US Treasury with the "Kick Save"
For Now At Least...
If you are new to The Rhythm of the $ystem, go ahead and check out the beginning of the series where I introduce The Economy Tracker. Doing so will help you better understand the information in this post:
Strong Beliefs which are Loosely Held: This is the key to understanding and tracking the economy and markets.
Here’s the deal, I had a post written and ready on what to watch for and expect over the next few months. First, I wanted to be sure that markets would continue to confirm. Instead what came was a catalyst in the opposite direction yesterday which changed the near to medium term course of the markets and the economy.
The good news is that the original post I had planned is now ready for a future date. Afterall, yesterday’s news doesn’t change the outcome, it simply changes the timeline. But we will deal with that when it is time to do so.
As for now, let’s get into what happened and what that means.
The Most Deceptive Phase of the Cycle
From the previous post:
“The current risk/reward is at one of the worst points in the cycle. Even if the economy gets a last second “kick save” and grows significantly here, it will result in inflation roaring back to life.”
What Changed and Why It’s Significant
Right when things looked the most bleak, the US Treasury stepped in yesterday morning and announced that they are lowering the issuance in longer term bonds.
In English, this means that they are not selling as many bonds as they have been and were expected to in the near future. Less supply than anticipated means higher prices and lower yields.
This is a significant and market moving change.
How this Effects the Markets and Economy
The result of this decision causes bond yields to fall which in turn makes bond and stock prices rise.
This in turn provides a perfect catalyst for markets at a point when they had entered their seasonally strongest months of the year. The catalyst and resulting price moves over the last two days forces shorts to cover their positions which leads to even higher prices. The higher prices then attract more money from the sidelines, pushing prices up further as it strengthens demand.
Due to seasonality, it is more than likely stock and bond prices head higher into February.
How this Effects the Current Credit Cycle
This move essentially turns the clock back and prolongs the current cycle. Meaning we go back to bond and stock prices both moving higher for the foreseeable future.
Why this is Not All Good News
In short, the US Treasury was forced to make this move for a number of reasons which deserves its own post.
While this is good for markets and the economy in the short term, it will more than likely lead to longer periods of higher inflation and increases the odds that The Fed will be forced to continue raising interest rates. A Fed “pivot” (lowering rates in this case) is nowhere in sight at the moment. This leads to an economy which will continue to be in a more difficult environment to navigate for a longer period of time.
Bottom Line
While the storm clouds appear to have eased for now, the economy remains in a Slowdown phase. Slowdowns are one of, if not the most unpredictable and difficult phases to navigate. If something changes, you will be one of the first to know. But until then, enjoy higher prices in stocks, bonds, and other assets.
More importantly, this also takes away the risk of growing unemployment into the holidays.
What Happens Next?
Watch for markets to once again trend back up into February. Important to remember that markets do not move in straight lines, so expect some short-term periods of weakness that end up getting bought. Seasonally, this is the best three to four months of the year for stocks. As long as this continues, expect the economy to continue trudging along as well.
For the next post entitled, Inflation is on the Ropes, click the button below.
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