The Morning Line

The massive terrorist attack by Hamas on Israel over the weekend will unsettle the geopolitical world for the foreseeable future. The economic implications are potentially too grave to be treated merely as a tradeable event; investors should instead be thinking about safeguarding capital. Will the price of crude spike to $117 or higher, as predicted here last week? A chart supporting that conclusion appears in retrospect to have been prescient.  However, I doubt the $117 price will be hit until the global supply of oil has actually been curtailed. Hezbollah's entry into the war could cause this to happen overnight. They've been firing rockets at strategic targets in Israel, a provocation that threatens to unleash a retaliatory response frightening to imagine.  Electromagnetic pulse (EMP), for one. The use of a pulse weapon would amount to Hiroshima without the body count, forever altering the way war is conducted. Cities, regions or even nations could go dark instantly, transported back to the Stone Age when everything powered by electricity ceases to work. Whatever happens, the possibilities are too complex, and potentially too disastrous, for investors to handicap. These all-too-interesting times have become still more interesting, leaving all of us at the mercy of the news as the holiday season approaches.

Price action last week in the charts of three bellwethers suggests that this year's 'October surprise' could arrive right on schedule and that it could be a doozy.  The first shows the dollar's so-far shallow correction off a minor Hidden Pivot rally target. This portends yet more strength, threatening to turn Powell's tightening regime into a globally ruinous debt deflation. Second, rates on the 30-Year Bond topped at 4.81%, precisely matching the prediction featured here last week. And now let me add this detail: If yields pop above 4.81%, they should be presumed headed for exactly 4.98%, a top that I regard as very unlikely to be surpassed. Interest rates presumably would fall thereafter -- for a long, long time -- discounting a weakening economy bound for, if not depression, then at least a very severe and prolonged recession. Don't expect falling rates to stimulate economic growth, since asset values will be falling even more steeply. That means rates will actually be rising in real terms, as occurred during the nearly fatal debt deflation of 2007-08.   One of the updated charts packed quite a surprise: NYMEX Crude. We've been quite bullish on oil since early this year, when quotes were lingering around $72/barrel. However, the rally turned unusually steep in May and hit a high last week at 95.03 that fell a few dollars shy of a $98 target we'd been using as a minimum upside objective. This prompted a look at a longer-term chart. Lo, the weekly bars imply an impending run-up to $117 a barrel. Moreover, last week's decisive move through the pattern's Hidden Pivot midpoint at 90.67 implies that a surge to $117 is no worse than an even-money bet. Could this mean that a long-anticipated war in the Middle East is about to break about?

The bullish gap on the chart holds ominous implications for the global economy, since it removes almost all doubt that interest rates on U.S. Treasury Bonds are headed significantly higher. The rally looks nearly certain to reach 4.81%, the target of the pattern shown.  The red line through which the gap occurred last Thursday is a 'Hidden Pivot midpoint resistance,' and it is where we look to get a firm handle on trend strength. When it is penetrated as easily and decisively as it was last week, this almost invariably results in a continuation of the trend to the target, in this case a 48.14 level that corresponds to a 4.81% rate. A tradeable corollary is that a swoon to the green line would be merely corrective, and that bond bears, far from being scared out of their positions, could double down on their bets with confidence.  The equivalent rate for the Ten-Year Note would be 4.68%. Historical Downturn You should jot those numbers down, since they will allow you to tune out the din of pundits and economists arguing about how high rates are likely to go. With the economies of China and Europe already sinking into recession, and the U.S. about to do so when the inevitable bear market in stocks gets rolling, another turn of the interest-rate screw threatens a downturn that will be one for the history books.  It will feature above all a strengthening dollar that will not only catch economist and policymakers by surprise, but also crush everyone who owes dollars. A ruinous debt deflation is coming, and it will make us nostalgic for the pesky consumer inflation that has ruled our economic lives since the wildly reckless credit-stimulus of the Covid years.

