Bonds Are the Canary In The Coal Mine

Written by Dennis Slothower
Posted February 23, 2018 at 7:00PM

On Thursday, we saw a prime example of what we should expect from the market in the near term.

The stock market shot back up again to the 50-day moving average resistance level in early trading. But as the day worked to a close, it failed the back test and once again sellers brought prices down, losing the majority of the gains (all of the gains for some indexes) for the finish. This renewed sell-off came despite Federal Reserve of St. Louis President James Bullard cautioning fellow policymakers not to raise rates too quickly. Traders clearly didn’t believe him.

Hiking rates by a total of 1% this year, which would signal four increases of the typical 0.25%, would be “price for perfection,” Bullard said. “The idea we need to go 100 basis points in 2018, that seems a lot to me,” he said. “Everything would have to go just right. The economy would have to surprise on the upside a bunch of times during the year. I’m not sure that’s a good way to think about 2018.”

Look, Bullard knows the economy is going to suffer because the Fed is engineering a contraction and likely recession — part of its continuing cycle of economic manipulation. Bullard’s comments can’t cover the fact that there is over a 90% probability the Fed is going to raise interest rates again in March and whether it is three times or four times in 2018, the Fed is on an interest rates advance... and the truth is the bond market is crashing.

Bearish Bond Market

Notice what is happening to the US 30-year Treasury bonds.

Why does a crashing 30-year Treasury bond matter? It matters because as the US 30-Treasury bond falls, Treasury yields climb and it is the 30-year Treasury yield that determines mortgage rates... which have spiked to 4.75%!

As long as the trend in the 30 year T-bond continues to fall like this, mortgage rates will continue to spike higher until which time the housing market crashes. Does this begin to sound familiar to you? Think 2006 and 2007.

It doesn’t matter whether the Fed hikes rates three or four times. What matters is at what point does the economy begin to break down due to higher interest rates in the housing market, in the auto sector, in the strain on the financial sector?

As long as the perception is the Fed is tightening monetary policy, the bond market is in trouble. At some point corporate bond selling (including high yields and municipal bonds) will escalate given the bubble that has been created in the bond market.

Part of the Fed’s job (though unstated) is to retard excessive speculation in the stock market where it becomes a risk to investment banks. That specific risk becomes especially dangerous when margin levels are so massive due to speculative borrowing that it threatens primary dealers/investment banks that provide the margined borrowing.


At the same time people have massively increased personal debt. Household debt has increased by $193 billion (1.5%) to $13.5 trillion in Q4. There were increases in mortgages, auto, credit card, and student loan debt.

The large increases in consumer debt and defaults, (mortgage debt, in particular) during the Great Recession (2008) highlighted the importance of understanding the liabilities reflected on household balance sheets.

During the mortgage crisis, the banks ended up with the defaults, but later it was the Fed that absorbed the mortgages from the investment banks to clean up investment banks' balance sheets.

What I want you to notice from this chart is the debts in this cycle are GREATER than the previous peak going into the Great Recession of 2008. The debts are so great together with rising expenses that it is choking out retail sales.

This chart includes all retail sales over the holidays, including Amazon’s sales. Yes, rising interest rates matter. Economically, people are becoming more and more stressed. We needed the tax cut but will the benefits offset what the Fed is intent on doing?

To your wealth,

Dennis Slothower Signature

Dennis Slothower
Editor, Stealth Stocks Daily Alert and Wall Street's Underground Profits

Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.

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