The Growing Power of Our Lender of Last Resort

Federal debt divided by all debt:

Back in the trend channel and looking good!

Risks of a Hard Landing in One Chart

Like Roths to the Flame

Chart courtesy of StockCharts.com.

Chart courtesy of StockCharts.com.

Safety seeking momentum traders have clearly fled long-term government bonds and piled into the riskier bond alternatives of consumer staples and utilities. The dividend yields are now SO low, even as long-term bond yields have sharply risen. In my opinion, it will someday end in tears. Think consumer staples [Hostess Brands] can't ever go bankrupt? That there isn't intense competition within the sector? Think utilities [California's Pacific Gas and Electric Company] can't ever go bankrupt? Good luck on those theories.

In order to invest in either stock market sector now I'd need to be compensated for the extra risk. As a recent investor in both sectors, just not seeing the future rewards any longer. At all. In the last few months, it's been like a wild train ride to crazy town. Want absolutely no part of it. The bargains are gone and all that's left is empty momentum driven euphoria. Just an opinion, of course. Can't speak of your opinion on the level of this insanity. Perhaps, unlike me, you feel that relative parabolic moves higher are now the new normal? All I can say is heaven help us all if you are right.

Trading Update X

In my IRA, all in on TLT @ $119.20. No longer sitting in cash awaiting opportunities. Long-term interest rates have reached the level I predicted in March of 2021. The 20-year bond looks to be the best bargain of the bunch, perhaps because TLT is now so unloved by retail investors and has a similar maturity.

The following chart shows the natural log of the 20-year Treasury bond yield. When using natural logs, constant exponential growth (or in this case, decay) is seen as a straight line. We have reached the trend line in red.

As is usual with my investments, this is intended to be a long-term holding. There's a lot of risk here, but if I am right about the particular path of our long-term future, then I feel pretty good about it. Well, as good as I could feel believing in an illusion of prosperity anyway. Counting on the Fed to engineer some sort of a landing. I do expect the plane to touch the ground again. Hindsight may easily show that touch was way too gentle a word though.

Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected. - George Soros

Brace for Impact

The following chart shows the natural log of the consumer price index for food and beverages. When using natural logs, constant exponential growth is seen as a straight line. I have added green and red trend lines to show how the growth has changed.

This is your captain. While a soft landing is still theoretically possible, please brace for impact. Place your feet firmly on the floor, tuck your arms and elbows close to your sides, bend over your thighs as tightly as possible, and tuck your head as closely as possible to the surface you are most likely to strike when slammed forward. Thank you for choosing to fly with Federal Reserve Airlines. We hope you have enjoyed your flight, the upcoming landing notwithstanding.

Household Net Worth

Behold the household wealth creation of a pandemic combined with ZIRP. Broken window fallacies be damned. Break them, and break them good I say. It's a brand new era of unprecedented prosperity! And should this plan ever start to falter, look for plague, pestilence, and NIRP to save the day!!

Seriously. Other than recent bitcoin and stock market performance, there's absolutely no reason to fear downside risk or reversion towards the mean theories. Even in uncharted territory, the Fed always knows what it's doing. Always has your back!

I know I said I was serious in the last paragraph. It was gallows humor. Sorry about that. I actually just bought more I-Bonds. Not only do they track inflation as seen in the CPI, but they can never deflate. Not that many are all that worried about deflation again. Yet.

A Channel Too Far?

Risk Off Is Not a Recent Development

The following chart shows how utilities are performing relative to the Nasdaq over the past 6 months. Note that utilities have been outperforming the Nasdaq since Halloween, which oddly enough is the same time I decided to go on a diet. Pure coincidence? Or is it all part of the same risk off mindset? I cannot say.

Chart courtesy of StockCharts.com

First they came for the Nasdaq
And I spoke out
Because the Internet really needs more bloggers stating the obvious

Here's something less obvious. Next they came for utilities? Interest rates have risen. The spread between utility dividends and the yield on the 10-year Treasury bond is dangerously narrow. Those who bought utilities as a bond replacement (such as myself) should be finding less value there now. For what it is worth, it is that narrowing spread in "safe stocks" that triggered my flight to safety just 10 days ago. The situation has definitely not improved.

Plenty of risk out there and not much value. Doesn't feel at all like it did through most of 2021. The headwind to tailwind ratio has increased dramatically.