How to break the marketsIn a fortunate turn of events, inflation has calmed.
For equity bulls, more good news. Yield rates have probably peaked.
To stop inflation, you must cool down a HOT economy. Overconsumption tends to increase prices. In an unfortunate (?) turn of events however, the markets haven't calmed down. Some charts suggest that the markets haven't felt at all the decisive rate-hike schedule.
A question arises: Are markets so strong not to feel current yield rates? Or is there some kind of lag we must take into account? When will equities suffer, and how much? These are important questions right now that need serious answers.
A custom indicator was invented to calculate the average-rate-of-return of equities against yield rates. It attempts to answer the following question:
How much better do equities perform YoY against the "safe" US 10-year bond investment?
Some interesting charts come up from this analysis:
In 1951 yield rates broke out of their long-term bear market. At the same time, the equity market exploded in even higher strength. Note that at that period, equities managed to perform better than the ever-increasing yield rates. It was after yield rates ~tripled that problems arised.
Moving to today, we only recently witnessed a breakout in the equity and the yield-rate-schedule. Judging from the '60s, we could even witness a decade of yield rates trying to catch up to the equity market.
A simultaneous breakout can make sense. A massive amount of money has flown out of the bond market and had to enter the equity market.
Equities may be forced to grow, for now. An incoming drop in yield rates from a pause in the rate-hike-schedule will almost certainly create an outflow from equities and back into bonds.
Be prepared. The weakness in the equity market hasn't showed up yet. At any point, the steep upward trend can collapse. A crash will certainly come. But at a time when nobody expects it to. Remember, rates of ~7% managed to break irreversibly the equity market back in the '60s.
Ask yourself and wonder. How tight of an economy can opportunistic equities handle?
At what point will stability become more important for us than growth?
Tread lightly, for this is hallowed ground.
-Father Grigori
