Rod Skyles: The Unconventional Economist

Stocks and Bonds

Stocks are staging a strong rally early Friday on a weaker than expected employment report, which comes after a Thursday rally on news the Fed did not plan to raise rates soon. While three to four Fed rate cuts in 2024 have been priced into the market since at least December of last year, the narrative had recently shifted to fear of rate increases, as inflation remains stubborn, even by watered down government data. But the last several trading days stocks have been buoyed by some very strong tech earnings and some bad economic news, confirmed today by weak employment report. Bad news is temporarily good news for stocks, as it means either no more rate increases, and possibly even some Fed moves to lower rates later this year.

The market could find itself in an odd position going forward, at least in the near-term. Bad news could potentially reduce inflation (at least temporarily) and could encourage the Fed to lower rates. A slowing economy would indicate that inflation may fall, which would lower borrowing costs for companies traded on the exchanges along with institutional and individual investors. However, it remains very apparent that we have little price inflation, but the higher prices we see are driven by lower dollar value due to exceptionally poor fiscal policy by Washington elected officials and bureaucrats. On this, taking out deficit spending by government, the economy is contracting and not growing, while using 1980 US government formulas, inflation remains above 10%, a clear sign of stagflation, no growth with significant inflation. Stocks do not do well in periods of stagflation, but so far, it has been different this time. Will that continue? Would love to hear your thoughts on that.

The bond market is rallying hard this morning on the weak employment news. Unlike stocks, bad economic news is almost always good for the bond market, but with massive deficit spending well out into the future by the US government, inflation is likely not going anywhere, and inflation is the biggest enemy of bond values. The data shows the environment for a LONG bear market in bonds, with some short-term rallies due to weak economic data. The short end of the Treasury market currently offers better yields than the long end, as well as reduced principal risk. In fact, Treasuries under a year in maturity are considered by markets to be money market instruments and (theoretically) risk free. I wouldn’t classify any bonds of an entity as indebted as the US government risk free, but certainly Treasury maturities under 1 year are about as low risk as an investment can get, at least for the time being.

Bitcoin

Bitcoin is up almost 5% in trading so far today, after a significant sell off over the last several weeks. The bellwether cryptocurrency had risen to a new high of over $73,000 in March, before pulling back to around $56,000 earlier this week. The coin has today spiked back up to over $61,000 and is likely set for more gains. The only challenge I see for Bitcoin is the influence large investment firms will have on its valuation, and we could see the major crypto markets begin to mirror stocks due to this involvement by big institutional investors. To understand why, if stocks begin to go down, it will pressure institutional investors, who are often leveraged (borrow money to buy investments so they can purchase more), and lower stock values will force these firms to sell stock assets, along with other assets, to satisfy their loans. One of the main reasons why Bitcoin went from trading below $30,000 to over $70,000 is the approval by the SEC for investment firms to create retail products around Bitcoin. But this is a double-edged sword that will likely add more volatility to an already very volatile market. Long-time readers will note that I love crypto markets, and that has not changed, but one must understand it is not for the risk adverse. Bitcoin has the chance to become a major, and maybe the only, alternative to central bank currencies, which should make its value continue to rise.

Final Words for the Week

First, to my loyal readers, I would like to apologize for the late posting of last week’s piece. There was evidently an issue with my email program upon sending, and while I got confirmation of it being sent, it never went out. After several people mentioned this to me this week, I FINALLY sent the piece out Wednesday. It did however post on Facebook and X (formally Twitter), my X handle is @10skyles and you can find me on Facebook under Rod Skyles. Please feel free to follow and share!

Quote

“What is the bravest thing you’ve ever said? asked the boy.
‘Help,’ said the horse.
‘Asking for help isn’t giving up,’ said the horse. ‘It’s refusing to give up.”
― Charlie Mackesy, The Boy, the Mole, the Fox and the Horse

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