U.S. 10-Year Treasury Yields Have The World On A String

Fed chair Jerome Powell in his press confrence yesterday sounded like he still has no idea of how to read the oncoming economic signals that are contradicting themselves. So he is still “navigating by the stars under cloudy skies.” He did sound the most dovish that he has of late but he seems to be just as confused as everyone else.

Powell appears to be a pilot on a no way out collision crash while remaining calm and composed for the passengers sake. He is most scared of the inflation he created in tandem with fiscal policy, running out of control as a result of dropping 5 trillion dollars on the economy hit by the pandemic. His only alternative is to ditch the plane and crash the economy while all passengers remain calm with seatbelts fastened.

The Fed fixed rates to zero for over 12 years and we are in unchartered waters with the next great financial crises looming in the near horizon as a result of easy monetary policy all over the world for far too long and the mistakes that have been made in the longest era of easy money.

Consumers are still spending as the 5 trillion dollars that fell from the sky is still floating around evidenced by Farrarri (RACE), that today announced a backlog of strong orders through the end of 2025. Visa (V) on their earnings call said the consumer is still strong and defying all as they continue spending, but delinquencies and defaults start to rise. TransUnion (TRU) on the flipside is telling us that loan volume has collapsed and the consumer can no longer borrow. Align Technology (ALGN), confirmed TransUnions story as fewer are choosing to charge this discretionary spend on their credit cards after seeing record numbers in recent years. But Starbucks (SBUX) tells a story of consumers still lining up for $8 lattes.

For now markets are still listening to chairman Powell as he gives the all clear into year end for now and it appears he will be looking up at the stars at his December rate decision meeting where he will likely stand pat again. So bonds rallied on the back of Powell’s press conference yesterday and yields should trend slightly lower once again just days after Turkey’s Central Bank raised its key interest rate from 30% to 35%. For now, markets can grab onto the seasonality train with the all clear into year end but this may very well be the last train leaving the station as the bond market will take control of the narrative in 2024 as Powell becomes a mere sideshow left with no more moves to make. Until now Powell has chosen to do the easy work by aggressively raising rates. Now he has to do the hard work of the central bank’s “reverse repo” operations that represent the largest source of easily extinguished liquity as the Fed needs to withdraw its pandemic-era machine gun stimulous.

The Fed had a balance sheet expanded from under $1 trillion in 2007 to more than $2 trillion by 2009 in it’s quantitative easing program aimed to help the economy recover from the Great Financial Crisis. In the early days of the Covid-19 pandemic, the Fed purchased a remarkable $1.5 trillion in Treasuries in March and April 2020 when Powell hit the panic button and called Larry Fink to buy everything in Larry’s store at BlackRock in an effort to stabalize the economy. It then decidided not to stop and continued buying all the treasuries it could as the party really started going. Jerome Powell was the head of the party while his predecessor Janet Yellen doled out shots.

Now that the party is over and Larry Fink is tired out, the Fed needs all that money to come back in as it reduces its balance sheet. It began reducing its balance sheet, also known as “quantitative tightening” over a year now. Today the Fed’s balance sheet sits around $8 trillion.

So look at it this way; quantitative easing is like the best party the economy and markets could throw and when the Fed expands its balance sheet to $9 trillion, everyone including old Larry Fink is partying like there is no tomorrow. Adversly when the party ends and the lights go out, it is the worst times. And once the the Fed loses control of the bond market, you have an economy in a tailspin and it will take a while to get through the wreckage.

Sell anything that involves the consumer borrowing to purchase big ticket items.