PART 2: No $7500 SPX Hat For Me
My ToP 5 Worries
»CLUB/EDGE client post Tuesday, November 26th.
Given my thoughts from PART 1: Don't Panic Until We Have A Reason To, hopefully you can see how hard it is for me to be/stay bullish if we get any macro trigger to interrupt the bullish flows (equities, options).
So that brings me back to why as soon as I see everyone ordering $7500 SPX hats for 2025, I quickly look at the other ride of that trade.
Let’s dig in…
#1 Worry - WAR IS NOT PRICED IN
There is nothing you can show me or tell me that War is bullish US assets should Russia drop a neutron bomb on Warsaw or elsewhere, or Iran attacks Israel with nuclear weapons or bio warfare. Just not buying the narrative it is impossible either.
I don't want to talk about Vegas odds on the matter because no way to accurately measure the vig since it's a black swan event and those creatures have been reported extinct once replaced by QE.
But I believe odds are growing for their return if those driving these headlines get their way: NATO Weighs Preemptive Strikes Against Russia.
I know I am the one who analyzed the "Trump Trade: PEACE" a few months back, but the facts have changed! He's not in power yet, and while he isn't, there is a concerted effort to escalate a War in Europe. Maybe even after. But I for one do not plan to be complacent.
#2 Worry - CURRENT USD DEVALUATION HIDES THE RISK OF FUTURE COLLAPSE
Now that's a title of a youtube video by one of those fear-mongering sites. Not one you would expect from me. And yet, I can imagine a situation now (first time ever by the way) where I can see the US Dollar Collapse with the Euro and everything changes.
It's like breaking the china. And I don't mean the country China, but the stuff we eat on.
Once it's broken... even if you glue it back together... you will always see the jagged lines and it will never have the durability or beauty of the original.
It will never be the same.
I talk about this below in more detail next because dollar is so tightly tied to debt, but I want it pulled out as placeholder section because I've never said it out loud and I want to make sure it's not buried as a sidenote.
#3: Worry - FED/TREASURY CAN'T /WON'T FIX THIS DEBT MESS
Newly appointed Treasury Secretary Bessent inherited this mess ($36T federal deficits to finance), and will ultimately hold sway on the largest, most important collateral in the world: US Treasuries.
"Treasury operations now explain approximately 80% of major market moves, dwarfing the Federal Reserve's influence."
Robert Balan
And Fed losses matter to the Treasury Department.
Market was excited about Bessent's ‘Triple-3’ policy suggestions to deal with escalating govt deficits but didn't think maybe it would be received about as well as former British Prime Minister Liz Truss.
Add to that, his focus on diverting from Yellen's approach of issuing shorter-duration bills to finance the govt spending to using longer-dated notes and bonds will reduce global liquidity (the stuff equities swim in). That's a problem for equities in general, banks in particular. And when we lose banks, we will lose tech.
I mean, Geoffrey (and Drukenmiller and Dalio and Gundlach) have repeated that the US 10-year Treasury yield would be ~100 bp higher if Yellen hadn't kicked the can. Will equities be okay if that strategy changes?
Instead, I bet Bessent relents. Either way, we are growing closer not farther away from an EM-style bond repulsion.
“The US is literally running out of time. Another major spike in inflation during Trump's term will trap the US into Latin American style overnight financing.”
JZ
One key variable that is often ignored is the average duration on US government debt. This is a key buffer that allows the Fed to hike short term rates to control inflation without immediately exploding US government interest expenses.
When Biden started his term, the average duration of USTs was ~7 years. Since the market is increasingly skeptical of US ability to control inflation, long term yield on USTs have been rising. Yellen have been issuing/refinancing predominantly with US bills (<1 year) in response.
Based on 8.7T expected issue/refinance in 2025 vs 36T in total debt, my estimate of average duration is ~4 years as of 2025.
What this means is that if the US treasury maintains Yellen's policy, average duration by end of Trump's term will shrink to ~1 year in 2028.
What is the implication of this? For average duration of N, the average % of debt that needs to be refinanced each year is 1/N. As N shrinks toward 1, 1/N approaches 1. This means that the % of US debt that will be subject to short term rates increases toward 100%.
If duration is 7, on average 1/7~15% need to be refinanced each year. If rest are near 0% rates, then even at 5% short term, average rate is only ~0.75% if duration is ~7.
At duration of 4 and 5% short term rates, average rate will increase to 1.25%, which is a 67% increase in interest expenses even if rates stay at 5%.
As the average duration shrinks toward 1 in 2028, the average rate paid will converge to 5% even if Fed keeps rates constant.
The US is literally running out of time. Another major spike in inflation during Trump's term will trap the US into Latin American style overnight financing. Imagine if $44T in federal debt have to be rolled over overnight every night by 2029.
At some point creditors will be so wary of inflation risk that they would insist on being able to pull all their money any day and the US would have to offer high enough interest rate to rent funding on a daily basis.
>> IF that was to come to pass... both dollar and Euro would likely collapse.
#4 Worry - TARRIFS ARE NOT PRICED IN
I just saw today that Nassim Taleb advises a fund to prepare their clients for 1929.
That's attention grabbing and something I haven't seen elsewhere by serious macro.
I also see mentions of Smoot-Hawley tariffs of 1930 - after the stock market crash of 1929 - that is being compared to Trump's Tariffs, as potential risk of unwinding a really good thing that is US equities and economy. Back then, this Hoover policy preceded the collapse of international trade, corporate bankruptcies, 30% unemployment spike, a debt bust that triggered a banking system failure and full-on deflation.
On the bullish side, I already made the argument where DOGE and Tariffs ** could ** be off-set, but it's a big bet, and hard to pull off.
The Trump Trade: Macro-to-Micro.
#5 Worry - DOGE IS SHORT-TERM PAIN FOR “LONG-TERM GAIN”
Many support the bullish view Vivek & Musk have proposed - (lots more posted in macro-to-micro-support channel). In a nutshell, they are proposing government efficiencies to restructure our fiscal debt:
- remove $1T in govt largess
- remove war spending
- remove the fraud from the defense budget
- remove a whole bunch of chair-warmers from the payroll
- drive productivity from entitlement reform and
- stimulate organic growth from deregulation...
But we must not forget the bearish view that:
>>the biggest reason for inflation is govt largess, and to shrink US govt is to shrink US equities.
I could go on but you get my thinking I hope.
Although none of the above is priced into markets, and we are clearly pushing above all time highs with Santa right around the corner, I am suddenly worried about what follows Santa, and thinking less about what to buy and more how to prepare for leaner times.
I'm sorry if this is not befitting a Thanksgiving vibe of grateful glee, but I'm expressing some reasons to enjoy this holiday cheer a little extra this year for fear we may not have so much to celebrate in the New Year.