US economic review

[james03]

10 yr. yield now pushing towards 4.2%, a large drop.  Should provide relief on mortgage rates, currently at 6.75%, down about 0.25%, and also lower government interest expenses.  The markets are showing confidence in Trump's ability to cut spending.

WTI around $69 and Brent around $73.  Still trending down.  The markets might be front running a Ukraine peace deal.  If Trump gets sanctions lifted, Brent can easily get down to $65, which would crush inflation for a period of time.

I think the next Fed move is to cut rates.  They'll probably end up around 3.5% to 3.75%.  However for now they are going to hold rates steady for awhile.  SOFR is currently at 4.3%

With the cuts, lower interest expenses, tariff increases, and deregulation, I believe Trump lowers the deficit by $1 TRILLION by the end of 2025 and possible even larger savings.  Cutting the Dept. of Education and USAID saves $300 Billion.  Lower interest rates means lower interest expenses also.

[james03]

Reference this chart with the inflation reports:



You can see what caused the recent uptick in inflation.  And then crude has almost crashed.

Inflation is going to drop, and the Fed will cut as its next move, but probably hold steady one more time.

I said Brent would hit $65 after the end of the Ukraine war.  It could be a real crash, with $45 as a possibility.  Brent has dropped to $71.50 in the past few days.  Low crude prices overall are good for the economy.  Trump needs the Ukraine war to end.

In other news the 10 yr. bond is at 4.18% now.  So the markets also think the Fed is going to cut.  Mortgage rates will go lower and soon take out 6.5%, which also helps Trump.

[james03]

Interesting happenings in Germany.  The Germans have opened the spigots on usurious government spending, and the German bond yields have shot up.

A recap of a trade I had previously mentioned.  You borrow Euros from Germany at say 2.5%, convert it to dollars, and buy US debt at 4.5% or so.  "Convert to dollars" means dollar demand, and so we saw the dollar strengthen.

Well due to this huge change, essentially one that surprised everyone, a lot of banks and funds are on the wrong side of the trade.  Since their interest expense on the Euro loans now spiked up, they are not making money on this trade or even losing money.

So you saw a big sell off in US debt, essentially the 10 yr. spiked from around 4.15% to 4.5% in a day or two, and the dollar drop as people were scrambling for Euros to close out their Euro loans.

It was interesting to observe if you are an econ geek.

I think the move is short lived, however the German spending will result in higher inflation in Germany.  This will also contribute to higher deficits in Europe and the UK as their interest expense just got a lot higher.

All the socialist rats are scrambling around trying to consume the last bits of capital available to them.  The US is the one eyed man in a blind kingdom in that at least directionally they are cutting spending.  Don't know if 4-D can succeed at this, but at least he recognizes the problem.

[james03]

Crude oil is down.  Gasoline down a few cents.  Inflation came in low, probably < 2% at this point due to the drop in energy prices.  In 2025 the Fed will cut some more, and this will lead to economic growth.  The big problem is Trump is obeying his ZOG masters and getting bogged down in the Mideast again.  Yemen could derail the drop in crude prices, however I think a Ukraine peace deal still will hit crude prices hard.

[james03]

Zion Don bombs Yemen and Israel kicked off the genocide again.  Brent back up above $72 again.

I think a settlement in Ukraine and the lifting of oil sanctions will have a big effect, but this was a bad week.  And it's going to be bad until we get to a peace deal.

[james03]

S&P below 5000.  Looks like we are getting to the bottom.  I picked up some great companies on a big sale.

Brent got to where it needs to make inflation effectively zero.  So the Fed now has room to cut.  The markets are discounting a global recession, which is likely given the huge debt overhang in the EU and China, along with the deindustrialization of Germany and the UK.  The US has attracted $2 TRILLION in new investments from overseas, so it is set up for a nice recovery.  Inflation is going back to a low level, unemployment is staying low, and I think mortgage rates will see 5% as the 10 year bond broke below 4%.  All good for young people and wage earners.  Not so good if you are a boomer who has to sell stock from his 401(K).

Believe it or not the US stock market is still considered to be in a bull market.  It could take out 4800, which would be an official bear, but I think we are nearing a bottom.

If Trump gets an end to the Ukraine War and normalizes relations with Russia, I think $45 Brent is very possible.  Being Zion Don and stirring up crap with Yemen, and with Iran is slitting his own throat to benefit his ZOG masters.

In summary, the tariffs are very beneficial for the economy and will mostly benefit wage earners and young people.  Same with the deportations and closing the border.

The future investment will be energy companies which you will pick up at a deep discount.  Maybe 6 months out for that.  I track the Vanguard VDE to gage that.  When it gets below $80, then I'll be looking at energy stocks to buy.

[james03]

Two measures of inflation, CPI and PPI came in negative month over month.  Brent is below $65.

On the stock market we either made the bottom, or we have one more leg down.  The downside potential is 4600 on the S&P.  However the over sold indicators are really high, and volatility has crashed.  If I were forced to bet, I'd say we already bottomed, but it is a close call.  I have orders for some stock that haven't been filled, and chances are I'll miss out.

Big action is in foreign exchange and bonds.  Either hedge funds were forced to liquidate what is called the "basis trade" (they are forced to sell bonds), or foreign countries are selling bonds to defend their currency.  Dollar weakened and bond yields spiked during a period of market panic.  Very unusual.  Who wants to buy German bonds paying 2.5%, when Germany is a failing economy?  Points to forced liquidations, which will play out and then people will rush to get back into dollars.

The way that this went down is that the stock market crashed.  Euro banks which had borrowed Euros, exchanged them for dollars, and bought US stocks closed their positions.  They then had to pay off the Euro loans, so sold dollars for Euros, crashing the dollar.  This then avalanched into hedge funds having to liquidate bonds, which also were funded by Euro loans, and it had a destructive feed back.

