The bond market is right even if it is wrong. As we see the yields on the 10-year Treasuries sink rapidly, we have a host of reasons why it could be the case. First, they could be the only game in town, a recognition that owning a risk-free 10-year Treasury is a terrific prospect if you are from overseas, especially because the dollar's been so fabulous. All you have to do is consider that Americans can always buy European bonds, but it would almost be irresponsible to do so, especially ahead of Brexit. Japanese bonds have been a sin to own for ages. You buy any Latin American bonds you are exposing yourself to incredible currency risk.
So, it makes no sense to do so. It makes much less sense if you are from any of those other countries -- especially China, which is almost a logical buyer of our Treasuries. We Americans are inherently ethnocentric. We simply do not believe that anyone else has any money when it comes to the bond market -- except, perhaps, rich Middle Easterns, particularly Saudis. That means we are never able to take seriously the idea of demand from overseas exceeding supply.
Taking the foreign money off the table leaves you with a belief that the strong dollar and the yield differential mean nothing, even though you have to believe that there is as least some part of this incredible rally fueled by foreigners.
Which leaves, of course, a lack of demand. There simply isn't belief in the future, no matter what, to warrant borrowing -- and that's the real reason for the decline. You couple that with the decline in oil to levels that indicate we reached a tipping point in slowness perhaps from the tariffs, perhaps from the annualization of the tax cuts, perhaps because of the end of deductions for state and local taxes, which hit some states very hard, and you get the cogent thesis that is taking down all stocks.
Once you get the ball rolling on this thesis, it's pretty clear that you are going to gather all sorts of facts that buttress the weakness theory.
For example, I have heard, pretty much endlessly, that the tariffs are going to cost every family at least $800. I simply can't believe this calculation. We have shown no signs whatsoever that there is any real inflation for anything because of the tariffs.
In fact, it's the opposite. We have had plummeting lumber and a pretty serious decline in steel -- supposedly the epicenter of the tariff battle. Given that 7150 stores have been closed since the year began, according to CNBC.com, you know that there will be downward pressure on everything those stores sell -- which is pretty much all things under the sun. I have no idea where, in the new economy, the Amazon (AMZN) economy, the same-old same-old kind of analysis is being used to come up with the cost, but the fact that it is taken at face value is pretty unbelievable.
How can the gospel not be challenged by the outlet stores, by the inventory all over the system, by the price wars among all retailers during what turned out to be a highly promotional spring?
The result? We are slowly, but surely, letting the bonds talk us into a recession. That means we are going to need the Fed to take back the last rate hike and start selling bonds. I think, though, given the recent nature of the rate boost, more data has to come out to justify the cut than just the 10-year's activity itself and theories about what it means.
That can only mean one thing: Until interest rates start going higher -- the nemesis of traditional equity valuations -- we could be destined for more downside, until we are oversold -- we are not -- and the depth of the trade war is finally reached.
