The Bond Market No Longer Trusts
Written by Charles Biderman, published in THE MARKET, 07.09.2020
When Will the Stock Market Follow?
Bond investors not only see a weakening global economy but have little faith that US President Trump can effectively manage the global trade mélange. My bet is sooner or later the stock market will follow suit.
The «smartest money» has always been the bond market and not stocks. Interest rates, as evidenced by the 10-year US Treasury, have been plunging since peaking last October when Fed Chairman Powell said the US economy was strong enough to require several interest rate hikes this year.
What changed? The fear of higher interest rates crashed stocks as 2018 ended, requiring Powell to back track on future rate hikes. But while the stock market rebounded sharply from the December low to make a double top on the S&P 500, interest rates started falling and have continued to do so regardless of what the stock market has done.
Why have interest rates plunged? The economic illiterate who is our President first announced China tariffs last summer. Initially, the financial community assumed that tariffs were a bargaining chip to get China to actually negotiate a fair-trade deal. However, by last November the bond market began to lose faith in Trump’s ability to negotiate any kind of deal with anybody.
Since the start of 2019, the global economy has started to weaken and then so has the US economy. While the stock market is still relatively buoyant – as evidenced by the early June rally in response to Fed Chairman Powell’s hint of future rate cuts instead of rate hikes – the bond market no longer believes that the US and global economies will continue to expand.
What is causing the divergence? In my opinion, bond market investors not only see a weakening global economy but have little faith that «Tariff Man» can effectively manage the global trade mélange.
Trump thinks tariffs are «good». After two years in office, he has been exposed as a mental lightweight. In order to cover up his ignorance he will make up facts and attack anyone opposed to him regardless of the truth. His lack of knowledge of economics and trade has scared the global bond markets into believing that there really is no one in charge.
As for Trump’s advisors, let’s ignore those who have been indicted and are now incarcerated. The advisors that are left are highly incompetent. I personally know and have been interviewed by Larry Kudlow on his CNBC show. What really scares me is that Kudlow is probably one of the smarter dudes still left in the White House!
Official Washington economists look backward and not forward. Yes, when Trump was elected the economy did bounce upwards as the tax cut and reduction of regulation boosted the economy. I agree that those two efforts not only helped the economy but were actually good and helpful policies.
But then the real Donald Trump surfaced in terms of ignorance about trade, immigration and the global economy. As a result, by the start of this year new business activities have slowed as no one really knows what is going on. Even after a trade deal was announced with Mexico last year, Trump’s anti-immigration policy trumped a done deal. How can the global business community trust him?
Global stock and bond markets have been going up for 10 years based upon trillions of «fake» money created by central banks and the trickle down impact on economies.
For the record, I have been virtually bullish on stocks since October 2010. Yet, every time I was interviewed between 2011 and this past fall, I said I was bullish for as long as more money was chasing fewer shares. My caveat was that the market would be in trouble when more shares are being chased by less money.
Guess what’s going on? It now appears as if less money is chasing growing number of shares. Just this May, US companies sold almost as many new shares than they bought back for the first time since March 2018. If that trend continues then at some point soon equity markets will follow interest rates lower.
Monthly Announced Corporate Actions
There are three sources of more money for the stock market. Historically most money going into stocks has come from investors savings. But this time it’s different. Since 2010, individual investors have invested a net of NO NEW MONEY into the stock market. The total amount of money that has gone into Exchange Traded Funds since 2010 is virtually equal to the total amount redeemed from mutual funds
So if no new money has gone into the stock market from investors, where has the money come from to inflate stock prices? The answer: Since 2011 public companies have given shareholders over $6 trillion in exchange for buying back their own shares net of all new offerings, whether IPO’s, secondaries or net insider selling.
Add to that $6 trillion of buying power, to the trillions of dollars created by central banks used to buy financial assets, and we have had a global bull market in both stocks and bonds.
But, starting this past August, the US and European Central Bank stopped growing their balance sheets. By early October, it became clear that central bank money printing was no longer the «Put» that meant central banks would print more money whenever it appeared stock market prices would weaken.
What’s more, there have been billions of dollars of new shares coming to market the last few months – and there are many more IPOs hoping to sell shares to the public before the window shuts. In addition, for the first time in several years, companies have slowed down new buyback announcements as well as new cash takeovers of already public companies.
In other words, the trend is for more shares to be chasing less money. That is why stock prices have been very volatile, with the Dow 30 making a triple top and the S&P 500 a double top.
My real fear about Donald Trump is that it does not appear Donald Trump has changed. Every Trump business deal whether Atlantic City, the Plaza Hotel, the Boston-NY-DC air shuttle, the US Football league and many others only known to those who have seen his tax returns, have all gone bankrupt.
The bond market now believes by its actions that Trump is incompetent. My bet is sooner or later the stock market will follow suit.
Charles Biderman