The Morning Line

[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.

Last week's commentary said the first big correction of 2023 had a ways to go, and that is still the case. If there were any doubts about this, Apple's swan dive Thursday on punk Q2 earnings released after the close should have dispelled them. The most valuable stock in the world fell by nearly 5%, shrinking the global 'wealth effect' by around $144 billion. This is unlikely to weigh on yacht sales as summer heads into the final turn, but it could impact them eventually if the stock, and few others favored by portfolio managers, fall to the worst-case targets on some of my charts. Goggle Porn It was word of a third straight quarter of falling revenues that upset investors, and innovation alone is unlikely to arrest the decline. That's because without Steve Jobs, the company has been unable to innovate its way out of a Glad bag. iPhone improvements have come mainly in the form of improved cameras and better batteries, but the wow factor has been lacking. The company took a stab at it with the introduction of a pair of $3500 virtual reality goggles a few weeks ago, and although the technology was impressive, consumers still seem to have doubts about whether it's cool to turn on, tune in and drop out with your head in a plastic shell. If and when the Visual Pro goggles are tweaked to deliver a satisfying sexual experience to perhaps three or four of our five senses, that's when sales will take off no matter what the price. In the meantime, AAPL stock will continue to fall, taking the broad averages down with it until its deep-pocketed sponsors sense that sellers are exhausted. Then the gaseous wafting cycle will begin anew as short-covering and gap-up openings circumvent the need for

My 'Chipotle indicator' suggests that CMG, along with other high-fliers and the broad averages, could fall by at least 27% from recent highs before the bull market resumes later this summer. We last visited the burrito vendor's chart in early May, just after a short-squeeze powered by feverish buying speared the red line, a 'midpoint Hidden Pivot' resistance at 1968. This stood to be a formidable impediment, especially since it closely coincided with the structural resistance of a key high at 1958 recorded 19 months earlier. But buyers, mostly bears scrambling to cover bets against the stock that were exploding in their faces, gutted the resistance with ease, managing to hold the stock effortlessly aloft for three months. Last week, however, it dove through the line in a shakeout that was stage-managed just as effectively as the gaseous rally. DaBoyz evidently had decided there was not sufficient buying power to keep the stock moving sideways indefinitely, so they pulled their bids, letting it plummet toward levels where they eventually will be able to accumulate shares once again with a thimble-rigger's confidence. A High-Odds Bet  If the selling should exhaust itself near the green line at $1582, that would trigger what in Hidden Pivot parlance is called a 'mechanical' buy. As longtime subscribers to Rick's Picks could attest, such bets seldom lose when they follow steep, powerful rallies such as the one that occurred in this stock during the peak covid years 2020-21. Ordinarily, we should expect the rally to reach the 'D' target at 2739. Stocks nearly always achieve 'D' when the midpoint pivot, in this case 1968, has gotten shredded on first contact.  Assuming Chipotle eventually hits its mark, the bull market in stocks would have significantly higher to go, since CMG and a handful of other world-beaters would

Last week's commentary predicted that rates on the Ten-Year Note, currently around 3.8%, will hit a minimum 5.5% before inflation lurches into reverse and the U.S. begins a hellish descent into a full-blown debt deflation. The following, insightful response came from our friend Richard Charles at Alpine Capital: Well done, Rick, for highlighting the crux of markets today. On May 19, the Ten-Year Note broke a triple top to new highs and we were off to the races with our mutual 5.5 % target, which broke several boutique banks parking capital in Treasuries. Long-term T-Bonds now target an even more ferocious 6.75%. Having conjured some $14 Trillion in M1 deposits since 2020 to fight debt default deflation of $294 Trillion in unfunded US debts and liabilities, it's no surprise there are bond vigilantes who don’t quit but get less vocal. Not everyone kens the contracting market signal of M2 savings losing over a trillion in the past year to monetary heaven (or is it hell?) Any wonder, then, that BRICS sell US Treasuries and plan gold-backed currencies while Western banks salivate for central bank digital control fiat with endless war profits on passive populations? Trafficking Are the millions of military age men and trafficked children finally on the border political-radar with [the smash-hit movie] Sound of Freedom? Are political candidates really ready to bomb the cartels? Martin Armstrong blames neocons running Uncle Joe and thinks markets may not resolve until 2032 after war demands drive Jim Grant’s predicted decades-long bear market in bonds. We are not so sure. In any event, energy, food and precious metals remain undervalued assets, while commercial/residential real estate and their mortgages (a.k.a. death pledges) decline and default with little media awareness yet. The Old Testament tells us to retire debts every sabbatical. By that calendar