‘Speculative markets are an accident in the making’

Credit Bubble Bulletin/Doug Noland/5-12-2023

A couple of notable insights from Doug Noland, released Saturday:

“Bonds and stocks rallied immediately on the release of CPI data, with television analysts scurrying to try to explain the spirited bullish market reaction. The explanation was in market positioning, rather than in data minutia. There has been significant hedging around key economic releases, certainly including CPI and non-farm payroll reports. And with markets remaining resilient over recent months, Greed is on the side of those writing derivative ‘insurance’ – with Fear weighing on buyers. Holders of hedges have ‘weak hands,’ meaning they have limited tolerance for additional losses. So, the basically in line CPI report spurred an immediate unwind of hedges and squeeze dynamics in both Treasuries and stocks. Rallies, however, were relatively short-lived.”

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“It’s intriguing. Inflation proving stickier than expected had no impact on expectations for a dovish pivot. The same for persistently tight labor markets and general economic resilience. In this I see corroboration of the thesis that the rates market is pricing probabilities of some type of accident forcing the Fed’s hand. The banking crisis is a potential accident. The ‘X-date’ fiasco could blow up. In general, speculative markets are an accident in the making.  But I’ve been positing over recent years that the vulnerable Chinese Bubble was likely a factor in persistently low Treasury and global sovereign yields.”