Everybody keeps asking me the same thing: What finally ends this run?
They point to war…oil…the next earnings miss….but none of that matters.
None of that breaks this market.
It starts with bonds.
You see, the bonds, specifically U.S. Treasuries, are considered “safe” investments because if the U.S. government defaults on debt…well, then we’ve got bigger problems to worry about.
So here is what I want you watching every morning: The yield on the 30-year Treasury bond.
Two levels matter right now.
The first is the 5.25 handle. If the long bond pushes through 5.25, I think the stock market is done.
The second is the 5.5 handle. If yields run through 5.5, it forces Kevin Warsh to raise rates because the long bond is a live read on inflation.
But here’s the part almost nobody understands…
The Debt Market Owns Every Stock You Hold
Debt markets hold equity markets prisoner. The tail does not wag the dog.
Global equities run around $200 trillion. The debt market dwarfs that by about a factor of 10x.
Debt markets set the cost of capital – the time value of money and the return you need just to stay ahead of inflation.
When it moves, every stock you own has to answer to it.
Why Rising Rates Punish Your Favorite Names
Here is how it works…
Rising rates discount future cash flows harder as your opportunity cost rises. That makes the earnings now and in the future worth less than before. So, the price of the stock needs to drop accordingly.
Rate jumps hit the highest-multiple, no-dividend names hardest. Dividends cushion that blow, working like a put option against rising rates.
That’s why most stocks I own pay a dividend. They hold up as the yield shields against the inflationary premium.
High-multiple tech stocks with no dividend have no cushion.
Let me help you visualize what I’m talking about.
The Choice That Ends The Party
Picture two options in front of you: Earn 5% in bonds or 5% in equities.
The mean-variance criterion settles it 100 times out of 100. You take the bond and collect the same return at half the risk.
Nobody accepts double the standard deviation for the same payout.
That is why the 5.25 handle matters so much. Push through it, and money walks out of stocks and into bonds with no reason to come back.
Who cares you say? Rates are already high you say?
Not so fast…
Inflation Is Still Climbing
The New York Fed Consumer Survey landed this week. The one-year inflation expectation sits at a three-year high.
The bond market is racing ahead of that inflation curve before the headlines catch up.
People keep pointing at oil to argue that we beat inflation.
Crude has dropped about $35 a barrel.
But gas at the pump here in Chicago has barely come down $0.35 a gallon. That kills the correlation.
Do not isolate one commodity and tell yourself the fight is over. Inflation is heading higher.
The AI Debt Bubble Sitting Underneath It
Goldman is already urging clients to hedge the AI debt bubble. They chose that word debt carefully.
The hyperscalers are spending $800 billion to a trillion on the build-out. If that invested capital does not turn a positive return within a year or two, the bill comes due.
When it does, defaults spread, the debt unwinds, and the damage trickles straight into AI stocks.
Think back to 2008. Debt collapsed the housing market. Equity had nothing to do with it.
What I’m Doing About It
I am sitting on 50% cash, and I am half short individual names. I do not own this market, and tomorrow’s move does not touch me.
A market melts down slowly from the lows. By the time you feel it, the exit is already gone.
Watch the 30-year Treasury every morning. Through 5.25, I think stocks are finished.
Through 5.5, Warsh has to move.
You have plenty of time to get out now. When the tape gaps 500 points, you will not.
Comments
Log in or sign up to join the conversation.