"You're not a wartime consigliere, Tom. Things could get rough with the move we're making." Michael Corleone
Humor me whilst I torture an analogy. I’m going to avoid endeavoring to define who populates the national political scene’s ‘families’, but stick with me here;
The America First Isolationists are making a play. Sensing weakness, Tucker Carlson (Barzini) is trying to marginalize Trump and his influence. J.D. Vance ( Tessio) throws out the ‘It was that war I opposed—oh, and Israel — that caused the electoral blowout,’ the day after the election, a position immediately supported by the President’s son (shocking, but not surprising). Hard on the heels comes a scorching 2-hour podcast by Tucker, clearly the brains/power behind the move, ‘explaining’ why Trump has betrayed ( his words) the people and the movement. ‘We are the real future, the real America Firsters, he declares. J.V.Last of The Bulwark lays this all out in his piece“The Conspiracy to Push Donald trump Aside”*The Democrat ‘Family’ is seeing some internal dissent of its own, as the party weighs whether to try to make sober deals with a now-wounded,*verylame-duck president— can real immigration reform be implemented, for example — versus those who want retribution, or at least a focus on investigations into corruption as the primary mission of the party now controlling both Houses of Congress by a large majority. We are seeing this in the split over who should be Speaker of the House and Majority Leader; are Jeffries and Schumer ‘pugnacious’ and ‘aggressive’ enough, one wing of the party asks. The question of impeachment proceedings for Cabinet officials—and the President— is being openly debated. Add in the growth in progressive members, and the stew gets spicy.*Which gets us to the Godfather, ‘Vito’. Aging, wounded, focused on legacy. Stubborn to a fault. A man who was schooled by the infamous Roy Cohn of HUAC fame, a man whose operating philosophy is most famously codified as three core rules: “1. Attack, attack, attack; 2. Admit nothing, deny everything; 3. No matter what happens, claim victory and never admit defeat.” Cohn viewed contrition as fatal, famously declaring, “I bring out the worst in my enemies, and that’s how I get them to defeat themselves.” There was a moment of Trump accepting the results of the election and seemingly turning to his vanity projects, which gave hope to those thinking the extent of the repudiation would make compromise possible**It seems, however, that the answer is the opposite. Trump has elevated his own Roy Cohn, naming the outspoken, combative Stephen Miller his Chief of Staff. Miller is widely believed to be the architect of the immigration crackdown's excesses and, along with Russell Vought, the main driver of the broad Unitary Executive concept of a Presidency with almost unlimited powers. Susie Wiles- the Tom Hagen of this novella- has been told she is not a wartime consigliere and will now run political operations. Trump and the Administration are ‘going to the mattresses’.*Iran remains the wild card. Trump famously hates losing and wants to leave a lasting legacy. With the situation as it is currently constituted, withdrawal from the Middle East would be universally seen as an ignominious loss. Dress it up however you want, the U.S. is weaker, and Iran is stronger than it was before February 28. Bibi Netanyahu is in dire electoral straits and is pushing Trump to get kinetic. I wouldn't be surprised to see a massive strike, including civilian infrastructure, followed by a ‘mission accomplished’ announcement and withdrawal. But I mean a YUGE strike, with full knowledge that retaliation by the Iranians is certain. I don’t see any other way out for this Administration given its mindset. I’d put the odds at 30%, and if it happens, it will be sooner rather than later.
**Regime.**A hiking Fed meets an AI permitting de-rating, and credit confirms. Stay defensive: credit and collateral shorts over equity beta.I’M WRONG IFhigh yield prints under 326bp with the VIX closing under 22.**Sector.**Long the exchanges against the card lenders. Volume pays the venue whichever way this breaks; funding stress reaches the near-prime book first.I’M WRONG IFcard delinquency prints lower year over year.**Where I’m fighting the tape.**The Friday bounce was a few chip names wearing an index. I won’t buy it.I’M WRONG IFSPX closes above 7,444.20 with four or more sectors up.**The fragility nobody prices.**A permitting freeze on new data centers is disinflationary, and the December hike price carries none of that.I’M WRONG IFcore CPI prints 0.4% or hotter.
Voters went after the data centers on Tuesday and the market spent Thursday deciding what that was worth. It decided about $3 trillion. Then Friday handed the Fed a payroll beat big enough to make a hike the base case, and the long bond shrugged at all of it.
That shrug is the week's argument. Equities priced in a growth problem, the front end priced in an inflation problem, and the 30-year priced in neither. One of them is wrong, and I think it is the front end, because what just got repriced lower is the single biggest source of new capital spending in the country.
The case against me is simple and I can’t dismiss it. Payrolls rose 165,000 with 84,000 of upward revisions, unemployment fell to 4.1%, and wages rose 0.4% on the month. A labor market that hot does not need data centers to keep inflation sticky. If Tuesday’s core prints hot, the permitting story is a sector story and the hike is real, and the four financials shorts in the book lose their best argument.
The week opened as a long-end, term-premium regime with oil as the binding variable. It closed as a Fed turning toward a December hike while the AI capex trade took a political discount, with the oil premium gone and credit finally saying something.
Chart 1. The two trades that carried the year broke in the same five sessions, and gold took the bid.
**Equities.**The S&P 500 finished at 7,376.86, after 7,688.62 on Wednesday’s close and 7,353.73 on Thursday’s. The Nasdaq 100 lost 4.91% and the semiconductor index 12.15%, with Thursday its worst day since March 2020. The Russell 2000 fell 2.05% and the Dow 0.94%, so the damage concentrated where the capex lives.
