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Dear Old Friend,
When Tim Melvin calls me before 8 AM, it's either one of two things:
The first is an emergency. The second is "a market emergency."
The latter type of emergency "emerged" from Jamie Dimon's latest statement and the current alarms around interest rates and the debt ceiling.
It wasn't long ago that an off-handed mention of 6% interest rates could get your mouth taped shut on CNBC.
But yesterday, things changed... JPMorgan Chase & Co. (JPM) CEO Jamie Dimon said that markets should brace for 6% or even 7% interest rates.
The longest-tenured CEO of the Too Big to Fail banks now warns that the banking system could take a big hit from commercial real estate loans. (That said, Dimon's chuckling along the way while JPMorgan now projects a $10 billion revenue increase from its previous annual forecasts in April... as it's benefited from the fire sale of SVB Financial... and other banking woes to come).
The Fed funds rate now sits at 5% - and some are still betting on cuts at some point this year instead of hikes. This rate cycle has been the fastest one in modern American financial history.
At 6% or even 7%, we'd get another dose of hard economic reality... and a jolt to both the equity and high-yield markets.
Not only would that force a dramatic re-valuation of the tech sector and deliver a body blow to what's already an ugly world for venture capital and hurdle rates, but it would create even more havoc for a nation facing spiraling levels of debt.
Goldman Sachs (GS) projects the Treasury Department will issue upwards of $700 billion once we hike the debt ceiling. With roughly $2.2 trillion sitting in money market accounts at 5.2% - the Treasury Department will need to make a rather attractive deal for anyone to pull that money.
Are we talking 5.5% to 6%?
The appetite appears at the front end of the bond curve. And does anyone want to own U.S. debt in 15 years when the national debt is projected to be somewhere in the $50 trillion range?
Maybe they get bidders. Maybe they don't.
But here's the thing about a government trying to refill its Treasury General Account in the direction of $1 trillion from practically zero on debt ceiling X date in the next few weeks.
If the U.S. creates another $700 billion in debt, it's going to hurt the budget. New and existing Treasury debt comes due - and the government isn't going to hand all that money back to the holders...
They'll need to refinance. And when your Fed funds rate might be exploding higher - in line with Dimon's projections - then they're going to be paying much more for that capital.
They need that interest rate lower at the front end. So, what is the only cure that can allow the U.S. to refinance all this wonderful debt at lower levels on the bond curve?
The only way to produce that: A recession, and likely a deep one.
Now, with rates moving higher - we start to think again about gray or black Swans that could pummel the markets. There are plenty of things that could still break. Tim and I discussed them at length earlier today, signaling a need for both of us to come on air soon and discuss them.
The mainstream chatter centers on commercial real estate (CRE), but we continue to watch for larger jitters in high-yield debt, private equity, venture capital, and foreign insurance companies (especially in Japan) that might be taking big hits from rising U.S. bond prices. No matter where the next crisis occurs, we'll be ready to react and find opportunities in Flashpoint Trader.
The cost of capital is heading higher across the economy - and that will soon produce some absolute bargains for longer-term investors who are seeking 7% or higher on (get this!) investment-grade paper. This could be shaping up into one of the biggest no-brainer, inflation-beating buying opportunities of the past 20 years.
Today's Momentum Reading
WORLD'S BIGGEST INDICATORS
Recap: The World's Biggest Indicator (Momentum) is Green
Energy stocks are rocketing higher... and so are cannabis ones.
Long Shot Trade
If you bought the Direxion Daily S&P Biotech Bull 3X Shares (LABU) May 26, 2023 $7.50 call yesterday, take some gains.
Now, let's try something else. Buy-to-open GrowGeneration Corp. (GRWG) June 9, 2023 $4.50 calls at $0.10.
Put Some Money on the Permian
On April 26, I predicted an imminent land grab in the $7.3 trillion oil and gas sector.
I stressed that smart investors were putting their money on the Permian Basin in West Texas - owing to the flurry of M&A activity that was brewing.
And the lucrative takeovers that have already hit since I made my prediction have been mind-blowing. Just take a look at some of the companies involved...
U.S. Energy Development...
Plus, today - the big one - a $7.6 billion deal between Chevron and PDC Energy.
The best thing is: We're just getting started.
For investors, these takeover deals can be massively rewarding. Will it happen again? I can't guarantee anything. But I believe so... Which is why you need to find out the names of the five firms that could be bought out next.
Because the next deal could hit as early as this week. And if you miss it, you'll be too late.
Improving Sectors: Energy, Technology, Communication
Weakening Sectors: Defensives
Watchlist: TIO, GM, ORCC, ALB, GRWG, OXY, APA
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.