[Last week's commentary on the gathering economic storm elicited a light-hearted reminiscence from our friend Richard Charles of Alpine Capital.  You'll find his recollection of some notable deflationists enlightening, and there's also a new word -- screwflation -- he has coined to describe a phenomenon that has yet to gain traction with eggheads at some of our finer universities. RA] Must have been something stimulating in that New Jersey aquifer we drank from, before saltwater and tritium from the Salem County nuclear plant made Bourbon the safer beverage. Since the Great Depression, an ever-inflating Fed made houses the number one wealth engine for the middle-class American Dream. Our Palo Alto home accidentally saw unbelievable nominal appreciation exceeding the original price tenfold -- or a hundredfold if you run the numbers with 10 % down on an adjustable-rate, fixed-payment, negative amortization at sixteen percent that everyone, especially the mortgage broker and realtor, told us was cuckoo. Merrill’s all-American asset manager back then in the mid-1980s, pipe-smoker Stanley Salvigsen, was a deflationist who actually shorted his home and made money. He was invited to leave Merrill for Comstock Partners before he died at 53 of a heart attack in the mid-90s. His offense: staying too short for too long. Bucking Merrill Lynch Gary Schilling had a similar experience in the mid-70s with Standard Oil,  the San Francisco Fed, Merrill Lynch and White Weld. His complaint letter to Don Regan, Merrill's CEO and former U.S. Treasurer, attested that Schilling's disinflationary views did not comport with Merrill Lynch's bullishness on America. This is despite the fact that his unconventional ideas made money for the investment firms' clients. Back in Silicon Stanford Valley, the biggest bond bull-market in history bailed us out with rates that ultimately fell almost to 2%, freeing yours truly for a

Can the Wall Street Journal's headline writers save America's juiced-up economy from going bust?  They are certainly trying. Check out the lede atop Friday's editions: The Fall in Home Prices May Already Be Over.  Fancy that!  With mortgage rates headed toward 8%, many readers must have done a double-take when they scanned this seeming howler. Your editor wondered why the copy desk had not punctuated the headline with three or four exclamation points, lest the story fail to goad potential buyers who have been sitting on the sidelines into action. However, the article itself, written by one Nicole Friedman, had a somewhat more nuanced take on the housing market. Although she gave Realtors an opportunity to do some boisterous cheerleading for the industry, she did not allow them to claim that residential sales are strengthening. For how could they be? It turns out that prices are no longer falling because transactions have all but dried up. Few homeowners are listing these days because the price of any home or apartment they might move into would be just as pumped up. Although there are probably millions of Baby Boomers who would love to downsize in order to free up more money for retirement travel and other pleasures, it seems increasingly unlikely there will ever be buyers for their homes at today's insane prices. Millennials and Gen-xers are already so tapped out that they can't even pay back student loans, let alone buy their parents' 4,000-square-foot McMansions in the suburbs, or keep Social Security and Medicare solvent. Our kids will eventually inherit the homes, even if they are unable to afford upkeep and taxes. It is predictable that lawns will go to seed and that the amenities of suburban towns will wither for lack of property-tax revenues. What AAPL Is Saying Here's

I let it all hang out in the interview I did Friday with USAWatchdog's Greg Hunter. Do I actually believe the U.S. economy is headed into a condition of barter? Yes, I do.  It will be that bad. And global. Americans in particular will face a long period of severe hardship when these boom times end. That's because the USA is where credit excesses and wealth-effect hubris have been at their most visible and disconcerting. Presumably, the cataclysm required to wreck the banking system would occur in the late stages of a bear market that has always been inevitable. I don't mean to imply that the damage would necessarily take a long time to complete, however. Indeed, it is likely to happen with shocking speed. Imagine it as the collapse of a financial black hole, powered by the implosion of more than $2 quadrillion of  derivatives backed chiefly by gaseous vapor. When the initial rumbling is felt, portfolio managers, including sovereign funds and the biggest investment firms in the world, will urge investors to keep their cool. Some will, at least for a short while. But mounting waves of redemptions will eventually force BlackRock, Fidelity, State Street et al. to dump the shares of clients desperate to raise cash in order to meet margin calls or worse. What Is Your 'Plan C'? Who will the buyers be in this avalanche?  That is a question for which there can be no comforting answer. In the meantime, we should be thinking through what my colleague Charles Hugh Smith refers to as 'Plan C'.  This doesn't mean hunkering down in suburban cul-de-sacs, hoping for the best. Rather, it might require moving to a town or locale with sufficient human and material resources to reduce dependency on distant providers of food, water and energy.

