- The stock market continues to ride the Trump wave to new highs, in fact the Russell 2000 hit an all-time record high today
- The enthusiasm for stocks not being dampened by the carnage in the bond market
- We now have the yield on the 10-year treasury up at around almost 2.3
- And the yield on the 30-year now, just below 3% – 2.99
- Yields are still low, but nowhere near as low as they were
- And of course, nowhere near as low as they’re headed
- It’s not just the fact that bond yields are rising, but the rapidity with which they’re rising
- And the technical damage that is being done
- This again, as I said in an earlier podcast this could be the beginning of an explosive move up in interest rates
- And right now, nobody seems to care, least of all Janet Yellen
- She testified today – her supposedly hawkish testimony is one of the reasons that gold sold off today and the dollar rallied
- Before she spoke, gold was positive on the day
- She did say it would likely be appropriate to raise rates “soon”
- And everybody interprets “soon” as, the next chance they get, which is less than a month from now
- Although, if the Fed is really determined to raise interest rates in December
- Why not just say it?
- Why say it may be appropriate to raise them soon?
- Just say, “It’s appropriate to raise them in December”
- They still want to leave themselves plenty of wiggle room
- Even though the markets are saying it’s a 95% probability
- The Fed is still being very coy and data dependent
- I think what’s more important for the markets is the fact that Janet Yellen acknowledged
- That if we get a fiscal stimulus – which she doesn’t even think is needed –
- She pointed out that we have a growing economy, everything is good, the unemployment rate is very low
- And that stimulus now in the form of tax cuts or extra government spending could overheat the economy
- And that she will have to adjust her monetary policy based on what Congress and President Trump ultimately decide to do
- That’s what’s scaring the bond markets, because what Yellen is saying, is that
- If Congress and Trump want to step on the gas, she’s going to have to tap on the breaks
- To prevent this thing from overheating, meaning that with unemployment already so low
- Any stimulus now, risks making inflation too high
- Meaning that the Fed would have to act to rein it in
- Even though she still suggests that the pace of rate hikes will be slow
- She’s implying that the pace will pick up if need be to offset the stimulus effects of tax cuts and spending increases
- And that is what is rattling the credit markets
- But what Janet Yellen or nobody else seems to understand is that any significant rise in long-term interest rates will crush this bubble economy
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