Signals Matters News Letter: The Signals THAT Matter
Broadly, the core and timeless principles behind the infrastructure of Signals Matter Portfolio Construction are carefully discussed here and here.
As for WHAT’S HAPPENING NOW…
The Latest US Bond Signals:
The most obvious bond signal of recent event has been the Fitch downgrade of the US Treasury bond from a AAA to an AA+ rating, which the rating agency attributed to “fiscal deterioration” related to the US “debt burden.” As indicated in the linked article below, this may be the understatement of the decade, as the US continues to deficit spend at an alarming rate. Any downgrade in credit rating, of course, is a warning of potential, or at least increased, default risk.
With a debt to GDP of well over 100%, the US sovereign bonds have fallen a notch for good reason. The Budget Office is officially warning that US debt burdens (i.e., interest expense on public debt) are approaching unsustainable levels, especially as the Fed raises the cost of that debt through a year of unprecedented rate hikes. It is estimated that within 10 years, the interest expense alone on government debt could reach 15% of the US budget.
The markets may feel, however, that such concerns are superficial, as there is no way or scenario in which the US defaults on its debt. Technically, this is simply untrue, for whenever a bond provides a negative rate of return when adjusted for inflation, said bond is actually and constructively defaulting the bond holder. Furthermore, whenever a sovereign nation (i.e., the USA) freezes the FX reserves of another sovereign nation (i.e., Russia), that too is a bond default.
In practice, of course, the USA could always avoid failed payments of its debt (i.e., USTs) by simply printing more money at the central bank. This may be good for bonds, but it certainly is not good for inflation or the USD over time.
The Latest US Stock Signals:
The news from Apple, a mega cap valued at over $3T (who cares about anti-trust or monopoly laws anyway?) just lost over $160B in market value, thereby sending it below its otherwise absurd $3T market cap. Given that the S&P 500 is effectively driven by just 5-7 names, nearly all of which are at nosebleed market caps above the trillion-dollar mark (Microsoft, Google etc.), anytime a leading name in an otherwise zombie equity market takes a hit (Apple down 4%), the entire S&P follows. Our team tracks these big names, as well as the current AI mania, carefully and skeptically, as the AI mania and narrative seems out of sink with basic value principles. Of course, just about every inflated S&P name is out of sink with sound valuation, largely because the Fed and the headlines now drive investor sentiment more than balance sheets and financial statements.
Other Key Market Signals:
As the Fed and other headlines pre-maturely declare victory over inflation despite failing to hit the 2% CPI “target,” informed investors recognize that much of the dis-inflationary success of late has less to do with the Fed and more to do with oil prices, which had seen more supply than demand due to emergency use of US energy reserves. As we head into winter and more recent headlines, however, forces are aligning to send oil prices, and hence CPI data, much higher into year-end.
Specifically, American commercial crude inventories are now falling (17 million barrels and counting) while Saudi Arabia, less and less a friend to the Biden administration, is cutting production, the combined “supply-side” effect of which should mean higher oil prices rising well above their mean valuations into year end.
As always, the key macro points are tied to debt levels, which are tied to global bond markets and hence global rate and currency markets. The ECB, having little choice but to follow the Fed’s rate hike trends, is still flirting on the hawkish side, which puts more downward pressure on their bonds and more upward pressure on ordinary citizens and the rising cost of credit, be it home, auto or credit card.
The most interesting country to watch, however, may be Japan. The Bank of Japan, like the Fed, is in a corner. It has to raise rates to fight potential inflation at home, but in doing so creates recessionary pressure as well. Unfortunately, and as even Pearl Harbor reminds, Japan needs oil to survive, and thus a stronger yen to purchase that oil, as it has always been an oil importer.
A stronger yen, however, could become the unseen trigger of a much larger, i.e., global “credit event,” as US investors and funds have been enjoying years of the yen carry trade—that is, borrowing from Japan’s banks at globally low rates and then using those funds to speculate in US and other markets. This rate arbitrage, however, would come to a painful end if Japan raised rates even slightly, and would force a margin call on foreign/US investors with potentially massive ripple effects in a topping US market.
Also making headlines is the upcoming BRICS summit in South Africa at the end of this month. You have likely seen the headlines and pundit hysteria concerning a BRICS gold-backed trading currency to emerge from this event. Separating the hype from the reality of this “de-throned USD” headline is critical, which the link immediately below addresses with more realism than sensationalism.
Even More
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Signals Matter Market Reports generally reflect the company’s long-term macro views and are posted free of charge each week at www.SignalsMatter.com, on LinkedIn, and directly to your inbox by Signing Up Here. Our Portfolio Solutions are generally geared to shorter timeframes, may therefore differ from our longer-term perspectives, and are available to Subscribers that Join Here. For three ways to engage with us, please click: 3 Ways to Engage.
A very good report without a lot of the B.S. that other advisors use as filler material.
There’s an overload of information available every day and only so much time to absorb it.
We appreciate the effort required to communicate the salient facts succinctly.
Thank you.