Stocks crashed today, thus rescuing bonds, since yields dropped because of the stock crash. The 10 year Treasury yield dropped 1.6 basis points; in after-market trading the yield dropped even more (a total of 3.5 basis points), like a stone in water. The SP stock index dropped 3.3%; NASDAQ declined 4.08%. The VIX exploded up 44%, making it too hard for speculators to buy put options thus forcing sales of stock out of the hands of short term speculators. Much of the world’s stock indexes have been negative for the YTD. Looks like the U.S. market is moving towards a global stock bear market, as are bond yields.
This morning the PPI inflation data was released showing inflation YoY is about 2.5%. One expert said the PPI report implies no increase in the rate of inflation for tomorrow’s CPI data release.
Dave Rosenberg mentioned a few weeks ago that the current half year 3.2% GDP growth should have been 2% higher with the huge deficit stimulus program, so the 2% shortfall from what should have happened implies the economy is weak. My opinion: The implication is that only 3/5ths of the expected growth from tax cuts actually occurred which is a sizable miss and this means less taxable economic activity occurred that can be used to pay back the deficit and thus society will get stuck with too much debt, leading to a disinflationary economy next year.
A lot of potential purchases of capital goods by businesses may have occurred as they seek to get a generous first year tax deduction for accelerated depreciation in the new tax law. They are “forced” to do this if they make more than the $315,000 income ceiling for new Section 199A tax law, assuming they want the Section 199A deduction, because for 199A they may need to reduce taxable income to qualify. (This depends on whether they are a personal service business or a manufacturing type of company). This could create a temporary unsustainable boom in 2018 as businesses rush to get a tax deduction, but they will risk losing money if they buy unneeded goods just to get a deduction. I expect this would be less likely to happen with larger, more bureaucratic companies. The equipment has to be delivered this year to get the tax deduction. If there is a time lag in shipping then the orders could be cancelled. Thus I expect a lesser demand for capital goods next quarter, which would dampen the risks of inflation. This means starting in November that manufacturers will have less work for their workers, assuming a 45 day lag time to ship and install machinery before year end.
Remember in December, 2000 the great tech boom ended when hardware manufacturers realized they had received bogus overlapping orders for tech hardware (where businesses were double-ordering from different suppliers) that were being cancelled and thus they had a sudden decline in demand. That happened right after the double top of September. I see a similar pattern now.
With the Italian debt situation way out of control and with the EU and Japan having negative yields it seems much of the world is headed for trouble. The Brexit hard exit deadline is soon approaching, which will trigger a settlement of trillions of derivatives and disrupt trade of physical goods, will also dampen the global economy. This is not the time to sort sell U.S. Treasuries!
Investors need independent financial advice about the risks of bonds.