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:

As warned consistently, higher rates “break things,” and falling corporate profits are just one more example of things breaking along side regional banks, sovereign bond market stability, dramatically rising US bankruptcies, lay-offs, car loan delinquencies etc.

Powell’s higher-for-longer policy has also been crippling to the commercial real estate sector while household spending continues to be primarily debt-spending at double-digit interest rates. This is not a sustainable nor a healthy indicator of economic strength outside of Fed-dependent market moves. The impact of the Fed’s rate policies has been undeniably hard on corporate profit margins, which naturally concern those who track stock prices down the road. Ultimately, pain in bonds always means pain for stocks in a debt-driven equity bubble now correlated to a distressed yet fattening bond bubble.

Powell, facing a recession triggered by his own rising rates will have to decide when/if to cut rates. If not, the economy and bond markets will continue a slow then rapid deterioration. However, if rates move from pause phase to cut phase, the result will be significant mouse-click money creation which debases the USD’s purchasing power. This too will be inflationary by definition.

So, there you have it: Save the bonds or neuter the Dollar? In the end, history confirms that currencies are sacrificed to support debt-sick systems.

Without such an injection of fake/Fed liquidity, risk asset markets are running out of time.

The Latest US Stock Signals:

Many are speaking of a surging stock market, but their “peaks” date back to November of 2021, not 2023…

Equities of late are moving temporarily north as Main Street economic indicators head south, revealing the growing disconnect between the two. November saw the sharpest monthly rise in the standard 60/40 stock/bond allocation since 1991. For almost a year, Wall Street has been signaling, expecting and pricing in a Fed rate cut which has yet to arise. Meanwhile, AI, which is the latest tech trend since crypto to seduce trend-traders, has been driving the NASDAQ. Widening gaps between the VIX, which measures stock volatility, and the BofA MOVE index, which tracks bond/rate volatility (soaring), suggest greater turbulence ahead for stocks, whose massive debt profiles make them vulnerable to bond market vol.

In the interim, as recession fears send more investors into USTs, sovereign bonds have been rising and hence yields compressing, which is a classic tailwind for stocks. The concern, however, is longer term. That is, as recession conditions warrant greater deficit spending, the looming surge in massive UST supply is likely to send yields and rates higher into 2024, which will be a headwind rather than tailwind for equities.

Other Key Market Signals:

Needless to say, few need reminding that a losing war in the Ukraine coupled with rising tensions in the Middle East and Asia hardly paint a rosy geopolitical setting. Any number of breaking points are possible as Saudi Arabia and the UAE move openly toward BRICS+ alliances and further away from an increasingly distrusted USA, USD and UST.

Inflation, currency and rate markets are connected, and any headline shift in these increasingly fragile fault lines (oil price, recession-triggers, expanded military measures, internal/external political shocks etc.) can send each of these markets into either course-reversal or course-accelleration. Predicting is impossible, but preparation is not. That’s why macros always overlay current market signals.

Even More

For greater detail on the signals we track, including proprietary recession/ ”storm tracker” indicators, cash positions and, of course, specific portfolio allocations tailored to individual risk profiles, Signals Matter invites you to become a member here.

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.