The Hardest Landing

Plus rocketing rates, labor market revisions, $100 million yachts and plenty more...

(Yacht envy. Photo: Bill)

Bill Bonner, reckoning today from Taormina, Sicily...

Wealth, power, status…and love. Those are the things we all want. Love is in a class of its own – immeasurable and imponderable. But the others are all relative.

So, we felt sorry for the owner of a huge mega-yacht that came into the harbor yesterday. Sleek and long…with its own starched-white crew and chef…worth maybe $50-$100 million. The rule of thumb is that annual operating expenses come to about 10% of the purchase price. 

How proud the owner must have been!  His friends and family aboard…all impressed by his floating palace…

But then, mooring in the Taormina bay…

…the poor owner must have felt like he needed a second job and a penis enhancement; the yacht was dwarfed by other super-super yachts already in the harbor. 

Welcome to the world of the rich…in Taormina, Sicily. 

Rates Rocket

We are in Sicily attending a wedding. Despite all the advances in technology – AI, cryptos, and luggage with wheels… 

…and all the advances in public policy – the Patriot Act, war in the Ukraine, removing statues, and almost 13 years of negative real interest rates…

… and progress in society itself – using ‘they’ to describe a single person, taking pride in things that used to be unmentionable and unpardonable, and recognizing that we are all hopeless racists…

…people still hitch themselves, one to another, like plow-horses.

And sometimes they want to do it in exotic locations…which is why we are here.

The wedding went smoothly, elegantly. And then we spent the weekend exploring the countryside…including the towns of Castiglione di Sicilia and Troina, where we heard they were giving away houses.  

More about that…tomorrow.

Today, let us look at the most important thing to happen in the financial markets.  Benzinga reports:

10-Year Treasury Yields Rise Above Inflation For The First Time In Three Years     

In a significant market development, the yield on the 10-year U.S. Treasury note surpassed the rate of inflation for the first time in more than three years. With the current yield at 4.04% and inflation recorded at 4% year-on-year in May 2023, this milestone signals a crucial market shift.

…when bond yields surge above inflation, the dynamics change dramatically. 

And here’s the Reuters’ report:

US two-year Treasury yield surges to 16-year high after employment data     

The two-year U.S. Treasury note yield rose to its highest level since June 2007 on Thursday after news that private payrolls jumped in June, showing that the labor market remains surprisingly strong despite risks of recession from higher interest rates.

‘Piping Hot’

What sent interest rates shooting up was news, last week, which told us that the labor market is ‘piping hot.’ We don’t believe it really is; most of the new jobs are actually second jobs, taken by people who are desperate to keep up with rising costs. But the news, along with chatter from the Fed, convinced traders that the Fed will stick with its rate hikes a while longer.  

Stocks sold off as a result. But not nearly as much as they need to. By our reckoning, the Primary Trend in interest rates has turned up…which means asset prices must go down a lot more.  

Interest rates have been increasing for the last 3 years – since July of 2020. That is the Primary Trend. And after 40 years of lower and lower borrowing costs, in which mortgage rates fell from over 15% to under 3%, our economy is not prepared for such an important change. Too many people borrowed too much money that must now be repaid…refinanced…and/or supported at much higher rates.

But so far, so good. The Nasdaq had its best first half in 40 years. The S&P 500 rose 16%. Jobs are still plentiful (though, not necessarily good jobs). And the economy is still growing at 2% per year.

So, comes the question: is our theory wrong? Can the US economy…and its asset prices…continue to grow and prosper, even as interest rates go up? Or not?

Hard Landing

Our grandfather lived through the crash of ‘29 and the Great Depression. His bank failed and he lost all his savings. We may have told you this story before, but we’ll tell you again; he reported:

It was rough. After the Black Friday crash, the stock market bounced back a bit. People thought the worst was over. But then, the banks failed.

I had an office in one of the tall buildings downtown [Baltimore]. We didn’t have air conditioning back then, so we left the windows open. And one day a guy jumped out of one the offices above me.

I heard him say as he passed by my window: ‘All right so far.’

(One of the things we most admired about our grandfather was that even though he had lost all his money, he never lost his good humor.)

David Rosenberg must see the bodies coming down, too. On TV news over the weekend, he said it was ‘totally ridiculous’ to think that there would be no hard landing. He went on to say that the next 12 months will tell the tale, as Adjustable Rate Mortgage payments approximately double…and the federal government’s own bill from interest on the national debt goes over $1 trillion per year.

We don’t know for sure what tale the coming months will tell, but we expect it will end with a thud.

Regards,

Bill Bonner

Joel’s Note: Speaking of those jobs numbers, it’s becoming increasingly difficult to trust anything that comes out of official government agencies, including the Bureau of Labor Statistics. (As we’ve said before, without the Labor, all you’ve left is the BS.)

Bonner Private Research’s maco analyst, Dan Denning, was on the case in his Friday research note to members…

The BLS revised April and May payroll figures lower by a combined 110,000— 77,000 for April and 33,000 for June. Another interesting question: how stupid do you have to be take these numbers seriously and then trade on them? If the jobs data are constantly revised lower in retrospect, they’re not real numbers. 

Behind the scenes we’ve discussed how to handle this problem of bogus government statistics and phony price action in the market. When the market is no longer a market, and when official numbers can’t be trusted, you have to resort to other measures to figure out what’s going on.

History is useful, which is why we focus on historic macro valuation measures like the Dow/Gold ratio. There’s also a whole other universe of real data from the real economy that tells you what’s really going on. The transport of goods and services through key infrastructure (roads, ports, rails, airports) consumes energy and generates information.

All of this leaves fingerprints, a kind of real-world paper trail (or exhaust fumes). Connect the dots and you have a much more realistic picture of the economic future the stock market is supposed to be discounting.

To this end, Dan and Tom are working on devising an index that relies on tangible, real world indicators to help inform the BPR investment strategy. Members are invited to watch this space for more… and if you’re not already a member, feel free to find a subscription plan that suits you, here…