Market on Edge?

Issue 362

By Jeffrey Trusheim, Chief Financial Officer, Mortgage Solutions of Colorado, LLC DBA, Mortgage Solutions Financial.

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Mortgage Solutions presents Issue 362 of Market Pulse. This commentary will provide Trusheim's perspective on the economic, political, and technical considerations that will have an impact on the global & domestic financial marketplace. The report will provide a recap of the previous week's activity as well as a look at the important market-moving factors in the week ahead.

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UNCERTAINTY PREVAILS ON WALL STREET…THE FED & THE MARKETS

Conventional wisdom would tell you that interest rates were supposed to fall after the Federal Reserve cut the fed funds rate by 50 basis points. However, since the day of that oversized rate cut on September 19th, the 10-year Treasury yield has actually risen by 67 basis points, from 3.59% to 4.26%. To add insult to injury, the 30-year mortgage rate has spiked 75 basis points higher during the same time frame.

For a perspective on this, the Fed has lowered the Fed funds rate 35 times since 1994, which was the year they started announcing their policy decisions on the day of the FOMC meetings. For all 35 rate cuts since 1994, the median change in the 10-year yield was a decline of 3 basis points, and the 10-year yield actually increased 15 times (43%). With the 10-year yield now up 67 basis points since the September rate cut, the current period ranks as the 3rd largest since 1994 (June 2003 = +103 bps and November 2001= +87 bps). IMHO, bonds aren’t out of the woods but are due for a bounce.?

Wall Street appears to be in a state of uncertainty as discussions and opinions around the future of the Fed’s rate decisions seem to be conflicting. Last week, remarks from Federal Reserve officials varied widely, with some advocating for continued rate cuts and others suggesting a more gradual approach. The general consensus is for a period of consecutive 25bp rate cuts to a terminal rate of around 3.5% by October 2025. The next FOMC meeting is on November 7th, and the probability of no rate cut has been steadily rising, currently at 9%, up from 3% last week and 0% a month ago.?

Investors are clearly becoming a little more skeptical about monetary policy easing.?

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THE MAN AND THE LEGEND

In my four decades of following the economy and financial markets, I have been amazed and starstruck by some of the brilliant minds I have come across. One who stands out as true “Master of the Universe” is Paul Tudor Jones. He shared some of his market and macro insights during a CNBC interview last week. I want to share a few highlights with you, and highly suggest to read or listen to the entire interview.

Paul Tudor Jones: “For me in the hedge fund world, this is kind of the macro super bowl coming up on November 5th. Some elections are not that binary. This one is binary - not so much because of which candidate wins. But it’s binary in the sense of what is the market's response going to be - to either candidate if they win. We can either continue down the path we’ve been on…or we may have that point of recognition where all of a sudden, the markets have different ideas than what the candidates have been espousing…

We’ve gone from debt-to-GDP at the federal level from about 40% to almost 100%; 60% in 25 years…CBO says we go from 98% to 124% over the next 10 years. That’s obviously something that can’t go on forever - won’t.

The question is, after this election, will there be some point of recognition - particularly with all the tax cuts that are being promised by both sides, as well as the spending plans? They’re handing out tax cuts like they are Mardi Gras beads. So, what’s being promised is crazy. After the election you’ve got 8% budget deficits as far as the eye can see, the question is, will the markets allow either candidate…The Treasury market won’t allow it…

We owe $35 trillion. Our tax take is $5 trillion. So, we owe seven times what our tax take - our revenues- will be this year. And our deficit is $2 trillion - and it’s $2 trillion as far as the eye can see.?

The question is, after this election, will we have a ‘Minsky moment’ here in the United States - in U.S. debt markets? Will we have a ‘Minsky moment’ where all of a sudden there’s a point of recognition that what’s going to happen - what they’re talking about - is fiscally impossible - financially impossible…”

“I think all roads lead to inflation…I’m long gold. I’m long commodities…The playbook to get out of this is that you inflate your way out”. PTJ

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THE STOCK MARKET

It was another volatile week on Wall Street, with all three major indices moving differently from each other. The S&P 500 finally halted its longest win streak of the year, but not until after it posted its 47th record high of 2024. The S&P 500 traded to a high of 5866 but closed at 5808, down 56 points for the week. It seems that our long-standing target region, around 5840, is indeed providing some resistance.?

Here are the y-t-d readings: S&P +22%, Dow +12%, Nasdaq +21%, Russell +9%, Utilities +27%, Banks +26%, Semiconductors +25%. Gold hit another record high at $2,772 + 36% y-t-d, and Silver traded to a 12-year high at $35.07 + 42% y-t-d.

For the last 10 years, the stock market has had an annualized return of 13%. The historical long-term average is 11%. Last week, Goldman Sachs posted a note indicating their expectation of just a 3% annualized return over the next 10 years through 2034.?

It’s not hard for me to agree with Goldman Sachs when I look at the massive fiscal deficits, the excessive debt loads, credit excess, and speculative financial markets. It’s no wonder why the gold and silver markets have exploded higher. Central banks are trapped in perpetual monetization. I also agree with Paul Tudor Jones in fearing that the U.S. election is a possible catalyst for trouble. It’s been a nice run for the two years, with the S&P 500 rallying from 3500 to 5800…It may be time for the markets to impose some desperately needed discipline. Stay on your toes.?

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THE BOND MARKET

The 10-year Treasury continued to get hammered last week, with its yield reaching a high of 4.26%, before finishing at 4.24%, up 16 basis points. The mortgage market also took it on the chin, with 30-year conventional loans spiking from a low of 6.01% in September to 6.95% last week.?

The Treasury bond market is mired in one of the worst losing stretches of the year. As the short-term rates fell 50 basis points (Fed cut in September), the long-end rates rose well over 60 basis points. The “term premium” is currently at its highest since November. That is a good indication of bond investors’ perception of future risk - whether it be inflation, supply, or geopolitical events.?

The annual interest on our nation’s $35+ trillion debt is larger than every single line item except Social Security. It’s larger than defense spending. It’s larger than Medicare. The CBO (Congressional Budget Office) has us going to $45 trillion in debt by the next election in 2028.

The total amount of Treasury Securities as of the end of June was around $27 trillion, or 94% of our economy’s GDP. Just eight short years ago (in June 2016), that number was $13 trillion…A full doubling of Treasury issuance in eight years! We are going broke, and neither Presidential candidate wants to slow spending, reduce our annual budget deficit, or even address our massive $35+ trillion national debt. Sigh

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Have a great week!?

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Jeff Trusheim is the CFO of Mortgage Solutions Financial. Jeff is a 30+ year veteran in the Wall Street arena, with a background in economics, risk assessment, and finance (banking and mortgage). He has previously worked in Fortune 500 companies in growing their portfolio and economic footprint.

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