Blog

Former Treasury Secretary Janet Yellen said this week that President Trump has taken a “wrecking ball” to the economy and could not give a “passing grade” to its handling thus far. The financial markets would agree with her. The utter chaos and uncertainty of the past two weeks make any analysis going forward difficult at best.

Because tariffs are inflationary, long term Treasury bonds have been selling off, causing long bond yields to rise worldwide. President Trump has asked the Fed to lower rates, and the Fed refuses to do so because this would fuel inflation. As consumers recoil and households feel less wealthy due to a declining stock market and higher unemploymen...

It is likely that 2025 will bring tension between the Federal Reserve and the Federal government. After last week’s strong jobs report, the possibility of further interest rate cuts has greatly diminished, and everything is pointing to higher bond yields which are rising to their highest levels since 2023. The futures market is now predicting only one interest cate cut in September. Indeed, some analysts are even beginning to consider the possibility of rate hikes in 2025, after a University of Michigan survey showed consumers’ inflation expectations jumped to 3.3% in January from 2.8% the month prior. Stocks are now back to pre-election levels.

The showdown this year will be betw...

GDP for the second quarter grew at 3%, showing no sign of a slowdown. Concurrently, there is an aggressive global monetary easing going on worldwide, as almost every central bank in the world is lowering interest rates. Money supply is expanding, financial conditions are easing, economic conditions are good, and global stocks are reaching for all-time highs. The number of advancing stocks to declining stocks, otherwise known as “breadth”, is suggesting a continuing bullish bias.

It is unusual for central banks to begin easing financial conditions when markets are at their highs, but usually a sign that expensive asset classes should continue to become more expensive. It may be arg...

Wall Street analysts are now predicting that the S&P 500 will report earnings growth of 11.33% in 2024 and 14.4% in 2025. While these are estimates, the outlook is very strong, and has even been revised up since the end of last year. We are in the midst of a “soft landing” with expectations of rate cuts ahead by the Fed, which is a bullish scenario.

Inflation has come down to 3%, and while prices are still 21% higher than when the pandemic began in early 2020, the inflation swap market is previewing 2% inflation in one year’s time. Low unemployment and real wage gains are keeping the consumer positive, and stimulative fiscal policy is still providing a tailwind to the econom...

Stocks surged in Q1 2024 across a variety of sectors, and earnings season will soon test the breadth of that rally. Last week’s CPI report on inflation is confirming that interest rates may indeed remain higher for longer as the bond markets have been suggesting. Inflation as measured by CPI, rose by 3.5% in March, higher than expectations, and signaling an acceleration of inflation. Without food and energy, inflation is now at 3.8%, while shelter was up 5.7%, and electricity was up 5%. This was the third time in as many months that the CPI was higher than expected.

It is most likely high interest rates that are causing shelter prices to spike, because so many homeowners are locked in...

A lot of bad news has been ignored by Wall Street on the assumption that the Fed will ‘pivot” and begin lowering interest rates this year. The market is annualizing three and six-month inflation, which is generating a lower inflation number than by comparing the last twelve months. For example, the Fed’s preferred inflation measure, the “core PCE” still shows annual inflation at 3.2%, while the six-month measure is now at 1.9%. This is leading many market participants to expect a significant amount of easing from the Fed. In fact, the futures market is expecting the Fed cut its short-term interest rates by 1.7% between now and the end of the year. Based on recen...

While many market participants are expecting a “soft” landing for the economy after more than a five per cent rise in interest rates, the evidence for a hard landing is mounting.

• Unemployment just rose from 3.4% to 3.8%


• The personal savings rate just rose by 3% with consumers anticipating harder times ahead.


• High yield bond defaults are up 1.6% to 3.2%


• Credit card delinquencies are up from 0.8% to 1.2%


• Auto delinquencies are up 5% to 7.3%


• Business confidence has been falling since late 2020.


• The bond yield curve is now steepening quickly; having been very inverted at -1.1%, it is now at only -45 bps.

The 10-year Treasury bond yield is now at a sixteen year high.

When bond yields go up be...

Momentum in the stock market is positive, yet overbought, as signs of lower inflation has driven technology stocks to the highest levels of valuation against the S&P 500 since the dotcom bust. This is because the valuation of tech stocks has increased without an increase in earnings expectations. Much of this exuberance is based upon the emergence of artificial intelligence as “the next big thing”, although this is still grounded in speculation.

Analysts are raising earnings estimates, expecting an economic recovery, despite leading economic indicators going in the opposite direction.

A handful of mega cap growth stocks is responsible for most of this year’s rally in the S&P ...

The stock market has been pricing in the possibility of the Fed cutting interest rates – a Fed “pivot “, which, presumably, could drive higher stock valuations. However, the bond market is clearly pricing in a serious economic recession ahead. Signs that unemployment has hit bottom, and is now rising, have begun appearing in recent economic data, which, historically (since 1948) spells trouble for stocks, particularly in the first three months of rising unemployment. Here is the most recent chart for US job openings from the St. Louis Fed:

When businesses cut job openings, layoffs often coincide. Another leading indicator of unemployment, temporary help services, have been d...

2022 was a year that focused on inflation’s potential impact on financial markets and asset prices. It was twice as bad as the global financial crisis in 2008; nearly $40 trillion in stock and bond value disappeared.

2023 will be a year in which the second-round effects of that inflation and subsequent rate hikes actually materialize.

This will come at a time when central banks around the world are raising interest rates to slow their economies to tame inflation, and shrinking their balance sheets from having over-stimulated economic activity for the past 14 years. The global money printing press stopped in 2022; we should now expect growth and inflation to fall.

To fight inflation, the U...