[james03]

A more sinister play would be the EU bank sold their Treasuries and bought a bunch of Euros to hit the US dollar.  Perhaps they want to force the Fed to lower rates which helps Europe.  I'm not sure if the Fed steps in between now and their next meeting.  I'm leaning the Fed waits until then.

[Heinrich]

James, why is silver not ascending commensurate to stratospheric rise of gold?

[james03]

Silver is an industrial metal.  Gold is money.  The market is anticipating a recession, which is why oil has dropped.  So silver is not going to do well, though it has secondary store-of-value aspects, so it won't necessarily crash.

Gold is money.  Either foreign central banks are dumping dollars because they don't need them if the trade balances with the US, or the EU and Bank of England are attacking the US bond market.  In any event, they have to park their proceeds from bond sales someplace, and they are parking them in gold.  As a result, gold is skyrocketing.

I'm leaning towards a deliberate attack, but I'm not convinced.

[Heinrich]

Wouldn't 37 billion in debt entice volume bond purchases?

[james03]

$37 TRILLION.

Ironically the large US debt is very LIQUID.  Defining liquidity:

1.  If you buy a car, the dealer offers it at $10,000, and you bid $9,000.  This is called the bid/ask spread.  If the bond market is very liquid, then perhaps there is a penny difference or so.  The seller wants 100.01 for a bond, and the buyer bids 99.99.  This shows liquidity.

2.  There is the size of the order stack around the bid/ask spread.  So there might be $100 BILLION in bonds posted for sale at $100.01, and $200 BILLION in purchase requests at $99.99.  It means you can clear a trade very quickly.

So if you are a Saudi prince, and you want to build a new chemical plant, you contact your broker and place an order to sell $10 Billion of you bonds "at the offer", sometimes called "hit the bid".  So you sell your bonds at $99.99 and the order clears 30 seconds later (because there were $200 BILLION in standing orders already there).  THAT is liquidity, and that is what the US Market has.

Now a few things went wrong, if we rule out malicious action.  First, there was a HUGE trade put on by hedge funds called the basis trade, which boils down to them buying bonds.  They did this with massive loans, even from the EU, UK, and Japan.  The trade malfunctioned which caused massive selling to end the loans they took out and pay them off.  Second, new bond supply (the Deficit) has exploded under Biden.  Third, the Fed is still "tight" in that they are selling some of their bond holdings, which only floods more bonds onto the market.

Now this will sort out.  Because suppose you sell bonds and buy gold.  What does the seller of gold now do with the dollars?  Eventually the dollars go back into buying bonds, because there is no other "final" destination for them.  For any other option, you always have a seller who ends up with the dollars, and he has to do something with them.

I actually sold off some of my gold and have been buying dividend stocks at huge discounts because I think we are in the final stage of "sorting out".

[james03]

Here's a great idea!  Let's sell US financial assets and buy German stock!

Entering 2025, Germany's economic situation had never been worse: following a 6th consecutive GDP contraction in Q4, the country which was once Europe's growth dynamo, has contracted for 6 consecutive quarters, the longest recessionary stretch in modern German history (since its 1989 reunification). ...

Earlier today, the German government slashed its economic growth forecast yet again, and now sees stagnation in 2025 instead of a 0.3% expansion as its had previously. The reason: why blame Trump of course, or as Reuters put it, "uncertainty from global trade disputes is set to hobble growth and dampen investment."

Only, it's not really Trump. Germany's energy intensive, export-driven economy was already struggling with high energy costs and weak global demand for its products as foreign companies - mostly China - chipped away at its competitiveness, and destroyed demand for German cars.

https://www.zerohedge.com/economics/germany-downgrades-growth-outlook-now-expects-recession-record-3rd-year-blames-trump

So lower corporate profits, and even losses.  Unemployment.  Lower tax receipts.  Means the ECB will cut interest rates further.  And people want to own Euros?

The recent sell-off in the US either already bottomed, or is close. Major players are out of position, and they are starting to realize that.  Expect some savage rallies coming up.

I did ok.  Sold some gold and picked up some dividend stocks which were on sale with a deep discount.  Now it is back to stacking shekels and waiting for the next sell off, which will take awhile.

[james03]

Two important graphs by Zerohedge:



Left graph:  Higher the red line the better.
Right graph: Lower the red line the worse.

So tax revenues are up.  Shows we aren't in a recession yet.  Federal outlays are decreasing.  Shows the effect of DOGE.

Good news, and the 10 yr. bond is responding, back to the 4.2% level.  It's kind of a floor until the Fed cuts.  If we get more low inflation data, then it can drop more on the rumors of a cut.

Only problem is that there is only so much Trump can do.  He needs Congress to cut spending, like eliminating Dept. of Education and cutting Medicaid.

Also, this makes me lean more to the stock market already bottomed.  There's still headline risk, and there's the potential for another leg down, but I'm going with a bottom, which is why I was buying dividend stocks at discount prices.

[james03]

One story that has been poorly reported on, even in the decent financial press, is the TRILLIONS in commitments to capital investment Trump has line up.  It's a mix of domestic companies building new plants or expanding existing ones, and foreign firms, specifically from Germany, Taiwan, Japan, and South Korea.  I think Siemens is doing a $10 BILLION expansion at two locations.

Bottom line, this will push down unemployment in the next few years.  It will also boost real GDP and wages.

I do expect some sort of recession, an after effect of the Fed raising interest rates to kill the Bidenflation, but maybe not.  Or maybe it is quick and mild.  With low energy costs, deregulation, and this huge flow of capital investment, I can see us starting to expand soon.