Writing on the Wall? – November 3, 2023

Wealth Management • Nov 04 2023
Writing on the Wall? – November 3, 2023
Morgan Lewis Posted on November 4, 2023

Writing on the Wall?

This week, HAI is coming to you from the Big Easy on the banks of the mighty Mississippi. This author is attending the New Orleans Investment Conference. So far, it’s truly been a great few days, with more to come tomorrow. Given all the events, this HAI consists of weekly prices with only a few brief comments. For full coverage of a busy and important week for markets, HAI recommends readers visit Doug Noland’s Credit Bubble Bulletin.

Early in the week, legendary investor Stan Druckenmiller stole the headlines with his harsh criticism of Treasury Secretary Janet Yellen for not terming-out US Federal debt post-2020. In other words, Druckenmiller was suggesting that Yellen could have greatly eased the burgeoning U.S. fiscal debt crisis by taking advantage of post-Covid-era low-interest rates by issuing longer-term debt while rates were historically low.

As Druckenmiller put it, clearly not pulling any punches, “I literally think if you go back to Alexander Hamilton, it is the biggest blunder in the history of the Treasury.”

HAI is not one to argue with Stan Druckenmiller, but it does seem possible that rather than a mere “blunder,” Yellen’s failure to term-out the debt when she had the opportunity could be a more ominous revelation that Yellen and the Treasury are already cornered. Yellen may realize that the long end of the Treasury curve may already be problematically illiquid. In short, Yellen’s “blunder” may be evidence that any effort at this point to term-out most of the debt would have caused systemic losses for the only remaining buyers of that debt—price sensitive hedge funds and households.

On Wednesday, the Treasury Borrowing Advisory Committee (TBAC) released their “Outlook for Demand for Treasuries” report. In it, Treasury reported that the “demand base for USTs has shifted toward more price sensitive buyers.” Again, extremely price sensitive households and hedge funds, two buyer cohorts that quickly turn seller as soon as they incur any meaningful losses.

This is highly significant. Yellen couldn’t term-out the debt because doing so would have cratered the long-end of the Treasury curve and revealed the Treasury Department’s dirty little secret: we no longer have the price insensitive buyers of long-term US debt to absorb the supply we need to issue in order to finance our out-of-control deficits.

In recent weeks, HAI has discussed how monetary policy is compromised (through the breakdown of the effective use of the interest rate brake) due to the high levels of government debt and threat of triggering a debt doom loop at higher interest rates. Such a compromised state of monetary policy leaves us highly exposed to inflation risks in a new era of secular inflation. Now, we are starting to get confirmation that the walls are closing in on Treasury functioning too as the unintended consequences of unsustainable policy continue to manifest and spread.

Signs are rapidly increasing that business-as-usual is breaking down fast. As the market gradually wakes up to that fact, the confidence bubble (the ultimate bubble) is increasingly in jeopardy. It is no coincidence that gold continues to scratch at the $2,000/oz resistance level, and appears to be building towards a major breakout to new highs. When confidence in business-as-usual breaks, expect the price of golden financial insurance to rerate higher in a hurry. We’ll see what next week brings, but Friday’s aggressive price action in the precious metals mining sector suggests shorts are beginning to cover and that the entire sector may be prepping for a large scale move to the upside. Perhaps markets are beginning to see the writing on the wall?

Weekly performance: The S&P 500 surged 5.85%. Gold was nearly flat, up 0.04%. Silver was higher by 1.70%, platinum was up 4.25%, and palladium lost 0.17%. The HUI gold miners index was up 0.71%. The IFRA iShares US Infrastructure ETF jumped 6.30%. Energy commodities were very volatile and mixed on the week. WTI crude oil was down 5.88%, while natural gas gained 0.92%. The CRB Commodity Index was off 1.17%, and copper was up 0.82%. The Dow Jones US Specialty Real Estate Investment Trust Index surged 8.13%. The Vanguard Utilities ETF was up 5.49%. The dollar index was down hard by 1.61% to close the week at 104.86. The yield on the 10-yr U.S. Treasury sank 27 bps to end the week at 4.57%.

Have a wonderful weekend!

Best Regards,

Morgan Lewis
Investment Strategist & Co-Portfolio Manager

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