Could yields retake 1.75% and boost the dollar?

Outlook

The bond market came up roses last week and worries about another taper tantrum were misplaced. That fat differential against nearly everybody else did the trick, especially in Japan, where the WSJ reports investors bought the equivalent of $15.6 billion of overseas bonds net last week, the most since November. Last Thursday saw the biggest one-day decline since early Nov, “reflecting renewed demand for government debt after sustained selling in the first quarter” and despite very nice retail sales, which is contrary–normally a good data report like that would push yields higher. But the bond gang is in wait-and-see mode and not ready to take on the Fed. We still expect to see yields rise back to 1.75% and well beyond, offering support to the dollar, but not yet.

Earnings season is upon us and so far everything is coming up roses on that front, too. Today it’s Coca-Cola, IMB and United Airlines, plus a gaggle of banks. Many stock market gurus say they expect a giant pullback in the big indices, but cannot say how big or when.

This week the ECB meets and Canada unveils a budget, with many expecting a drop in bond issuance and maybe tapering, too. Normally we offer the Econoday calendar, but it has not arrived yet. Instead see the partial calendar from Lynne’s Weekly Bulletin.

As for the immediate forecast, the trend is your friend.

Tidbits, Nuggets and Tea Leaves: We have some terrible data of no interest to the world of finance but probably important all the same. First up is 64 mass killings of at least 4 persons in the US since Jan 1, and over half of them non-white. The US doesn’t have more crazy people, we just have more crazy people with guns. The FedEx shooter (8 victims) bought his two guns legally.

Another number–the J&J vaccine caused 6-8 blood clot cases, mostly in women, and one death, of over 7 million injections. The vaccine was pulled until the CDC can think about it on Friday.

But data is not always king. Sometimes an event from left field that has been developing all along pushes itself forward to become a Big Deal. Sometimes you can barely detect it in the tea leaves. Last week we saw a few of these emerging. One of them is US intelligence that there was indeed “collusion” between the Trump campaign and Russia. One problem–we don’t know when the intelligence gang knew it and if Trump knew it, too.

Then there is the lack of a coherent narrative on the Jan 6 insurgents. Some were well-organized and had a plan, but most are out on bail and won’t be charged with much. The infiltration into the police and military is really scary. Remember how the Spanish Civil War began. Jan 6 can happen again. It failed last time because Trump and Co. can’t manage their way out of a paper bag. A better manager might succeed.

Elsewhere in politics, Chancellor Merkel’s 16-year tenure ends on Sept 26 and it’s not even remotely clear whether Germany will retain leadership in the European Union. We would probably like France’s Macron in person, but as leader of the EU, we’re not so sure. He’s confrontational with Turkey, for example, and of course France has never really liked NATO (and kicked it out back in 1966).

Speaking of confrontations, Putin seems to be seeking one with somebody on the Ukrainian border. Is that Europe, NATO, or just the US? China is also confrontational or at least assertive, according to The Economist, and not just at the border or the South China Sea–it wants to demonstrate that the old West is old hat and the values of the post-war world–things like human rights –are stupid and ineffective.

As for the US pulling out of Afghanistan, finally, opinion is divided, but one the whole, the Establishment and the public agree the war can’t be won and was never going to be won. The country will almost certainly revert to a hotbed of primitivism and terrorists, and the one big loser will be women, all the gains of the past 19 year up in smoke.

In finance, the big one is bitcoin and crypto generally. Now that China has tested it and will be using it, the rest of the world, including the US, must not be too far behind. One analogy is that bitcoin is the Facebook of money–and it’s inevitable. Now that legal tender money supply is so vast (and dispersed globally) that we can’t keep track of it and its effects, and the same thing is true of deficits, crypto can perhaps become the new alternative legal tender quite easily because its supply is limited. Well, maybe. We continue to question the store of value aspect, too. When crypto becomes a widespread payments method, we can start to worry then. Does that mean Keynesian economics is dying or that we are getting a two-tier monetary system? Two tiers never, ever work, by the way. Just ask Belgium. And until further notice, no version of the Chinese currency is fully convertible. Talk of replacing the dollar as a reserve currency are way premature.

Finally, there is all this chaotic stuff going on in the investment world. SPACs and NFT’s. New York Magazine ran an article with this para: “In the absence of hegemonic answers to the question of what money is to us, strangeness reigns. Even as money has been injected with new political vitality, its actual life has become more baroque. NFT’s and meme stocks and cryptocivilizations aren’t just the product of new technologies run amok or old financial dynamics dressed up in new clothes, they are the morbid symptoms of an interregnum during which the role and identity of money in our lives and politics are shifting.”

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