Markets normally price forward with an 8 month lead time on economic expectations. Today’s news often misinterprets market actions based on current news events versus explaining what the markets had anticipated 8 months earlier. However, the recent US election through a monkey wrench into that with the January 6th US Electoral College vote leaving the Democrat Party in charge of US Policy. Markets had not fully priced in the Inflationary consequences and are now in the process of “catch-up”.

Though the markets expected a Democratic victory, in-line with the Polls, markets completely under-estimated the dramatic policy initiatives in the form of 57 Presidential Orders that has been unleashed in the first 36 days of the new presidency. It has come as a shock to both the markets and, even might I venture, to many centrist Democrats.

BOND MARKET QUESTIONING US POLICY PRESCRIPTIONS

After less than 36 days the Bond Market has seen enough and have begun reacting accordingly. The US debt market as a result is in turmoil and has begun revolting as the “Bond Vigilante’s” and Foreign Investors react to the new US Regime’s planned policies of heavy borrowing, without an accompanying credible economic growth plan. Treasury investors are rightly worried that massive new borrowing initiatives will fail to go into sufficiently productive assets which will pay for the elevated borrowing levels. Additionally, they see new loan levels making existing and rollover loans more risky.

Here are just some of the emerging worries of foreign US debt lenders I have heard expressed:

• Fiscal Spending Plans
• The $1.9T Covid Relief Bill is months too late to be effective in aiding urgent cascading needs,
• The Covid Release bill has little Covid help and is primarily a Bailout of State & Local Governments & Democratic political support needs and policy objectives,
• The attack on US Oil and Energy by shutting down the Keystone pipeline and banning oil & gas projects on government land is seen to be a complete reversal of US Energy Independence & future inflationary pricing.
• Fiscal Revenue Plans
• Tax receipts at all levels of US government are currently in peril and persisting lock-downs and forbearance are huge hurdles soon to manifest themselves in economic fallout
• Monetary Policy
• There is a strong sense that the Fed is losing control of the Bond Market and has no plans to combat an Inflationary over-shoot.
• Foreign Policy
• The military incursion and bombing of Syria completely reverses recent US withdrawal policies and means more Military spending to an already strained fiscal budget.
• The Re-engagement in the Pan America Trade Agreement and the Paris Climate Accord is seen to be a significant financial economic headwind for the US to absorb without negotiating any concessions.
• Domestic Policy
• Immigration & open border policies suggest increasing major burdens on US immigration, police, health and entitlement services
• Wholesale reversals of all Trump Regulatory Reductions is seen to be a major impact to the US economic growth which resulted from them.
• Leadership
• The president’s health, energy and policy involvement is raising serious leadership questions.

FIRST THE INFLATION SCARE

The current inflation scare is in the early stages and is only now breaking out of overhead resistance as shown below by the 10Y US Treasury Note and West Texas Intermediate Crude price overlay.

FUTURE RATE HIKES BEING PRICED IN

FED RATE HIKES

February saw a massive shift in the market’s perception of The Fed’s rate-hike trajectory. It is now pricing in more than 4 rate-hikes between 2022 and 2024

A TROUGH IN LABOR UNIONIZATION?

Watch the March 30th Alabama vote on unionization at Amazon. This maybe a straw that will break the camel’s back. A trough in labor unionization & peak corporate equity valuations is not a good combo.

As the post WWI “baby boomer” generation retires at over 10,000 per day in the US, the working age population in the West plus China will decline, which which many expect will soon help labor reclaim lost power (inflationary). Though others suggest robotic / AI technology will offset this, it will come at the expense of

REFLATIONARY INFLATION POLICIES

Ultimately though, inflation will likely depend on how aggressive monetary and fiscal policy are and whether they work together consistently. In the post-GFC decade, they worked in opposite directions, but the early signs post-Covid are that they are moving more in the same direction. Reflationary Monetary Policy with inflation overshoots acknowledged and massive fiscal spending to support a decaying social entitlement structure and old school Keynesian stimulus spending.

A fiat currency system is currently believed to allow such an experiment if the new administration proves to go down that route. All eyes will be on the US stimulus package(s) and the FED over the coming months and quarters.

FORCING THE FED’S HAND! – YELLEN AND POWELL’S FIRST TEST

PARABOLIC TREASURY YIELDS

10Y Yields therefore also exploded higher as the auction debacle struck (surging from 1.47% to 1.61%) before ‘someone’ stepped in, attempting to push yields lower..

SUPPLY CHAIN PROBLEMS ARE DRIVING UP COMMODITY PRICES

As Building Permits explode higher (driven by multi-family units) the demand for lumber has soared, sending the building material jumping to an all-time high of $1,004.90 Thursday. Prices have climbed more than 30% this year… as gold sinks to a seven-month low. It is not an uncommon supply chain issue. COVID-19 shut down the plants that treat the wood, and that finally caught up.

“The supply chain was screwed up. Dimension sizes were in limited supplies; even something as simple as a two-by-four-by-twelve Southern yellow pine treated was in extremely short supply.”

The price increase gets passed on to the end consumer. Future homeowners and people remodeling will end up paying the brunt of the price increase.

CONCLUSIONS

• The Bond Vigilante’s are back! They can be expected to pressure Powell and Yellen in ways not seen since the 90’s,
• Foreigners are not buying the new US Policy direction!
• Though near term Inflation is solidly here, Bond Investors are telling the Fed they are equally worried about coming deflation associated with the Pandemic fallout of cascading Bankruptcies and the inability of the US to handle the associated debt failures and delinquencies.

“’Trouble ahead’ is signaled by a rare combination of low-quality securities, staggering valuation metrics, over-leveraged capital structures, a scarcity of honest profits, a desperate dearth of understanding evinced by the most active traders, and economic macro prospects that are not as thrilling as the mobs braying ‘Buy! Buy!’ seem to think. … Nobody in America has actually seen, or most people probably can’t even contemplate, what an actual loss of confidence may look like. If you think about some of these elements and how they might interact, you might come up with other paths of transmission or risk and pain. But I wouldn’t go about your business thinking it’s business as usual in a typical post-crisis, post bear market recovery.”

Elliott Management’s Paul Singer