In many ways, it’s pretty amusing how frustrated everyone is about the direction and meaning of interest rates, and how uncertain they are about the economy and the direction of stocks and bonds.  In my view, they should be just the opposite.  They should be saying “this is an obvious slam dunk.  Interest rates are headed DOWNward, and whether at the long or short end of maturities, you should be long bonds.  End of story.”  After all, when do you get gifts of clarity like that?

Kevin Muir of the Macro Tourist is a man I read unfailingly and, while I do not always agree with all of his takes or recommendations, he is invariably loaded with good reasons and empirical evidence to back up whatever he says.  But what is always true about Kevin’s fine work is his underlying theme of purpose, which is essentially that it does not matter what OUGHT to be happening, or whether what is happening is different from what ought to be happening (and therefore don’t highlight any observation of that nature…NO!)  Forget such considerations, says Mr. Muir.  What you want to know is what IS happening, and based on getting that observation right, what is more, likely to happen in the future…whether market direction or associated policy.  In other words, forget what is in your heart or your desire to be master of the universe and instead engage your eyes and ears and use your brain to summon up the history, analytical framework, and rational inference to PUT FOOD ON THE TABLE by harnessing rational probabilities.

So I look at the direction of interest rates—DOWNWARD—and what I see is “be long bonds.”  And as for associated policy, it doesn’t really matter to me what the Fed is going to do in the future or why they would do it.  And there are pretty much two choices on that.  They can either join the panicky ranks of Kudlow and Moore and get ahead of the curve and cut by 50 basis points now to try to stave off a recession, or they can wait and do so later, and thus follow the softening direction the bond market is indicating economic activity is already forecasting for the future.

Is that so difficult to divine from what’s going on?  I don’t think so.  But you know what I think a lot of “smart” people do?  I think they are so smart they outsmart themselves.  They look at something like I just said about the direction of bonds and they think, “that’s too easy.  It must be more complicated than that.”  So they come up with something more complicated.  And guess what?  They get it wrong and outsmart themselves.

This is also backed up by evidence in the current indicators repeatedly showing shortfalls vs. estimates in retail sales.

It is further confirmed by technical evidence in the stock market where breadth measures are stalling out, especially when you see this right in front of your eyes in real time while simultaneously observing indexes rising.  What does that mean?  It means smaller and smaller numbers of stocks that are big caps are holding up averages (and even pushing them higher) as larger and larger numbers of second and third tier caps are falling off the log.  That is a sign that a topping process is underway, but don’t confuse that with a top per se. That takes weeks and months.  And during that time, a declining number of big caps still has the money muscle to push averages considerably higher (but that isn’t a guarantee either).  But—fortunately—you can avoid that nagging headache by being in bonds.  Or you can be in cash, or gold, or oil or any number of commodities, especially those sourced and priced abroad, because the implication of lower rates in the future implies a weaker dollar.

And what does that mean?  Well, let’s say you’re a company that depends on something like beef as a feedstock.  I’m not going to name names.  Use your imagination.  A lot of beef comes from Brazil.  Over the past 10 – 20 years it’s been a mixed bag regarding the relative strength of the dollar and the Brazilian Real, but during that same time period there is no ambiguity of what the price of beef has done priced in Brazilian Real per kilogram, and it has gone up dramatically, especially recently.  Depending on the time segment you choose, that increase has exceeded eight percent compounded annually, and that ought to get your attention if you follow the dovish inflation numbers our government puts out which form the field of context the various cheerleaders for the Fed put out there to reassure the equity markets that there is no reason to worry about inflation if the Fed needs to lower rates to protect the stock market economy.

But good, qualified CFOs at companies whose margins rely on steady beef inputs are not so easily taken in by the herd mentality.  They are worried and, if you know such folks, next time you see them, take a look at their hands and especially their nails for signs of nail-biting—right up to the elbows.

And let me add this final point.  If you are able to identify as I have one class of inputs on an inflationary trend, and it is sourced abroad, and it is key to a domestic company’s margins, and the data you find to confirm that trend doesn’t conform to the inflation data in more general terms the government circulates and the Fed highlights, then guess what?  Well, there’s an old slogan oft-quoted during hot Manhattan summers.  If you see one roach in the bathroom, there’s 200 more you don’t see.