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The Economy is Sinking so Follow the Smart Money

During the past week, there were two striking television segments which caught my attention regarding the financial markets and the coming collision between higher rates and economic stability.

The first involved a discussion with the hosts of Bloomberg Surveillance where the bond market was the center of attention.

Think about that number highlighted above; if a financial institution purchased a 30 year US Treasury in 2021, they are now down 53% in price. This is an astronomical collapse which will have implications for weaker financial institutions who are sitting on this ticking time bomb and end up in liquidity quicksand. What might that be?

If they are unable to offload MBS (Mortgage Backed Securities) currently stuck on their balance sheets because the Federal Reserve continues to be engaged in Quantitative Tightening, then if said institutions need to raise cash in the public markets they will have to sell more equity (dilution) or those very treasuries at massive losses causing their books to be marked to market at an accelerated pace.

Ergo, selling begets selling.

Marko Kolanovic at Goldman Sachs has recognized this danger and thus with the bond market in an almost 2008 style collapse has warned we could see a 20% decline in equity prices potentially before year end.

The employment data created the conditions for a low volume short squeeze in equities with poor technical structure and little depth but as the numbers were picked apart, the data produced by the BLS became even more suspect.

Hence, it is time to break down some different but related data points, much more instructive as to the current condition of the American worker and the economy as a whole.

This flies in the face of the claims by the Fed and the administration that wages are stable and strong and not experiencing net deterioration due to inflation. On a percentage basis, the declines are even worse.

The impacts of these declines is not just on the Federal level, it is going to hit unprepared state and local governments even harder, as the Federal Reserve data is warning about.

Thus despite the “strong” non-farm payrolls report, the underlying well being of the American consumer and their ability to support over 70% of the economy has to be called into question. The ultimate outcome will be a increase in defaults, be it on homes, auto loans, or credit cards unless inflation is tamed (unlikely) or economic growth surges with wages to offset the impact of stubbornly higher rates of inflation.

These are signs of an economy falling into recession, not recovering from a pandemic and continuing strong sustainable growth. The layoff data does not lie and it is beginning to indicate the same headwinds.

Watch the smart money this week, aka, the bond market.

The bond traders know what is coming and how the flood of issuance by local, state, and the Federal government into a stagflationary environment will impact rates over the long term.

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