The Ugly Tree is Out of Branches

The bond market is telling equities to get out. The 10-year yield jumped 24 bps yesterday, its second worst day since 2008. Were you forwarded this email? [Sign-up to Rude Awakening here.]( [The Rude Awakening] September 27, 2022 [WEBSITE]( | [UNSUBSCRIBE]( The Ugly Tree is Out of Branches - The Fed’s steep hiking cycle is causing all sorts of problems. - The 10-year yield jumped 24 bps yesterday, its second worst day since 2008. - The Dollar Index is now over 114. The strong dollar is killing equities. Recommended Link [A Kiss From Joe Biden]( I did not consent. You did not consent. But on March 9th, 2022, Joe Biden did something that will solidify his legacy as the greatest ‘Peeping Tom’ in history. A despicable act that could give him direct access to you... Your neighbors... And your children. That’s why I am urging you to get the details of this order and take action before it’s too late. [Click Here For The Shocking Details]( Sean Ring Editor, Rude Awakening Happy Tuesday! It's a gloriously chilly morning here in Asti. Good friend and Rude reader Andy is getting on a plane heading back to England. Then he's off to Gibraltar to find new lodgings. I will miss my friend, but my liver will have time to rest before Aussie Trav and Boston Marty get here in three weeks. They’ll arrive in the middle of truffle season. Here in il Piemonte, especially in Alba, the white truffle is a naturally-occurring delicacy that can fetch thousands of dollars. Shaved onto spaghetti, it’s a delicious, if expensive, treat. Since the euro continues to fall out of bed, the truffles will be more expensive for those who earn in euros. Luckily, I get paid in dollars. With that said, the almighty dollar is crushing all in its path, thanks to Jay Powell’s reckless and relentless hiking cycle. In today’s Rude, I’m going to walk through the markets with you, showing how they’re interconnected. Hopefully, the world will make a bit more sense after this cup of coffee. But before we get into it, I want you to keep this in mind: The bond market tells the equity market when it's going to crash. The equity market then ignores the bond market. The Federal Reserve As the world’s de facto central bank, printer of the world’s reserve currency, and banker to the world’s most bloated military, the Federal Reserve has a reach no one could have predicted or genuinely wanted. But what the Fed says goes, and it’s given birth to an entire subindustry of Fed watchers. As you well know, I think Jay Powell has gone nuts. He didn’t act fast enough last year. And now he’s gone too hard too quickly. In January, the upper bound on the Fed funds target range was 0.25%. In March, he doubled the rate to 0.50%. In May, he doubled the rate again to 1.00%. In June, he hiked 75 bps the first time, bringing the rate to 1.75%. At the end of July, he hiked 75 bps again, bringing the rate to 2.50%. And just last week, Powell hiked 75 bps for the third consecutive meeting, bringing the upper band to 3.25%. In plain English, rates didn’t rise 3% this year. Rates rose 12x this year (3.25 / 0.25 - 1 = 12). I don’t think Jay Powell or the FOMC do math well. Raising rates at that frequency with that steepness is bound to be disastrous. Now, let’s connect the toe bone to the foot bone. The Money Markets Once the money markets know their central bank’s base rate, the money market rates will adjust accordingly. Money market instruments are financial instruments born with a life of less than one year. These include treasury bills, commercial paper, repurchase agreements, eurodollars, and certificates of deposit. Short-term finance is supposed to be boring… But as the base rate increases, money market rates will also increase, lowering the value of money market instruments. Not only that, but this is where credit card rates start to increase dramatically. If lenders match the Fed’s latest rate hike, the [national average card APR could climb as high as 18.91 percent this fall](. Ok, time to connect the foot bone to the heel bone. The FX Markets I’ve been howling about the US Dollar Index for a while now. Often, foreign companies or countries issue USD-denominated debt because creditors won’t accept their home currency. Creditors worry that countries will try to print their way out of their debt (Argentina, for example). But if a country’s or foreign company’s interest and principal payments are in USD, and the USD is soaring against their home currency (assuming that’s where most of their revenue comes from), then those foreign entities won’t be able to pay their debts anyway. Also, if the dollar soars, the number of dollars needed to purchase US stocks or USD-priced commodities is reduced. Hence, prices fall. But we’ll talk about stocks and commodities later. We’ve got bigger fish to fry. The Bond Markets Former US Treasury Secretary Andrew Mellon once quipped, “Gentlemen prefer bonds.” Let’s look at the current yield curve versus past yield curves. Credit: [GuruFocus.com]( Most of the current yield curve is inverted, which isn’t a good sign. But the 3-month yield is lower than the 30-year yield, so that’s ok. Why? Because banks typically borrow in the money markets for three months and then loan out 30 years for mortgages. If that part of the curve inverts, we’re likely in another financial crisis. What’s also noteworthy on this chart is how rates are much higher across the curve in 2022 than in previous years. That means every cash flow is discounted at a higher rate, lowering the present value of those cash flows. In short, as bond yields have spiked, bond prices have cratered. Looking at JNK, the junk bond ETF is informative. Junk bonds have higher credit risk than investment-grade bonds, so they’re partially shielded from rate hikes. (Their coupons are already high.) Here’s how they’ve done recently. Not great. But thanks to the steep rate hikes, the TLT long treasury ETF has been hurt worse! Recommended Link [New Federal Rule could change America forever]( [Click here for more...]( Everything about your way of life is about to change – thanks to a new rule passed by the Federal Government. How much you pay for energy… how you shop for groceries… even how much you pay for healthcare – it could all radically change. That’s according to the man dubbed “The Tech Prophet” by Forbes magazine. Not only that, he believes it could create one of the greatest money-making opportunities in American history... [Click Here To See Why]( Now let’s connect the ankle bone to the leg bone. The Commodity Markets It’s simple. Higher rates mean a higher cost of carry. A higher carrying cost means commodity prices must come down. Even oil and natural gas have taken their lumps in recent weeks. And gold? Gold isn’t protecting anyone now that it costs more to own it. And now, the leg bone connects to the body. The Stock Markets The SPX is ugly. The Nazzie is uglier. And the Dow is ugliest, just entering a bear market and making new lows. But we were warned. All other markets, which underlie the equity market, are crying “UNCLE!” Equity traders never listen. We’re going lower from here, according to the charts. But you don’t want to fight Jay Powell and the FOMC anyway. They’re committed to hiking. It’s time we all believe him. Wrap Up I hope you enjoyed our little jaunt through the markets. From Jay Powell’s rate hikes through to the equity markets, it’s critical to understand how markets are interconnected and interdependent. And it makes life a bit richer, along with your wallet. It’s evident that Jay Powell should be put in a straitjacket, and his shrink should work out his savior complex. It’s too much, too late, and he’ll break this market for years. Until tomorrow. All the best, Sean Ring Editor, Rude Awakening [ARCHIVE]( | [ABOUT]( | [CONTACT US]( Rude Awakening is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [unsubscribe](. Please read our [Privacy Statement.]( If you are you having trouble receiving your Rude Awakening subscription, you can ensure its arrival in your mailbox by [whitelisting us.]( © 2022 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized financial advice. We expressly forbid our writers from having a financial interest in any security they personally recommend to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.