In today’s Issue:

  • Trading the rescue package before the crisis even begins
  • Flawed jobs data is giving the Fed license to cut rates
  • The 2007 debt refinance crisis is back!

Investing has become a lot more difficult since 2008. Every crisis now has its corresponding bailout. And so investors need to correctly predict both to profit.

A friend of mine was in the futures trading pits in Sydney when the 2008 meltdown began. He made vast profits trading the market crash. But doubled down the day before the TARP bailout. And so lost most of the gains as the market rebounded.

So, you can be right about the 2008 stock market crash. But you also need to predict when politicians will launch their stimulus packages to reverse the crash.

You can be right about the European sovereign debt crisis. But you also need to know how the IMF, EU and ECB will negotiate bailouts for Greece.

You can be right about the inflation of 2022. But you also need to guess when the central bankers will finally wake up to the threat and start hiking rates, fast.

Things can get even more absurd than that in this bi-polar market.

For years, the “bad news is good news” rule governed market moves. Every piece of bad news made intervention by the central banks and politicians more likely. So markets priced in the rescue package before the crash even took place.

Today, it’s much the same. The US faces three crises. But nobody is interested in what could go wrong anymore. We’re all waiting for the timing of the rescue packages. And so markets are already rallying in anticipation of bailouts.

Dodgy jobs data gives the Fed a license to do…anything

There has been much wailing and gnashing of teeth about US jobs statistics lately. As with every statistical argument, there are enough ways to slice the data for both sides to claim they’re right.

Nobody can even agree on the basics anymore. Even in hindsight, we can’t agree on what happened. So the debate is a bit pointless anyway.

Even if the statisticians were on the same page, since the pandemic, nobody trusts government data anymore.

But it’s quite clear that the US jobs market is in a crisis of some sort.

Combined job gains for May and June were revised down by a staggering 258,000 last month. This represents the largest revision outside the pandemic era.

It must drive business managers utterly insane that the same government which forces them to submit reams of paperwork for their employees cannot count jobs. It’s almost as bad as the UK’s immigration statistics!

The day before you read this, the August jobs data comes out. I haven’t the foggiest idea what it’ll say. But it’ll matter immensely to markets. And there will be lots more wailing and gnashing of teeth. Despite the fact that the figure is utter rubbish.

That tells you a lot about financial markets these days. It reminds me of the old Soviet jokes. “We pretend to work and they pretend to pay.” These days, the government pretends to count jobs and the market pretends it’s a meaningful number.

But that sort of joke can get you arrested by five armed police these days. So, let’s move on to the second crisis…

The US property market is in a deep freeze

In the dystopian film V for Vendetta, a detective tells his colleague that, “One thing is true of all governments – their most reliable records are tax records.” And governments love to tax housing. Because it can’t leave for Dubai.

So, you’d think housing data is reasonably accurate. Comparatively speaking, anyway.

On Thursday we covered what that data tells us about the “frozen” US housing market. Things are looking dicey.

Since I put that article together, there have been some developments…

“We may declare a national housing emergency in the fall,” US Treasury Secretary Bessent told the Washington Examiner.

No wonder US housing stocks are rallying hard in the face of a housing crash…

The rescue is in before the crisis begins.

The refi-crisis is back too

The 2008 financial crisis was triggered by adjustable rate mortgages. Borrowers’ repayments suddenly surged. Too many couldn’t pay. And because house prices had fallen, they made a loss when they sold out to be free of the debt.

Somebody had to book that loss. Through a chain of SPVs, CDOs and CDS, they were distributed around the world. Mostly to unsuspecting victims. Including some of the people who originated the dodgy loans in the first place!

Why was the shock so large? People had borrowed at artificially low rates while the Fed fought a recession in the early 2000s. And then their mortgage payments ticked over to new higher rates after the Fed had increased interest rates dramatically by 2007.

Ominously, we face the same thing today. But in the government bond market instead of the property market. And the Americans are once again the centre of the crisis.

The US government needs to refinance a dangerously large chunk of its debt in the next 12 months. About 50% of the national debt matures in the next three years!

If interest rates don’t come back down, fast, then that debt will be rolled over at dangerously high rates. And government bonds are like fixed rate mortgages. Their interest payments remain fixed. So rates today determine interest costs for the full term of the bond.

The US government has been doing two things to combat this. It is buying back lots of its own debt. And financing itself with increasingly short-term borrowing, because that’s cheaper.

The strategy is a bit like using credit cards to pay the mortgage bill in the hope of refinancing that mortgage at lower rates next year.

What makes the Treasury think rates will be lower? Apart from the crises highlighted in this article, of course.

Well, in May, Trump appoints the next chair of the Federal Reserve. The chair will have the power to set interest rates and buy government bonds.

Trump is planning to appoint someone who cuts rates very rapidly. And promises to keep the government debt financed too.

So, the Treasury is playing for time in the meantime.

The trouble with this strategy is that it is risky. The more the Treasury shifts to short term borrowing, the worse the problem of constantly having to refinance the debt becomes.

If rates don’t go down because the bond market doesn’t want to lend to a government that prints money to finance its debt, then the crisis becomes more immediate more quickly.

The Fed knows this. It has a mandate to ensure financial stability. Which includes ensuring there isn’t a crisis in the government bond market. So, by making such a crisis more likely, Trump is forcing the Fed to save him before a crisis begins.

Until next time,


Nick Hubble
Editor at Large

P.S. September 17 could be a turning point. There’s one under-the-radar AI play I’m watching closely — what I call the Master Key. If the Fed acts, this could be the spark. See how to get your piece.