A simple recap
What I’m watching
One of the most important stories this week is the treasury department’s announcement to double long term bond buybacks in an effort to stem the rise of the long end yields. This worked for exactly one day and spurred a rally in many risk assets in addition to the long bonds but this quickly faded Thursday and Friday.
The more interesting or perhaps revealing response of the market is that the dollar sold off amid the continued rise of the long term yields, while gold and bitcoin rallied with strength. This apparently shows that the market is not too confident that the Treasury’s action of effectively duration management is going to work out, especially considering that the treasury will have to fund the long end bond buyback somehow, mostly likely through the issuance of short end yields.
Some argue that the administration’s plan is to have the Warsh’s Fed drop interest rate (which we hear the president say this a number of times this year already), and then the treasury can issue new debt at a lower rate in the short end to buy back the long debt that has higher interest rates.
However, if this were to actually happen it will not be a good signal for the independence of the Fed (which already there is some doubt into it), and that will greatly undermine the confidence in effective control of long term inflation. This I think is precisely what the market is pricing in at this time, in buying the gold and bitcoin (perceived as the antithesis of fiat currency). Next week there will be the Fed’s annual Jackson Hole retreat, where we will get to hear Warsh again on Friday and see if he will talk about the long bond situation and how the Fed intends to respond to it and the inflation outlook.
A position or thesis
I continue to think that it is very hard for the Fed to actually do something to combat inflation, by way of actually hiking rates. They may keep the rates higher for longer but to think that Warsh being hand-picked by the president himself will openly defy him is hard for me to imagine. He is really in the hot seat right now and if he doesn’t show anything concrete instead of repeating the same old 2% goal, the market might continue to price in dollar debasement and fiscal trouble.
This also spells trouble especially for high growth high valuation stocks, as higher yields in turn require higher growth to justify current pricing. As the equity market is near or at all time highs, this could result in a reprice of certain growth stocks, even when recent earnings growth is stellar.
In combination, I currently hold the view that gold will continue to be good to hold and might continue to add a bit, although I’m getting close to my allocation target. As for equities and specifically chips stocks, I might hold off on any additions, until there is more clarity on how the market views this dynamic between higher yield, higher growth requirement and recent strong earnings.
What I got wrong or updated
Last week I said I’m completely out of the SOXS position and instead started to view long SOXX. This changed again as SOXX failed to clear the daily EMA and turned lower again. I stayed out of SOXS, but also did not add any SOXX or chip names. This is also due to the yields dynamic, where a higher yield will put a damper on growth stocks even when their earnings are high and they are the only ones still benefiting from AI capex. NVDA earnings on Wednesday will also be important to see how participants react to it.
The Ephemeral Tourist 