Knife in the Back
We are quickly approaching a breaking point!
America’s paper wealth, or what is often referred to as the Wall Street economy or the artificial economy, is getting destroyed by the pace and seriousness of the tightening measures taken on by the governments.
In April alone, and we still have a full CRAZY WEEK of earnings to go, the QQQ (NASDAQ 100 index) is down 10.67%!
If the NASDAQ was down 10% in a calendar year, it would be considered a miserable and dismal performance, but in 30 days, it is a calamitous event.
The S&P 500 is down a full 7% in April so far, and the 10-year Treasury bond yield is up 25%!
Investors are dumping Treasuries, and the reason is that the CPI numbers indicate that to hedge against inflation, the 10-year must offer more income or you’re guaranteed to lose purchasing power.
Bond traders are screaming that inflation is no longer transitory and that they want to receive higher yields for the next decade. In our view, the 10-year yield is going to hit 4%.
This is a very aggressive and non-compromising tightening cycle, and it’s working its way through the economy while hitting everything in its path.
The Dow Jones Industrial Average, which includes Apple and 29 other companies, is down 12.6% in 2022. The S&P 500 is down 14.5%, the NASDAQ 100 is in a bear market, down 22.2% after having already left bear market territory, which makes this even more severe, and the IWM, which is the Russell 2000, is down 23.1% this year.
It is truly a horrific time for the markets since so many things are happening all at once, and no one is talking about China’s clamping down on zero-COVID policies, which is putting tens of millions of people in restrictive measures again.
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What worries me is that in 2018, all of the major indices entered the bear market, but in 2022, the S&P 500 and Dow Jones are far from this for the moment.
What this tells me is that earnings week, which started yesterday and will include Amazon, Apple, Google, Microsoft, UPS, and META, among others, will decide the fate of the indices, with a looming 0.50% hike followed by another one.
It’s no wonder we’re seeing record inflows to materials.
If there’s one industry that does exceptionally well in times of inflation, it is raw and natural resources.
If recession fears escalate and accelerate, materials will deflate, but we think the FED won’t stand idly by and allow a recession that it promised it will do anything to avoid from happening. Instead, it will take a dovish pivot.
If there’s something that Jerome Powell doesn’t want to be remembered for, it is tightening into a recession like Paul Volcker did.
Inflation in 2022 is nothing like in 1980, and the labor market is quite strong today.
Where things could get ugly is in housing, which is rate-sensitive and employs a lot of people both directly and indirectly.
By this summer, if rates continue to climb, it will change the fundamentals of the real estate market, and we think that more institutional buyers will be the heavy buyers while average Americans will be struggling.
The rubber is meeting the road and the next 90 days will be either successful and offer a soft landing or we will enter an official recession.
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