Greenbroke

The U.S. dollar is an endangered specie.

We all know trying to call the outcome of the debt default looming in Washington is a crap shoot, but the brinksmanship and polarization currently being exhibited by Biden and McCarty portends an inevitable blow-up. When it comes to politicians, it's always a race to the bottom with little chance of compromise. Biden's use of the 14th Amendment could be the 'iron fist in a velvet glove' that is needed to break the logjam. McCarthy will run that one by his stacked Supreme Court, furthering the mess. Oh great!

But the markets today seem to be ignoring all this, implicitly saying; 'They always punt the debt ceiling down the road".

But if you stop and think for a moment, isn't it better to just own 100 shares of Apple? You have a voting claim on an impenetrable franchise with a fortress balance sheet that is exceptionally managed. None of those elements is common with a U.S. treasury bond. All you get with that is a breakable promise and a threat of unlimited dilution in an entity seemingly run by idiots. No wonder the ratio of Apple to the bond market (below) has broken out again.

Ratio; AAPL/BND

By any measure, confidence in the dollar, and by extension U.S. Treasuries, is waning dramatically. Just ask China, the Saudis, and Russia. They are buying gold. From a combination of deglobalization and internal political dysfunction, the role of the Greenback as the reserve currency is being questioned. And so it should, given the breakdown of norms and practices being exhibited daily in Washington. But the market for risk assets seems unconcerned by such talk. They have heard it all before. And really, what jurisdiction looks better?

Oh, and if and when the debt ceiling gets solved, watch out for the deluge of Treasury offerings emanating out of Yellen's office. Combine that with Powell's QT balance sheet run-off and you could see the 10-year at 4.5% in a heartbeat. The crowded bond trade is now highly vulnerable to a soft landing.

At the risk of being repetitious, I still believe this market is uninvestable, let alone tradable or predictable. Over the past few months, I have yammered on about the interplay amongst opposing forces; the inverted yield curve and low equity risk premium, contrasting with the offsetting elements of sentiment and investor positioning. That concerning impasse is still there. "Either way the yield curve dis-inverts, it won't be good for risk assets".

Stocks and bonds are blithely projecting an immaculate disinflation that leads to Fed rate cuts later this year. A 'have your cake and eat it too' scenario is now the market's embedded consensus. The result has been a choppy, sideways, low-volatility environment that is turning investors off. Yesterday's low stock market volumes tell me that people don't know what to do next. But count me out. I'm still saying "No Banks, No Thanks".

The problem could be a combination of the 'fully invested' and 'passive' nature of modern markets. A combination of FOMO, inertia, and benchmarking has masked the typical signals that come from major market indices. Look underneath this market, held up by 10 or so stocks and led by Apple, Microsoft, and Alphabet. They, along with long bonds and gold/bitcoin, are the new flight to safety beneficiaries. You gotta invest in something you believe in and fewer investors believe in the U.S. economy, so they buy Apple. Not me.

Should we continue to see this choppy, inflation-prone slowdown, instead of a generalized recession, the current trading range could soon resolve in another upward pain trade in the short run. Bonds, especially the pricey government kind, are unlikely to benefit in that scenario, further driving fund flows into equities. But be careful soft landing fans, rising bond yields are a blunt sword that could easily crush current valuations for equities.

Only a hard landing, nowhere to be seen as yet, makes the current yields attractive. A soft landing world of 1-3 % growth and sticky inflation above 4% means more money will flow into the winning trade - quality growth - but only until such time as yields bite down hard on valuations.

The losing trade will continue to be mid-cap financials, as the yield curve inversion is a world of pain for that sector. They are still as broken as the U.S. Treasury.

Risk Model: 3/5 - Risk On

Ignore the model, investors, even if it is working. The siren song of low volatility continues to lull market participants into a 'wall-of worry' state of complacency. Now that the Fed has intimated they are ready to press the pause button, the bulls have continued to pick amongst the investment minefield for their bouquet of flowers. Airlines, AI, and Megacap Growth stocks have continued to curry favour. Sprinkle that with a dose of Consumer Staples and Bonds - voilá you get a fully invested portfolio! Talk about whistling past a graveyard!

Until there is a greater urgency to protect capital, the current construct for valuation and relative positioning will be maintained. I find this discomforting, to say the least. I'm not sure you can stay positive on risk assets, while quietly deconstructing the financial system through the implementation of a systemic policy error. The Federal Reserve is currently parading the regional banks, one by one, in front of a firing squad. They have gone from a policy of financial repression to one of financial oppression. This will end badly.

I'll leave you to fill in the blank - "Sell in ____ and go away"