A handful of tech moguls already control the global flow of information, but their influence over our lives will only expand and deepen if Congress doesn't do something soon to pry their greedy hands from the ultimate fruits of AI development. I say this while recognizing the irony of casting our elected representatives as the good guys here. Many if not most of them are in cahoots with the industries they purport to regulate, and some on Capitol Hill could rightly be described as allies of giant companies run by power-hungry men who bend too easily toward the enticements of fascism. So what have the evil titans of the digital world been up to?  For one, they have gone all-out to convince us they're gung-ho for open-source development of AI code. Who could object to that, especially since they've seeded the project with enough money to ensure the kind of breakthroughs that will pay off financially. And for two, they've rolled out industrial-strength AI platforms online that can be downloaded and used by nearly anyone. Many subscribers are paying up for bells and whistles that can help their businesses operate more efficiently. Law firms, for instance, have been axing paralegals in droves, since it doesn't require a human brain to churn out boilerplate that no one reads. And students either too lazy or too stupid to think for themselves, let alone think critically, have gained more time to do the things they really enjoy and care about, such as hook up on Tinder and play beer pong. Such a gift! There Are Strings But there are strings attached, and this is where motives and possible outcomes get sticky. The strictures that a handful of AI poobahs have placed on the creators of chat bots are more than a little troubling.

[The following was sent out to clients in late July by my friend Doug Behnfield, a wealth manager and senior vice president at Morgan Stanley Wealth Management in Boulder, CO. Long-time followers of Rick's Picks will be familiar with Doug's work, since his thoughts have appeared here many times. I have always considered him not only one of the smartest investors I know, but also one of the smartest guys. I am grateful to him for allowing me to share the insightful report with you.  RA] On July 12, the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) for the 12 months ending in June came in at 3% inflation. This annualized inflation rate represents a drop from 9.1% in June of last year, which was the peak in this cycle. The interest rate on long-term bonds correlates very closely with CPI, so it is unusual that bond yields have not followed inflation down in a meaningful way so far. [Editor's note: At this point the report displayed a chart showing bond yields increasing into late October and then going sideways. However, just after the report went out in late July, yields exploded upward in a manner unforeseen herein. Here is a chart that shows this. If it has changed Doug's outloook, we will share his thoughts with you at a later date.]  One contributing factor to this sideways action is that long-term bond yields also correlate very closely with the Fed’s interest rate policy and the Fed has continually raised the Fed Funds (overnight) Rate since inflation peaked last summer. In June 2022, the Fed was still at 1.5% on Fed Funds, but since then they have hiked rates by 4%. The Fed has also hiked rates by 2.25% since October, even as long bond rates

Is Mr. Market about to deliver the coup de grace to bond bulls? It certainly appears that way.  They've been getting schmeissed regularly since a frightening few days back in March 2020.  At the time, investors were struggling to decide how covid would affect their financial lives. The wild gyrations near the top, followed by the subsequent collapse of Treasurys as yield soared, attests to the fact that they all got it wrong -- and so did everyone else who subsequently jumped in. In technical terms, TLT, an ETF proxy for T-Bonds maturing in 20+ years, is on thin ice. It tested a key support two weeks ago when it came down to the red line, a 'midpoint Hidden Pivot support' that must hold if TLT is to avoid a further fall to the 80.84 target. Although the line has yet to be penetrated decisively, it looks to be giving way. A two-day close beneath it would likely send TLT down to at least 88.05, a last-ditch support. Beneath it lies an abyss that portends a rise in long-term rates to at least 5.5%  (as noted here earlier) from a current 4.27%. If there is a bright side to this scenario, it lies in the implication that an all-but-certain debt deflation much more destructive than any consumer inflation we are likely to experience is going to be yet a while longer in coming.