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Successful Test or Nightmare Ahead?

03-06-2020

The market opened with a giant thud, losing about 3% after the jobs number, which was far better than expected, was completely ignored, because obviously it doesn't really mean anything anymore. From there, a large rally began that I'm sure many were counting on to deliver much higher prices and a successful test of last week's closing low.

Light the Lamp However, the rally fizzled instead and with about an hour to go we were back on the lows. Then a stick save at 2,900 on the S&P redeemed the day and the market closed almost 3% off that level, down just 1% to 1.5% for the session, depending on the index. I think that with any renewed weakness next week, things could turn ugly pretty fast.

Away from stocks, green paper was hammered once more, and fixed income exploded again, with the 30-year bond yielding about 1.2% (more about bonds below). The metals were wild, as gold traded from up 1.5% to down a similar amount before recovering to about flat. Silver saw similar action, but its recovery was more muted, as it lost 0.75%. The miners were smacked very hard almost immediately but finally managed to recover a fair amount of their losses. I know everyone is frustrated because the party for the miners just won't get started, but it will.

Some Clogs In the Plumbing Now I'd like to touch on a group of a market-related developments. Yesterday, the Lord of the Dark Matter told me that "credit had cracked." I had seen stories of outflows as well. In addition, someone forwarded me a link to a Zero Hedge post of an interview that Jeff Gundlach did on Bubblevision yesterday where he said that the corporate bond market had seized up.

Gundlach also made a point that I thought was very important. I've talked about the Fed losing the bond market some day, and on the QTR podcast last weekend, I touched on how that could start to develop, with people maybe having a preference for cash, which yields next to nothing, over a long bond, which yields only an incremental amount more than nothing.

Gundlach's point was that bonds are for safety, you can't really make any money in them, and he suggested that people do exactly what I had noted might happen. That is, hold cash and short-dated paper instead of anything related to a note or a bond.

Bond Barometers So, there is trouble coming in the land of credit (and no yield), where spreads and ratings have been absurd. A credit problem is going to throw a monkey wrench into the Fed's plans and will be as big a deal for finance as the coronavirus is for the general population.

This could be the beginning of an important psychological change, especially if you combine it with the fact that people have learned that sometimes you have to buy in advance, just in case, and that prices can climb rapidly. All that could feed together to promote a change in psychology regarding the Fed, inflation, and all those topics I wrote about a couple of weeks ago as this was all getting started.

Also, the action we've seen in the last few weeks is exactly what I've been talking about for so many years when I said that the markets are crash prone and they can't decline in an orderly fashion. Thus, several theories and topics that people couldn't quite see ever coalescing could all be getting started at once.