. Probably Blackstone and Goldman Sachs traders were involved, along with all their hangers-on.
  5. The current flatness of the yield curve is an indication that no one knows what the demand for money is, everyone already has plenty, so interest rates beyond the 3 month Fed Funds rate is a guess at best.
  6. My guess is that rates in the prior cycle high in late 2018 to early 2019 period are the barometer that the manipulators used. If one looks at the current interest rate curve we see the following comparisons compared to the late 2018-early 2019 highs: 30 year 2.925 vs 3.462%; 10 year 2.827 vs 3.240 %; 5 year 2.790 vs 3.090; 2 year 2.524 vs 2.977; 3 month 0.785 vs 2.470 %. What I see is that the rates that no one has a clue about, have reached levels close to the prior cycle highs, while the rate the Fed controls is only 32 percent of the high. If the Fed wanted to stop inflation they should have pushed the 3 mo rate to 2.5 % in three hikes. they are not even close.
  7. The old story, “Don’t Fight the Fed” works most of the time and that is why retail investors are dumping stocks now. In the long run that is probably smart.
  8. So now we have a time when Main Street and consumers are flush with cash and the FED and the media are implying that the economy and stocks are going to crash now because the FED is raising interest rates. No doubt the market will crash at some point, but probably not right now while everyone is Flush.
  9. Update at 1:45 PM CDT. One final factor, High Risk, High Yield Bonds continue to trend above low risk 10 Y Treasury’s. See chart here updated through midday today. To me that means there is a plenty of liquidity, little fear.

Trading comments for today:

Last Tuesday we got out of our remaining short positions in trader accounts and then started lightly buying long positions Wednesday through Friday. Today on the opening we added the last half of our buys in SPXL @ 107.81 and TQQQ @ 46.81, the 3X ETF’s. It is interesting this morning to see the CNBC crowd as more timid than any recent day, maybe the exuberance of the April 13 moves have had an effect, that is a good first step in making this trading bottom..

In the commodity and gold area, I sold out a small long position in gold late last week and am short a small position in oil as my analysis shows these areas are probably topping out. No position in interest rate markets, the fluff buys in the market the past three days to me seem as a last gasp move.

As far as individual stocks, these are three I have added in the past three trading days, stocks in tech and EV: RIVN, QS, AARK.

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