Gold: broken out, but not a buy right now
Gold broke above its descending trend line - stage one. When a descending trend line gets hit many times and then breaks, price rarely goes straight up. It usually does a "checkback": the old resistance gets retested and turns into support. Gold broke out, hit resistance, and is now pulling back. It could fall further if yields keep rising, but the larger trend points higher over time.
I would not buy gold this second. You can likely get it $100 to $200 cheaper in the coming weeks or months. For a long-term holder that gap does not matter if the upside is 10K or 15K next cycle. The real point of gold is fiat currency slowly degrading and the de-dollarization of the dollar. You need a 5-year view for gold to pay off in a big way. Near-term gains in gold are uncertain, and so is the stock market, though I still see some upside in stocks - how much is up for debate.
Bitcoin has the best chart setup right now heading into year end. The 75,500 level must hold; if it breaks, the bullish flag pattern falls apart. Still, no massive upside into year end.
The economy is running on "drugs"
Recessions are normal and cyclical, like sleeping every night. The conditions for a recession have been in place for a while. Since the Great Recession of 2008-09, the Fed and the government have pumped the system with stimulus to keep the high going. Picture someone who has not slept for weeks and is on drugs. AI capital spending could stretch this out to maybe 2030. Then comes a crash - either a crash coming off the drugs, or the patient dies, which is worse. Either way it arrives; you cannot keep the good times going forever.
Government running huge debt is stimulative - spending keeps the high. But the 10-year yield is rising, borrowing costs more, and housing is suffering because 30-year rates climbed. These add up to the straw that breaks the camel's back, whether a dollar collapse or something else. There will be a reckoning. Politicians play hot potato, keeping things good enough to get reelected, and someone gets left holding the bag.
Stress is already showing. Auto defaults are rising substantially, mortgage delinquencies are ticking up, and credit card 90-days-late is surging.
AI stocks: paying peak prices for cyclical profits
The AI trade got stretched over the summer with Micron (MU) and similar stocks. AI may change the world, possibly for the worse, but the trade pulled demand and expectations forward and got people chasing. It is cyclical. More factories are coming online to produce memory, which brings margins down. AI margins will not stay at 80% for the next 30 to 40 years; they probably drop back toward 20%. That means a big revaluation for stocks that went parabolic. They can still run near term on hopes and dreams, but a reckoning comes.
Is this the day before another 2022?
In 2022, the last major hiking cycle, everything fell - the S&P dropped, Bitcoin crashed hard. The Fed took rates from 0 to 5%. What matters now is why the Fed is hiking and how many hikes come. A move from zero to 5% again would be a major bear market. If the Fed just reacts to oil and hikes a few times this year and next, maybe not.
I do not think this is the day before another 2022. Capex spending should keep the economy on life support and things rolling. Profits are amazing now but will stall eventually. The Fed knows the retail consumer is suffering badly under inflation and must be careful. Push too hard and a depression comes much sooner. Many people already feel we are in a recession, probably not a depression yet. Kevin Warsh is very aware that things are already breaking.
There are haves and have-nots. The upper group is heavily invested in the market and making money hand over fist, along with the president. Everyone else is just getting by, wondering if they can pay the credit card each time prices rise at the pump. The Fed cannot raise rates much without triggering something bigger than a minor recession. Markets tolerate slow, steady rate rises - the rate of change matters most.
The 10-year yield and the 5% line
A headline crossed today: the 10-year hit a new high not seen in 19 years, since 2007 - the market peak before the financial crisis. That connection worries investors that conditions before the last collapse are returning. Since the 2023 pivot high, rates have swung between roughly 3.5% and 5%, rangebound. Breaking above the 5% pivot high, which was pierced earlier today, opens a new scenario - a breakout where people start fearing a financial crisis. Yields have since come back to 5%. This is a possible pierce of a double top, worth watching closely.
The setup is this: either the long end of the yield curve rises, or the short end does. If the Fed does nothing, the long end rises, which is worse for the economy and markets - the 10-year could go to 5.2%. Or the short end rises because the Fed funds rate goes up. Most people assume they move together; my thesis is one moves one way and the other moves the opposite way. The best outcome is the Fed getting control, because about $7 trillion in US debt is rolling over and needs refinancing in the next 6 to 12 months.
Why credibility beats a policy surprise
The US already pays about $1 trillion a year in interest. Push the 10-year to 5.5% or 6% and that number steamrolls exponentially higher. So the Fed has to come out strong. Kevin Walsh needs to be fairly hawkish - not promising a hike every meeting for the next five or six, but making price control and the 2% mandate the main goal. There has been talk of accepting 3% as the new normal; that is wrong. Investors buying US debt need to know someone is in control, because they do not trust the president, who will do whatever pushes the stock market up. The Fed has to be the adult in the room and raise rates.
The Fed could surprise both ways: not raising (bad), or raising beyond 25 basis points and signaling more tightening than expected (also market-moving). The Goldilocks path: raise 25 basis points and say they are data dependent, watching every CPI, PPI, and PCE number. If inflation does not come in - much of which depends on oil - they should raise again before year end, which shows the market they are data dependent rather than locked in. The Iran situation needs resolving; it is adding heavy pressure to inflation. Get oil back to $70 a barrel and inflation falls substantially.
Bearish positioning as rally fuel
The retail crowd is bearish, shown by the put/call ratio, which is heavily skewed to the downside. I take the opposite side. People assume a Fed rate hike means more bad news, but the confidence a credible hike gives could actually rally the stock market. Wherever there are more puts or more calls, the opposite tends to happen, because institutional money does not want to pay out the buyers who have piled in on one side.
S&P 500 levels
The S&P sits at a major trend line around 7575. As long as it holds above, I stay bullish. The pattern is a move up, then consolidation - a bull flag. That level is being tested today. If Powell - correction, Kevin Warsh - stays the course, raises, and stays hawkish, the markets should rally the next day. Warsh is not the dictator of the Fed; if the other governors have the votes to raise, they raise.
There is a neutral zone between 7575 and 7400. Trading inside it turns the picture murkier, still possibly bullish but less clear. A break below 7400 is where I get very concerned - that is a major trend line running back to the 2021 bull market peak. Break it and the S&P likely heads down to 7000, a big drop.
Near term the stats are heavy: oil at $104 to $105 a barrel, the 10-year yield at 5%, the president meddling with and attacking the Fed, and the AI question. Dario Amodei said over the last weekend that AI is an existential threat and we need to slow down, which puts the idea of unlimited AI growth at risk. Yet the S&P is only about 3% off all-time highs, and with the Fed raising I still expect a move up. Every trader needs levels where the thesis is invalidated. Longer term, I am watching a 2030 potential for a massive corrective decline, possibly a great depression - the US, like the rest of the world, is in a heap of trouble down the line.