Underneath, the index hides more than it shows. A third of the index’s members sit 20% or more under their own 52-week highs while forward earnings estimates sit at records. The gap could also be an orderly rotation out of crowded leaders, and the estimate line would say exactly that if it survives the next round of guidance.
Chart 2. Prices have reset across a third of the index while earnings estimates have not.
That divergence has one precedent worth remembering. In April 1999 the share of members with overbought momentum ran this far ahead of the index’s own reading, and the S&P fell about 9% before it ran 26% into the top.
Chart 3. Momentum this narrow has led the index lower before it led it higher.
Jim Paulsen has the ratio of cyclical to defensive stocks collapsing since early August, and his Old Era stocks are the ones that win if yields fall (Paulsen Perspectives). I read all of it as a warning about dispersion and say nothing about direction from it. It argues for owning the book I own, mostly single names with specific reasons, and against owning the index.
**Rates.**The official 2-year closed at 4.51%, down 5bp on the week, after rising 6bp Friday on payrolls. The 10-year fell 8bp to 4.86% and the 30-year 5bp to 5.26%. 2s10s flattened to +35bp from +38bp, and 5s30s steepened to +62bp. The long-end rally could just as easily be a growth scare as a flight to safety, and one week of curve doesn’t separate the two. I’m less sure about the long end than about anything else in this note.
Chart 4. The front end took Friday’s hike repricing and the long end sat it out.
What matters for the Chubb long is the gap between that curve and what corporations actually pay.
Chart 5. The rate companies pay on their debt has barely followed the 10-year up, so the refinancing bill is still in front of them.
Non-financial corporates are still carrying debt struck years ago. Every quarter at these yields moves their effective cost toward the market, which is a slow tax on margins and a fast one on every borrower who has to refinance into a spread at 348bp.
**Credit.**High yield printed 348bp for 5 November, 22bp wider than the week before and the widest of the move. Investment grade went to 93bp and CCC to 1,320bp. The high yield fund lost only 0.26% on the week. That gap between the index spread and the fund is the whole HYG short in the book. Unless defaults start to follow, 348bp may simply be a positioning flush in the riskiest paper, and the fund’s calm would be right.
**FX.**The dollar index rose 0.37% to 102.29 and the yen weakened to 158.50 through a 5.96% Nikkei collapse on Friday. A funding currency that refuses to rally in a crash is telling you the selling was forced and local.
**Commodities.**Brent settled the week at $98.32, down 12.4%, its worst week since early 2020, and WTI fell to $90.44. Gold rose 5.0% to $4,079.60 with copper down 3.4%.
Chart 6. Oil and inflation breakevens moved together for a decade and then stopped.
Maxence Visseau’s point is that a war-driven liquidity premium in TIPS is holding breakevens down, so the market’s favorite inflation gauge understates what the barrel did. If he’s right, this week’s oil drop removes less inflation than the screens imply.
Chart 7. The share of countries with annual producer inflation above 5% is climbing again.
Volatility. The VIX closed at 25.64 from 19.42, after a Wednesday close of 16.61 and a Thursday close of 28.18. Above 22 my book stops adding anything, and it has closed there twice.
FLIGHT CHECK.
Gold and the long end got the haven bid. The dollar and the yen didn’t, and bitcoin fell 1.5% to 75,733 while the Nasdaq Composite bounced Friday. Metals bid beside a firm dollar and falling copper is a policy hedge, and it is the same hedge the 30-year is running.
Liquidity is the background. Visseau’s global M1 measure leads world equities by roughly six months, and it has turned down again. Capital Wars has global liquidity falling for another week as a firmer dollar and central bank balance-sheet runoff outweigh Chinese injections (
Capital Wars).
Chart 8. Global narrow money has rolled over, and it has led world stocks by about six months for two decades.
materials carrying returns and communication services the laggard.
The regime call for the week ahead is in THE CALL. The doubt is the payroll print. If the labor market is that strong, a permitting freeze is a rounding error against everything else that is hiring, the 2-year is right, and I’m early on the disinflation chain by months.
I’M WRONG IF the next spread print hands back the whole week’s widening while volatility settles back below the add line, which would say this week ended at equities.
Marked against last week, the 23 October edition was wrong on the barrel by about $14. Its featured pair, long energy against staples, needed Brent to hold above $105, and Brent settled under that three times this week. XLE fell from 69.33 to 61.62 while XLP rose from 88.26 to 90.08, so the pair lost about 13 points and the kill fired.
The regime call, a stagflationary squeeze with credit confirming, got the credit half right for the stated reason: high yield never came near the 310bp that would have killed it and finished at the widest of the move. The Fed call was wrong too. I said the 2-year at 4.69% had drifted too far from a December hike; it closed at 4.51% with the hike at 77%.
Verdict: one of three right, and the one that was right is the one still running the book.
Behind the wall this week:
THE BOOK: what closed this week, what survived Thursday, and the level that ends each line.
SECTOR OF THE WEEK: why the exchanges and the card lenders sit on opposite sides of the same funding story.
FINANCIALS SLEEVE: the money center I’m keeping against the regional I’m short, and the Citigroup short I’m not adding.
Everything above this line is free and always will be. What’s below is where I put my own capital. $450 a year at marketmusing.com, or the price of one bad lunch a month.
Disclaimer: Opinions are mine alone and may change. It does not constitute an offer to buy or sell or a solicitation of an offer to buy or sell any security, loan or asset or to participate in any trading strategy. It is not intended to form the basis of any investment decision, should not be considered a recommendation, and does not constitute an offer or solicitation with respect to the purchase or sale of any investment, nor is it a confirmation of such terms.
