There Is ‘Only One Scenario’ Where Equities Benefit From Here
Boy, I'll tell you what: I would absolutely love to rent out a small auditorium, pack it full of economists and analysts, make it an open bar event (so, all you can drink for free), set the conversation topic to "impact of rising rates on stocks", lock the all the doors and then watch what happens from the safe confines of an observation deck.
Obviously, this is all anyone wants to talk about these days and it's clear why. This month's market turmoil was variously attributed to the above-cons
Why would inflation expectations be revised down? We’ve seen nothing but upside surprises.
“More importantly, this debate is taking place against a backdrop of reckless fiscal stimulus, piled atop an economy that’s already running at full employment and then to top things off”
I equate it to being at waterhole around midnight and thinking, “I should have a couple more bourbons before hitting the road”. Regrettable choices
I suspect investors are worried about the massive tax cut driven fiscal stimulus and their impact on bond prices. Some think growth will jump to 4% and that will mitigate the deficit spending but that is an uncertain bet.
Well, as I see it the Fed is most likely to remain in control of short term rates (continued low’ish inflation even with some creep) while longer term rates maintain an uneven climb in reaction to unwind + growing fiscal funding demands + increasing pressure from unsolvable deficits. US equities decline as economic cycle wanes and risk-on mentality builds. Any decrease in LT rates due to equity selling should be short lived… LT rates just have to trend up in reaction to debt supply / fiscal situation… pushing money market cash to short term debt or overseas markets. Oh if only I had a clear crystal ball….
International markets are in control of the yield curve. As long as they stay away, like Japan has until maybe the Japan Insurance companies dipped back in last week, Treasury rates are going higher. The only way to satisfy the Trump-Treasury need for funds is by stocks sales if the Fed is going to cut off the domestic leverage spigot for more leverage domestically. On the international credit front, I don’t see the foreigners playing ball unless they can extract maximum pain, and Europe should be in retreat by Fall’18. It doesn’t have one iota of correlation to inflation. It is pure and simple power geopolitics telling Trump to take his trade plans to the garbage dump or else. Maybe the Fed will cut the need for reserves on excess reserves and the Money Center banks will soak up the need debt for a while and keep rates suppressed. But leverage and credit around the globe is just itching for a trigger to wind rates higher, and stocks lower.
Those who can’t figure out that this is a dollar breaking scenario, not a dollar strengthening scenario obviously were not alive in 1971. It was lack of gold in US reserves at that time that caused a large scale dollar devaluation. and a folllow-on energy shock in 1973-74. Similar scenario is now in the making, only it is Trump, not Nixon that will do the devaluation to unwind 50 years of current account deficit madness. Let;s see who blinks first.
Stimulus from here would create more treasury supply and more growth…higher inflation, and higher growth.