The next big shock |

The Fed says

“We need to think about how to consolidate the Treasury market so that it can better withstand the next big shock.”

This “big shock” headline and similar comments by Fed Chairman Loretta call out to us. Is the Fed forecasting a big shock on the horizon that could destabilize Treasury markets? The only apparent events we can think of is the acceleration of reduction or the upcoming debt ceiling debate in Congress.

The bond market is also worried about something. The graph below shows the MOVE index. The index measuring the implied future volatility of bonds is similar to the one measuring the volatility of stocks. Currently, it is on the rise and near the peaks of the past five years, excluding the March 2020 peak.


Post market

  • 4 p.m. ET: (NASDAQ 🙂 to report adjusted earnings of $ 1.96 per share of $ 6.35 billion
  • 4 p.m. ET: (NASDAQ 🙂 to report adjusted profit of 97 cents on revenue of $ 1.82 billion
  • 4 p.m. ET: (NASDAQ 🙂 to report adjusted profit of 87 cents on revenue of $ 1.31 billion
  • 4:05 p.m. ET: (NASDAQ 🙂 to report adjusted earnings of $ 1.57 on revenue of $ 1.21 billion
  • 4:15 p.m. ET: (NYSE 🙂 reports adjusted earnings of $ 3.10 on revenue of $ 1.98 billion

What does the Fed know?

  • Fed’s Mester Says Improving Treasury Market Resilience Is Priority
  • Williams of the Fed says: “We need to think about how to support the treasury market so that it can last better. The next big shock

The Next Financial Crisis – Problem with Expensive Stocks and High Leverage

A recent analysis of Kailash Concepts explains the problem of overvalued stocks and high leverage.

“We don’t understand why others aren’t alarmed by an ‘anything goes’ attitude towards record levels of leverage where interest expense cannot be paid out of profits. As documented in our brief article, Equities vs. Bonds, the world is awash in financial chemistry.

“Since 2007, much of the US debt crisis has shifted from the financial sector to over-leveraged non-financial stocks. The KCR research team thinks the combination of record high debt and equity valuations is likely a side effect of real rates approaching record lows ever seen in 1973. Whether we’re right or wrong about causation, the facts are intimidating in our opinion.

“Our research has shown that the world has never been less prepared or less equipped to deal with a possible spike in inflation or a decline in federal largesse.

“Chart 1 below shows the growth in total debt of non-financial corporations as a percentage of GDP. Financial repression and low interest rates have led to an explosion in borrowed money. American companies have never owed so much. “

The debt crisis in US stocks
The debt crisis in US stocks

Powell or Brainard?

President Joseph Biden has said he will pick the next Fed chairman in the coming days. The market is betting Powell will be renamed, but some believe Lael Brainard has a chance. “Who will be the next Fed chairman? “ at Baron’s, compare and oppose the two candidates. While they certainly have some differences, Brainard will likely be as accommodating as Powell if she gets the nomination. However, the markets can be uncomfortable with Brainard. Namely, Danielle DiMartino Booth is cited in the article as follows:

“Plus, moving away from the continuity at the Fed that Powell represents would like to shake up the markets, which is the last thing Biden needs now,” she adds in an interview.

Deflation remains a bigger threat

More Central banks are increasingly convinced that high inflation rates might not be so transitory after all. This is why the tightening cycle has now started. It is worth remembering that secular demographics are expected to reach maximum deflationary pressure over the next decade. This is in stark contrast to the 1970s, when demographic trends underpinned the inflationary surge of the time.

But amid the current inflationary panic, Eric Basmajian of @EPBResearch reminds us that the demographic headwinds facing large economies are intensifying (especially with people leaving the workforce). Its large charts show that deflationary pressures are intense. – connect.

In the long run, demographics will be a major shock to central banks’ hopes of rising inflation rates.

Age dependency versus inflation
Age dependency versus inflation

7% risk-free returns

Mark Hulbert of MarketWatch shares a little-known secret about 7% returns on US Treasuries. In his article, Hidden in plain sight, an American treasury brings in more than 7%, Mark reviews Treasury I Bonds and the benefits of owning them in a higher inflation environment like today. With the, the new coupon rate on the I bonds is 7.12% for the next six months.

Since I bonds reflect the current rate of inflation, they are a viable alternative to TIPs. For comparison, the real yield (nominal yield minus expected inflation rates) on the Treasury bill is -1.66%. The chart below compares the nominal yields of I bonds against the Treasury curve.

Current yields

People who quit push up wages

The dropout rate can reach 3%, the highest level since they started tracking it 20 years ago. In general, people “quit” or voluntarily quit their jobs in search of better paying jobs. The graph below confirms a strong correlation between the quit rate and the wages of people who change jobs. Given the record number of people leaving their jobs, we believe it will continue to rise, putting additional pressure on corporate profit margins and, more importantly, increasing the risk of an inflationary wage spiral.

United States quits SA rate

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