Summary – A top-down review of interesting calls and comments made last week in Treasuries, monetary policy, economics, stocks, bonds & commodities. TAC is our acronym for Tweets, Articles, & Clips – our basic inputs for this article.
Editor’s Note: In this series of articles, we include important or interesting Tweets, Articles, Video Clips with our comments. This is an article that expresses our personal opinions about comments made on Television, Tweeter, and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Macro Viewpoints & its affiliates expressly disclaim all liability in respect to actions taken based on any or all of the information in this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerance.
0. Israel vs Iran conflagration
We confess we have no clue how this conflagration might develop this coming week. Our sense is that both Israel & Iran realize that, if unchecked, this conflict might damage both countries to a far worse extent than they might have imagined. But it is equally likely that one or the other might escalate.
One of the more interesting developments is the discussion between President Trump & President Putin on this topic. We saw a message from President Trump that he would have no problem if President Putin could act as a mediator. After all, President Putin has been both a benefactor to Iran and a beneficiary of Iran. He also has a constituency of Russian Orthodox Jews inside Israel. After all, President Trump has tried to mediate Russia & Ukraine. So it might be President Putin’s turn to try to mediate between Iran & Israel.
But until we see some daylight, we don’t see any point in guessing action in the stock market. The one exception we make is to the impact on the US Treasury market.
1. “Most Important Issue for the U.S. economy“
To quote Stephanie Pomboy from her Thursday’s clip “What’s Coming Is Bigger Than A RECESSION…”,
- “… really the most important issue for the US economy that …, I think, is the stubbornly high levels of interest rates; and, with a $37 trillion in debt, even if tariff issue is resolved … we have $8 trillion in debt that has to roll between now & the end of the year; and we have a 10-year yield now at 4.5%; so despite a softer CPI & some softer comments from the Fed, we have this stubbornly high level of interest rates that will become a problem as not only the US government but the private sector has to roll debt at rates that are substantially higher ….. I do want to emphasize that the interest rate picture is the most important issue for the US economy& the financial marketplace; … you have this kind of perfect storm … where the reasons to buy are sort of diminishing & at the same time our supply isn’t diminishing at all; so that’s a problem; the imbalance between supply & demand …ultimately I think the Federal Reserve ends up having to renew QE; “
Jeff Gundlach, in his Bloomberg appearance on Wednesday- June 11, also spoke about an announcement of QE using long term Treasuries & recommended a clear trade:
- “…. they will announce QE on buying long term Treasuries and when they do, you have to very quickly .. buy long-term Treasuries as much as you possibly could, because once that gets announced, …. you could get a 20-point rally in the long bond if they announce they are buying the long bond because it would be a 100 bps drop; … “
How about something less draconian-sounding than the above title used by Ms. Stephanie Pomboy? How does the title “This Will Just Get WORSE … “ sound? That is from Dr. Lacy Hunt who last week quoted studies about private credit from the Boston Fed & the IMF. First Dr. Hunt points out that today’s “situation …, especially when global economic activity is as poor as it apparently is, used to happen in 1920s & 1930s” and adds “ironically the announcement of the tariffs has given the economy an boost in important ways“.
Fast forward to minute 2:30 of his clip:
- “the budget that was enacted for 2025 is indicating that the increase in Federal Spending for the final 6 months of the fiscal year, which started on the 1st of April, is going to be basically flat; so we’re going from a massive federal stimulus to a zero federal stimulus on the spending side, a decline in real terms and we don’t have an offset in terms of where we’re going with regard to Federal Taxes; so we have to sort of deal with two … – one related to the tariff & the other related to fiscal policy; and so its very difficult to look through all of this noise ; but, I think, when one does we find that the economy is in a much more frail condition than is generally understood…”
If you think Dr. Hunt’s “economy is in a much more frail condition” description is bearish, watch & listen to Signor Gundlach explaining what he says a real break in credit looks like:
- “… a real break in the credit markets is Bonds drop 30 points and everyone thinks they are cheap and they have to Sell; … so you might have an opportunity to buy Bonds, let’s just say, down 25 points; ….“
So when does he say simple folks will have real & simple opportunity to Buy?
- “2027-2028 are going to be window of tremendous opportunity; because I think the Treasury problem will become even more in focus than it is today”
2. Fed ahead
Allow us to simply reproduce what the weekend’s Renaissance Macro email wrote:
- “”Meanwhile, the Fed is still “on hold“. – They’ve missed the turn. And every month they delay? The tightening gets more passive – and more painful. Jeff deGraaf sees it too. High real rates should attract capital. They’re not. The usual safety trades (Treasuries, the dollar)? Not responding. “There’s a disconnect,” Jeff said. “Something’s afoot – and usually that’s not good news.“
3. Impact on China
What follows is what we thought was an interesting discussion about the impact on China of the Iran-Israel war. We are in no position to comment on how accurate the analysis below is but we found it intriguing enough to share it here. The bottom line according to the author is:
- “Israel’s strike wasn’t about China but it’s a giant shock to the fragile Chinese system – energy crisis; capital flight; debt defaults; geopolitical isolation; elite panic – all of this was happening already & now it will accelerate“
The segments are:
- China is Iran’s #1 customer buying up to 82% of Iranian crude; … Israel just targeted key Iranian infrastructure & oil export points; … higher oil prices mean higher input costs for China which is already burning thru its FX reserves;
- Iran’s coming collapse will ripple thru China’s shadow banking; China has been quietly funneling state bank credit ,shadow loans into Iranian projects. If Iran plunges into chaos, those loans go bad; another hit to the Chinese banking system
- global risk premium just went thru the roof across markets; capital flight accelerates from risky economies; … foreign capital was already leaving; now it’s running;
- China armed Iran with missiles tech; so geopolitical risk on China just exploded…
How are Chinese businesses coping with the mess created by the Chinese leadership? Below is an interesting clip that explains that while official Chinese economy might be imploding, the Chinese underground economy is exploding. As of today, it’s estimated to be bigger than the country’s official GDP.
- “What used to be hidden in alleyways and backrooms… is now out in the open. Entire cities are running on untaxed cash, encrypted payments, and black market goods. This isn’t a fringe rebellion anymore, it’s the economy that actually works. How did one of the world’s most tightly controlled economies spiral so far out of control? What happens when breaking the law becomes the only way to survive? And how long can the Chinese Communist Party pretend none of this is happening?”
Click on the link to watch the above clip. Below is a clip about the official economy?
For the past 20+ years, all of us have known China to be the 2nd largest economy in the world. Now it seems to be in a state of utter malfunction. As the largest trading partner of America, is it reasonable to worry how much growth the US economy might lose from the mess in China? If so, is the mess in China contributing to lower inflation, if not deflation, in America?
What does the Fed think about the influence of the Chinese mess?
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