The boy who cried wolf was ultimately right.
In September 2023, I argued that the only real way to save Treasurys was to crash stocks. Back then I was increasingly worried about the speed with which yields moved. I believe the Federal Reserve and Treasury Secretary Janet Yellen were worried about this dynamic as well, which is why they opted to convince the market that six rate cuts were coming. That of course caused a huge reversal in equities, saving bonds WITHOUT crashing stocks.
The problem? That came at the expense of reaccelerating inflation, which is why I don’t think the Fed can pull that trick again.
Now, the Fed needs the stock market to crash.
You might want to pay close attention to the yen here. It looks like intervention is imminent, which could spark the currency crisis and reverse carry trade that was always the catalyst in my mind for a global margin call and credit event. Here’s why this gets so complicated.
Why the Fed Needs to Sacrifice Stocks
An intervention by the Bank of Japan means they likely need to sell Treasurys. This would cause excess supply and send prices lower in bonds and yields higher. I think the Treasury market today is sensing this. But that spike becomes problematic because, again, the speed becomes disruptive for the entire financial system. Japan must sacrifice Treasurys to save the yen, which means the U.S. must sacrifice stocks to save Treasurys.
It’s worth noting that small-cap stocks see this as well. After a strong open on Monday, they reversed course and are negative on the day. This makes sense. As yield push higher, highly levered small-cap stocks become vulnerable to refinancing risk, unable to afford higher interest expense against high starting leverage and razor-thin profit margins. This, combined with gold prices still sending a warning of risk, continues to convince me that no one is prepared for what’s coming, and that we are likely in a high-risk period that could shock the world.
Just in time for “sell in May, go away.”
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
