“Yesterday, the U.S. 10 year treasury bond hit our long held 1.40% target. A sea of bond bears has become an ocean of bulls. Brexit’s risk to the global economy has created an opportunity for those willing to step in and short bonds in the face of a large group of clowns rushing to the exits (abandoning their long held bearish bond positions).”
Bear Traps Report
July 6, 2016
The Fed is playing a very dangerous game. They will do anything to protect their beloved Hillary Clinton’s 2016 election hopes, but in doing so they risk financial instability. When you get too close to the edge one often gets burnt. Colossal stakes are on the line. The 10 year U.S. Treasury hit a yield of 1.63% this week, a seller’s panic has begun. As long term bond bulls we turned bearish in late June, recommended our clients SELL bonds.
Friday morning, in classic fashion our favorite “labor market” economist in Janet Yellen talked up the U.S. economy. Yellen reiterated her belief that the U.S. is nearing full employment and meeting their goals. Heading toward the 2016 election, the Fed’s cheerleading has become a double edged sword. Central bankers have been talking up the U.S. economy, but in doing so they risk waking up the beast within global equity markets.
Over the last year, every time the Fed has tried to raise rates stock market volatility has surged dramatically. There’s over $10T of debt globally tied to the U.S. dollar, commodities and emerging markets. As the Fed has kept rates near zero for eight years the easy money gravy train has exploded in size. Every second they’ve kept interest rates too low for too long, capital has oozed into places it just shouldn’t be. As the Fed tries to exit the “lower bound” the U.S. dollar surges along with systemic credit risk. As we said in January, “the Fed will NOT hike rates this year, but they will try (and fail) to get one in. ” It’s the beast in the market that will stop them once again.
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The global wrecking ball that is the U.S. dollar surged Friday. After over two months of public silence about her views, Yellen pointed to “continued solid performance of the labor market.”
The Fed chair also emphasized the “case for an increase in the federal funds rate has strengthened in recent months” in her speech Friday to central bankers and economists in Jackson Hole, Wyoming. Complacency had taken control over equity markets globally this summer. Friday we witnessed a rare surge in volatility, for the first time in months the VIX traded in a 23% range.
U.S. ten year Treasuries hit 1.63% today, the highest mark in 3 months.
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Just as the very last bond bear turned bull, Treasuries now in the throes of the most significant sell off this year
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“We’re reasonably close to what is thought of as full employment. The inflation rate this year is higher than last year’s. It’s still not up to 2 percent. But it’s been growing.”
Stanley Fischer
Fed fund futures have shifted from a 13% chance of a rate CUT in (post Brexit low) to a 43% chance of a rate HIKE in September.
Years ago, back in our Morgan Stanley days Barton Biggs warned us of the “GE – Transports non-confirmation omen.” It’s a classic sign that unsustainable factors are holding up stock prices, not solid fundamentals. We have an equity market positioned on a loose clay foundation with NO sign of bedrock.
Instead of listening to 2000 journalists lecture us on how the 2016 election is all over, lets manage risk. Where’s the most attractive risk – reward in this year’s election cycle? What’s priced in and Not priced in? Should the VIX (the CBOE stock market volatility index) really be under 12 one hundred days before this election? All you need to know is up in this chart above. We call it the “revenge of Joe lunch pail.” Just like middle-class families in the countryside of England in June (Brexit vote), there are so many working class Americans who have had it with globalization, political correctness and elitist media telling them how to vote. They are tired of living in fear. All they know is their incomes and jobs have moved to Asia, terror and U.S. racial tensions are on the rise. It’s pure common sense. Whether right or wrong, Donald Trump has tapped into a powerful political vein running across America. It DOES NOT MATTER whether Mr. Trump has an effective plan that will work, Joe Lunch Pail is just VERY HAPPY someone is finally listening to him.
Joe Lunch Pail is hurting, his family has been dealing with flat to declining income going on 6 years. As much as the U.S. media wants to get off this topic and focus on their perception of Trump’s flaws, they are ignoring the elephant in the room. The U.S. media regime is making the same mistake the BBC made in London during the pre-Brexit risk analysis. Far too many people priced the risk of Brexit at unrealistically low levels, we know what happened next. There are eight million people in London, 50m outside the city. London votes 8-1 to remain, but people across the countryside voted 3-1 to leave. The only problem, no one listened to the butcher, the baker, the candlestick maker. Lets NOT make the same mistake they did, we MUST learn from history, not repeat it.
You wont find this chart in the main stream media, but unemployment is sharply on the rise in the Rust Belt, especially in Ohio and Pennsylvania. 
Two term Presidential elections and recessions have a lot in common.
Oil in blue, junk bonds in white are singing a classic warning sign for us all. The disconnect is eerie. As long as desperate insurance companies in Tokyo and Frankfurt have an unending thirst for yield, U.S. junk will be mispriced. Short Junk Now.
German and Japan 10 year bonds, married at -0.08%, a true global growth story.
