Lots of Bonds and Maybe a Government Shutdown

Hey There Income Hunters,

 

I hope everyone had a great weekend. Certainly on paper, we should all be feeling pretty good.

 

Did you catch the new household net worth numbers reported last week?

 

Households have doubled their net worth since the housing crisis:

 

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The whole increase is based on paper profits in housing and the 401k. Now, we just need the Fed and the administration to keep the money flowing.

 

Ultimately, they will, but they better make some progress this week or the government shuts down on Friday. Oh, and there will also be $183 billion in Treasury Bonds and $20 billion in corporate bonds for sale.

 

This is all coming at a time of year when the seasonal trends for both bonds and stocks are terrible. But the markets will be hot this week with massive flows to get out in front of …

 

Today, I’ll show you the details on what we can expect and the trades to jump on …

 

Get Ready for Yield Curve Control 

 

The markets have finally woken up to the fact that inflation is not going away. This has unleashed the bond vigilantes on the bond market.

 

Aside from being a bad-ass name, bond vigilantes is a term coined in the early 1980s for a group of investors who sell bonds in protest of fiscal or monetary policy — or in this case both.

 

The iShares 20+ Maturity Treasury Bond ETF (Ticker: TLT) started lifting off on Wednesday after Jerome Powell’s initial tough-talk pontification. However, the bond market wasn’t buying it this time. Ince sellers came in it was a good ol’ dog pile of selling right to the closing bell on Friday.

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This shift in consensus from transitory inflation to prolonged inflation will add volatility to the markets.

 

So, now the Fed must prepare to initiate yield curve controls in case rates rise to levels that could derail their plan. You know, the plan I said all along they would be forced to put in motion … the plan to keep rates low and inflation high, which is designed to reduce their $28 trillion debt burden by devaluing the dollars and bonds.

 

Always have TLT and the US 10-year yield on your dashboard. They will give us clues on where the money is flowing.

 

What’s Next?

 

This week will be filled with political theater creating more uncertainty and volatility. In the end, the following will get done …

 

      • An infrastructure bill that will make it through the House.
      • The budget resolution will pass for a number closer to $2 trillion with fewer tax hikes. Final passage should come in early November.
      • The debt ceiling will be raised avoiding a technical default.

 

Bond Supply and Key Economic Indicators

 

On Monday, investors will have to bid on two Treasury auctions  … $60 billion 2-years and $61 billion 5-years.

 

On Tuesday, investors will be bidding on $62 billion 7-years …

This will be a good test for investors’ interest in bonds. The interest rates are higher by .05% for 2-years, .10% for 5-years and .14% for 7-years. The past few auctions have been met with good buying, so I expect that trend to continue.

 

The important economic numbers come on Thursday when initial claims will be watched for signs of continued strength in employment, which will determine if and when the Fed will taper bond purchases.

 

What Can Go Wrong?

 

      • The fear of tapering will hang over the equity market for the next couple of weeks. Plus, the market will watch China closely for possible contagion in their property sector.
      • The Evergrande default may lead to other defaults inside of China, but this will be a China problem that will be dealt with internally.
      • I think that the bigger problem globally is a weakened China economy. They are the fastest growing economy and the world’s most important exporter. Something we need to watch for sure.
      • Finally, a major signpost for equity selling is inflation squeezing company’s margins. Higher shipping costs and higher wages are having a dampening effect on margins and they could force lower guidance for earnings.

 

These issues are hanging over the market at a difficult time of the year. The S&P 500 seasonal trend from the middle of September to month’s end forecasts a drop of 2%.

 

The chart below shows the trend for the fourth quarter and these seasonals cover the period from 2002 to 2019 …

 

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I will hedge my portfolio with either SPX put spreads or calls on VXX for the next couple of weeks … 

Then once we get through the Treasury supply in early October and the CPI report on Oct. 13, I think the timing will be right to add to energy trades and commodities …

 

Bring It Home 

 

I am cautiously optimistic we will come out of the next few weeks and then the economy can pick up steam from there.

 

Covid infections could be plummeting in the months ahead and consumers can gain a lot of confidence and go out and spend all the excess cash they have been accumulating.

 

Look, we know the Democrats have only one thing on their mind … that’s to find a way to hold on to full control of COngress. They must spend as much as possible from now until then.

 

It may still not be enough for the Democrats, but it sure will be fun for #Income Hunters!

 

Have a great week everyone and as always …

 

Live and Trade With Passion My Friends,

 

Griff 

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