Oil Retreats & Bonds Oversold

So what looked to have been a consistent margin call blowout of someone or more than likely, a few shops over the last few weeks in bond land, perhaps we can now put in a basing pattern. We know the fundamentals at this point, do not support higher yields despite all the rhetoric that we need to “tame” all all and any inflation. Well that is simply not true, the FRB was late to raising rates and they will be late to cutting them as well. This is always the case, nothing new under the sun when it comes to how the FRB executes policy. What we want to see now to confirm a basing pattern is a continued dislocation of the correlation of bonds vs equities in regards to equities remaining defensive, but bonds not selling off everyday.

This would be consistent with a major topping pattern for equities, this would be consistent with a continued steepening of the US treasury curve and it would be consistent with most of history when it comes to finally getting the regime to change from hiking rates to cutting rates. With $33T in debt and rising rapidly the US Treasury doesn’t want $1T interest payments and what we would rather see is a continued roll off of the FRB assets while they maintain a steady rate and begin to cut. The real source of inflation is the FRB balance sheet and that is what needs to fall. Rates are just one portion of the mechanism to control leverage, but its an input function that is inferior to the FRBs actual asset accumulation because the FRB is an actual competitor in private markets whereas the interest rate is a proxy for all participants. The FRB doesn’t pay an interest rate for its funds to acquire assets, its a non zero sum player, with a $0 WACC.

Anyway, we await our final two pillars to confirm the major topping formation, the negative non farm payroll print and the subsequent first interest rate cut. Once we have those, the markets will realize the FRB sees major trouble ahead and you should too. We are close, but the blind buy only AI crowd coupled with the drone like 401k crowd creates a constant flow of buyside funds to feed the markets, so timing is everything. However we can see that days where the markets are bought up are met with real sellers looking to get out, at least that is what we see.