And the last word goes to ... the bond market. Always. As Thursday's morning equity rally fades in the afternoon, I didn't have to search for the culprit. It is here, on Bloomberg's U.S Rates and Bonds page, as always. So, the bond market, after what ZeroHedge described as a "mediocre" auction of 30-Year U.S. Treasury notes, has fallen dramatically since this morning's "inflation is over" rally in the S&P 500.
At 4.09%, the current yield on the 10-year U.S. Treasury note sits 21 basis points higher than it finished 2022. But the Nasdaq, as measured by the Invesco QQQ (QQQ) , has risen 39% year-to-date.
So, who's right?
Is it the stock-huffers, with their CEO hagiography, monosyllabic mantras and constant propagandizing? Uh, no. The bond market, especially for short-term T-bills, really can't be too bearish or too sensitive to fears of inflation. It can certainly be not sensitive enough, but honestly if a 3-month bill is mispriced, it will simply expire in the next 90 days.
But bonds with longer maturities can be mispriced, and that's where the Bloomberg page really comes in handy. Even though, as is customary, those Bloomberg prices/yields reflect synthetic bonds. (There might not be an actual Treasury note that expires in exactly 10-years, so you just blend the price of the ones that expire in 10 years and two months with the ones that expire in nine years 10 months and so on; it is very straightforward math). So, the pain felt by bondholders can be very real, not artificial.
And that pain invariably leads to more liquidations of leveraged positions, which lead to lower prices and higher yields which cause more pain, which leads to...you get it. It is a vicious cycle, not a virtuous one.
So, what can stop this? Well, the Treasury could stop issuing so much debt, which puts constant pressure on prices and hence yields as supply always trumps demand. Uh, yeah. I don't think Real Money's publishing system supports emojis, but I just loaded up 12 clown-face emojis, just in case.
The idea that the Biden Administration, helped by the feckless overspenders who inhabit both sides of the aisle in Congress will somehow get religion and stop issuing so much debt one year ahead of the 2024 elections is patently ludicrous.
That gross overspending was, for about a decade, offset by the shadiest of all shady accounting practices, the wall of economic voodoo known as quantitative easing. Powell loved it and Yellen, when she had Powell's job, worshiped it, too. But it led to the current wave of inflation that is enveloping the economy, and -- as July's year-over-year core and overall consumer price index inflation rates actually represented increases from June's year-over-year inflation rates -- may actually be getting worse. Having the Fed buy bonds issued by the Treasury amounted to a rolling , never-ending fiscal stimulus plan, that was, as the kids would say, "inflationary AF." We can't go back to that...unless we want the 10-Year U.S. Treasury yield to hit 5%, which it may do, anyway.
So just as the price of Apple (AAPL) is a fairly reflective view on the fiscal outcomes of Apple Inc. (three consecutive quarters of declining revenues is pretty scary, in my opinion) the yield on the benchmark 10-year Treasury is reflective of the market's view on the federal budget and its impacts on inflation.
The bond market is telling you that Stagflation is here. So is AAPL's top-line and the S&P 500's bottom line, which has also contracted for three consecutive quarters.
So, be careful with fixed-income and high-duration stocks here. Position yourself in currently-floating-rate preferreds, like the ones that entirely compose my WYLD model portfolio and to a lesser extent are represented in my FLOAT (most of the FLOAT securities have floating-rate provisions that have not yet kicked in) and CRAPP model portfolios, as well.
One of the first Wall Street cliches I learned was "The stock market follows the bond market." Please don't forget that pearl of wisdom.