by okie1
A month or two ago, I posted a thread predicting that the dip in rates was temporary, and that we would see rates go higher late Spring or early Summer (this was at the time and probably still is in opposition to the MSM and contrarian views that rates have peaked and the fed is about to pivot).
It’s starting to look like my predictions might be in the very early stages of unfolding as we speak. I’ve outlined my macro theory in previous threads I’ve posted, so you can go back and look at those for that.
As for the current technical analysis that’s unfolding, TLT has remained in its descending channel, and is about to complete a third cycle in said channel. So far it’s failed to keep its head above either moving average.
The 10 year treasury broke higher out of its descending wedge, and the wedge’s upper boundary has acted as a lower boundary for whatever it’s doing now. The inverse of this is true for the 10 year bond price.
The DXY just put in a double bottom, suggesting that the dollar is going to go higher still.
The money supply is still shrinking (just updated today, showing a sharp decline vs. last month), with no end in sight. As I’ve noted in the past, my opinion is that the fed doesn’t actually have much influence over rates, and that rates are a free market phenomenon based on simple supply and demand principles. I.e. when the supply of capital is high (i.e. the money supply is growing), the cost of that capital (i.e. interest rates) goes down. Inversely, when the supply of capital is low (i.e. the money supply is contracting), the cost of that capital goes up (i.e. interest rates rise.
If you compare the M1 money supply to interest rates, this works out quite well. Now the mainstream view is that the fed does this by raising and lowering rates, thereby facilitating growth in money supply, but that’s a chicken and egg argument at best. And historical data would suggest that the fed follows yields, vs the other way around.
What’s more, I believe that the expansion of the money supply is determined by the creditworthiness of the American average Joe, and his ability to take on new debt. By all metrics, Americans are at the moment the least in shape to take on new debt, due to already high debt, increased cost of living, and the failure of wages to keep up with expenses, thereby reducing disposable income.
Despite the deflation in money supply, CPI is still running hot, with little to no relief. This is due to the increased cost of capital due the higher rates caused by the contraction in money supply. Our entire supply chain runs on debt. Corporate bonds, revolving credit lines, etc. So as counterintuitive as it sounds, deflation in money supply is resulting in inflation in prices for goods and services, as all of those goods and services are produced with money borrowed at increasingly higher interest rates. Essentially, the increase in prices you’re experiencing is you the customer paying the rising interest on the debt being serviced by everyone in the supply chain.
This incongruity alone should be evidence enough, if not proof positive, that the fed doesn’t control rates, and therefore couldn’t ease monetary conditions even if they wanted to (which they undoubtedly desperately do). The fed is relying on the public’s lack of awareness when it comes to the difference between monetary and price inflation. Historically, those two normally go hand in hand, and that’s what makes this environment very unique. This gives the fed cover for ostensibly raising rates during a period of contracting GDP. They are powerless to control broader rates (the parts of the curve the people themselves borrow at), and are therefore relying on the guise of fighting inflation.
In this macroeconomic outlook, rates will come down when asset prices fall far enough to enable borrowing. In my opinion, we’re not there yet. While asset prices have come down substantially from their peaks, I don’t think we’re nearly there yet. Especially now with slowing wage growth and accelerating layoffs. Initial unemployment claims are beginning to trend upwards again, which is consistent with the tightening supply of capital. I would expect layoffs to increase sharply over the Summer, leading to true capitulation in asset prices.