SPX 5340 OR BUST?
It is pretty much a running joke that the market is manic. And this isn't just relegated to NVDA with 11 green weekly candles taking it 40% above its monthly 10EMA.
There are signs here and there and everywhere.
And this isn't even talking about actual companies or commodities that have gone parabolic.
ANF has better returns since May 2023 than NVDIA & Bitcoin combined!
Cocoa prices have tripled over the past 12 months thanks to a bean disease in West Africa.
I would contend: 1999 has already occurred for the Semiconductor sector.
And if we are going to have an "Everything Rally", then it better hurry up, because cracks are starting to form.
And I'm not even talking about AAPL losing $500B in market share this year or the massive economic and logistical hit to all those companies and communities affected by the Baltimore Bridge collapse moving forward.
Is high-yield debt market showing cracks?
US leveraged-loan default rate has climbed to 6.22%.
The ratio between companies’ earnings and their interest expense has fallen to the lowest level since the pandemic, signaling they have less income to service their debt.
The so-called debt-service coverage ratio averaged just 3.5 times for the median company in the leveraged-loan universe at the end of September, said Torsten Slok, of Apollo.
It is an issue for the US government, too. The Treasury market has grown more than 60% to $27 trillion since the end of 2019.
It is roughly 6X larger than before the 2008-09 financial crisis.
And interest payments on this fiscal debt now equate to $1 trillion a year.
Is THIS why Powell, the “Anti-Volker", is pushing THREE rate cuts?
Craig Shapiro, our MacroAdvisor EDGE Manager, summed it up well post Fed day:
"Powell's dovish press conference yesterday, in the face of a drastic loosening of financial conditions which has re-ignited animal spirits, inflation expectations and actual inflation, can only be explained by the Fed's primacy of the Fed's "third mandate" which is to ensure financial stability of the US Treasury market.
The pivot we saw last fall from the Fed and Treasury suggests that they became very concerned about the impact of higher yields and term premiums in the August-October 2023 period and needed to orchestrate a pivot that would eventually bring down borrowing costs for the US government.
This government is currently running 6%+ GDP deficits despite full employment and will continue to do so for as far as the eye can see given the dysfunction in Washington DC that will not allow for spending cuts or tax raises.
The only lever to pull to improve the Govt's fiscal situation situation is to lower interest expense and so the Fed is acknowledging fiscal dominance and will be continue to act to deliver that result.”
Fast forward a few days, and what are the realistic chances these expected 3 rate cuts will go through?
Craig again:
“There are likely 3 voters now (Bowman, Barkin and Bostic) who are at zero or 1 cut. Two more voters are at 2 cuts (Waller and probably Mester). So you have 5 voters now with 2 cuts or less for 2024.
It is not clear to me how Powell is going to force a cutting cycle by mid year on these folks without dissent unless the labor market implodes mightily in the next couple months.”
I am firmly in the camp that the Fed will let inflation run hot but not too hot. And talking 3 rate cuts made a lot of sense in this context of timing…
When term premia is high/positive, Yellen issues Tbills AND Fed is hawkish.
When Yellen has low/negative term premia, she issues coupons/longer duration AND Fed is dovish.
Currently, term premia is near ZERO! Powell talked a good game about maintaining 3 rate cuts this year (and next), two days before a massive $1.2T fiscal spending bill Friday was passed. Color me skeptical, I think that timing mattered.
At the next FOMC meeting, May 1st, I wouldn't expect such a dovish tilt.
Add to that, we have NVDA earnings May 22nd, where I suspect longs will be getting a case of vertigo just before.
Geoffrey Sees A Market Top
Our MacroAdvisor EDGE Economics Advisory, Geoffrey Fouvry, has been carefully watching the banking sector by combing through quarterly FDIC reports. He is convinced they will start to roll over now.
He is also an expert on Fiscal Dominance, and the transition we have made from Monetary Dominance to Fiscal is one that few have spotted.
Luke Gromen concurs:
In plain English: The Fed printed $114B (net) out of thin air & handed it to banks, essentially to bribe them not to lend excess reserves into the economy.
The only person I have seen talk about the implications of Quasi Fiscal Deficits on X is @GraphFinancials
ARE WE LUCKY TO HAVE CRAIG AND GEOFFREY HELP US NAVIGATE THIS MACRO LANDMINE OR WHAT?!
Yes, is a complete sentence.
With that, I wanted to point clients to his channel in slack tomorrow. Geoffrey is recording for CLUB/EDGE clients a pretty important message:
TITLE: “The Credit Anatomy of a Blow-Off Top"
So clearly we know what’s on his mind!
MONEY QUOTE
“We are doing a repeat of March 2000 Blow-Off, topping exactly when credit is souring... and Fed is late again.
Problem is that the long end of the curve will not provide relief because of gov debt fiscal dominance problem.”
That’s the chaser.
Here’s the shot:
“Credit is going to roll over; it was apparent in last 2 FDIC quarters.
And the blow-off top sweep out-of-money options market won't help.”
So I wonder, now, if we will see my $5340 SPX call I made in January.
But. We. Are. So. Close.
