February 22, 2017, 4:30pm EST                                                                 Invest Alongside Billionaires For $297/Qtr

We had new record highs again in the Dow today.  But remember, yesterday we talked about this dynamic where stocks, commodities and the dollar were strong. But a missing piece in the growing optimism about growth has been yields.

Clearly the 10 year at 2.40ish is far different than the pre-election levels of 1.75%-1.80%.  But the extension was quick and has since been a non-participant in the full-on optimism vote given across other key markets.

Why?  While stocks can get ahead of better growth, yields can’t in this environment.  Higher stocks can actually feed higher growth.  Higher yields, on the other hand, can kill it.

But there’s something else at work here.  As we know Japan’s policy to target the their 10 year at zero provides an anchor to our interest rates, as the BOJ is in unlimited QE mode.  Some of that freshly produced liquidity, and the money displaced by their bond buying, undoubtedly finds a happier home in U.S. Treasuries (with a rising dollar, and a 2.4% yield).  That caps yields.

But in large part, the quiet drag on U.S. yields has also come from the rising risks in Europe.  The election cycle in Europe continues to threaten a populist Trump-like movement, which is very negative for the European Union and for the survival of the single currency (the euro).  That creates capital flight, which has been contributing to dollar strength and flows into the parking place of U.S. Treasuries (which pressures yields, which is keeping mortgage and other consumer rates in check).

These flows are also showing up clearly in the safest bond market in Europe:  the German bunds.  The 2-year German bund hit an all-time record LOW, today of -91 basis points.  Yes, while the U.S. mindset is adjusting for the idea of a 3%-4% growth era, German yields are reflecting crisis and money is plowing into the safest parking place in Europe.  The spread between German and French bonds are reflecting the mid-2012 levels when Italy and Spain where on the brink of insolvency — only to be saved by a bold threat/backstop from the European Central Bank.

We talked last week about the prospects for higher gold and lower yields as questions arise about the execution of (or speed of execution) Trump’s growth policies, some of the inflation optimism that has been priced in, may begin to soften. That would also lead to a breather for the stock market.  I suspect we will begin to see the coming elections in Europe also contribute to some de-risking for the next couple of months.  We already have a good earnings season and some solid economic data and optimism about the policy path priced in.  May be time for a dip.  But as I’ve said, it would create opportunities– to buy any dip in stocks, and sell any rally in bonds.

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