A cura di Walter Snyder, Swiss Financial Consulting
The recent stock market correction appears to have been triggered by investors reckoning that rising interest rates will negatively impact equity prices. This in itself does not mean that the connection between stock prices and the real economy has been restored. Central bank intervention in the markets has led to distortions and misallocation of capital.
Several market observers have made it clear that US debt is a factor that is going to influence the markets. The Fed is projected to put into effect four interest rate increases in 2018 as the most recent rise in inflation makes clear. At the same time QT (Quantitative Tightening) means that the Fed is going to put ever larger amounts of bonds on the market just at the same time as the Treasury is going to have to raise ever larger sums to cover the budget deficit that Republicans have approved by practically eliminating the debt limit.
It has not gone unnoticed that increased debt in an environment of rising interest rates will result in larger sums being required to service the debt. Unsurprisingly US dollar weakness has been sustained and continues with the euro and yen becoming stronger against the dollar. The renminbi also has shown gains against the dollar.
With a trade deficit increasing due to continued high consumption in the US, the scene is set for dramatic changes in as much as the long-awaited Shanghai oil futures market is planned to start in March. The CBO figures for 2018 and 2019 are highly optimistic as the present recovery and bull market is in its late stages, and a recession is likely towards to the end of 2018 or early 2019. Some analysts have seen the correction as a harbinger of worse to come as the government goes deeper into debt and consumers find that they have reached a point where further debt will be extremely difficult to finance.
Shorting the dollar makes sense because it is highly likely that the Fed will have to buy Treasuries when fewer buyers in the market will result in higher yields. This will cause problems for the Fed and may bring about curtailing QT especially if there is a recession.
Higher bond yields will lure investors out of equities into fixed income investments. At that point one can expect a bear market on Wall Street. That will come when ten-year Treasuries yield 3% or more, and that may happen rather sooner than later and will represent a tectonic shift for investors. Bondzai!