Signals Matters News Letter: The Signals THAT Matter

Broadly, the core and timeless principles behind the infrastructure of Signals Matter Portfolio Construction are carefully discussed here and here.

As for WHAT’S HAPPENING NOW…

The official narrative is all about US growth, with the Atlanta Fednow reporting 5.9% real (and 8.9% nominal) GDP forecasts. As Piepenburg’s report (below) confirms, however, such a debt-based growth story is horrible rather than positive news at the macro level. The USD has reached 6-month highs on the back of the Fed’s “higher-for-longer” meme, all part of Powell’s war against inflation whose tactics, ironically, will only spur greater inflation as the end-game.

The official narrative is America is growing while China and Europe disappoint. In fact, nothing could be further from the truth, as debt-based growth is not growth, but can-kicking us toward greater and greater needs for artificial and inflationary liquidity to monetize USTs. The hard data confirms that China, along with Europe, Japan and the US are tilting toward a debt-driven corner from which no solution—inflationary or deflationary—bodes well.

An inverted yield and euro-dollar curve suggest that official attempts to declare a soft landing are just that: attempts. The manufacturing data further suggest a hard recession ahead and such data is more reliable than political/financial platitudes designed to stem fear and hence contagion.

Furthermore, a stronger USD only makes the currency less rather than more attractive to BRICS+ nations making irreversible efforts to trade outside of that weaponized currency.

The Latest US Bond Signals:

Bonds fall in price as rates rise, and bonds rise in price and rates fall. Yields move inversely to bond price, and yields represent the cost of debt. The Fed knows this, and given that the US is approaching a $33T public debt level, the interest expense on that debt in a rising rate policy environment becomes destructive if rates, or yields, get too high. This is why Powell’s rate hikes will only stem inflation in the near-term; longer term, the only way to pay those interest expenses will be via a return to Fed liquidity—which is inflationary. Thus, even if the Fed were to support bonds and keep yields and rates lower in a looming recession via a QE pivot, the inflation (from mouse-click money to rising oil prices) will negate any return in the bonds. On the flip side, if the Fed doesn’t pivot to more liquidity, the rising rates will send bond prices lower, and hence banks, small businesses and markets toward a cliff of unpayable/over-priced debt in a high-yield world. In short, no matter what the Fed does going forward, it is fighting a losing war: Death by QT, or death by QE. Save the bonds and control yields and debt costs? Sure, but only by killing the currency via debasement, regardless of its relative strength. Hence the gold positioning.

The Latest US Stock Signals:

Headlines surrounding a Chinese slowdown have sent stocks lower, as one of the world’s primary growth engine’s breaks a series of pistons, from an over-levered/priced property bubble to a ban on iPhones. Tech, the growth story for US equities in 2023, is reacting to the downside, as expected.

That said, FOMO, momentum and expectations of more Fed liquidity are driving markets higher for now despite some of the worst economic and debt indicators ever recorded. Sound familiar?

Other Key Market Signals:

China has struck a deal with Qatar to pre-pay 27 years of Liquid Natural Gas. To effectuate the purchase, China is dumping USTs. Why? Because China would rather own decades of LNG than 10 more minutes of an increasingly unloved and non-performing UST.

The implications of this simple transaction are immense, and speak to the growing distrust among the BRICS circles who are moving away from a weaponized reserve currency and unloved American IOU. This trend is irreversible and will lead (slowly but certainly) to lower USD demand.

Macro Thoughts & Gold:

SignalsMatter.com board member and Gold-Switzerland/Matterhorn Asset Management, AG Partner, Matthew Piepenburg, shares his latest insights on the foregoing debt (and Fed) trap here:

Rising GDP + Rising Yields = A Major Sign of “Uh-Oh”

Even More

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Signals Matter Market Reports generally reflect the company’s long-term macro views and are posted free of charge at www.SignalsMatter.com, on LinkedIn, and directly to your inbox by Signing Up Here. Our Portfolio Solutions are generally geared to shorter timeframes, may therefore differ from our longer-term perspectives, and are available to Subscribers that Join Here. For three ways to engage with us, please click: 3 Ways to Engage.