The Fed Just Lost Control — Massive Bond Short Squeeze Triggered

A massive bond short squeeze is triggering and I know what you're thinking, Steve how can this be possible, didn't you see that the Federal Reserve just raised interest rates? What you're suggesting is this could be a massive contrarian signal, because how is it possible that rising interest rates could cause the long bond to rally here? And even though Fed officials are signaling growing support for a series of rate hikes, to the extent that 16 officials projected at least one additional increase this year, But when you look at 17 years of history, this is the 3rd largest short bond position out of all of them, and yes, it's entirely possible that we could see rate hikes from the Fed trigger a massive squeeze here, and I'm going to show you exactly how that can happen because these last two squeezes led to a monster rally. And again, we already know the facts, because when you look at the Federal funds rate in blue against two year treasury yields, we can see that when the Fed is hiking, it means rates go up, but yet something happened yesterday, and this is TLT the long bond ETF, and I want you to see that spike there, that happened right after the FOMC announcement, so what you saw was an initial squeeze before we saw sellers came in, but let's dive into the details because I don't want you to miss out on what could be another monster short squeeze that could have put a ton of money in your pocket. Now Warsh said we removed a dose of a combination so that financial and credit conditions would be more consistent with our ultimate objective that is to deliver price stability, and I want you to understand that Warsh, he's a money supply inflationist, he thinks that things like quantitative easing cost all of this inflation, so in his mind, you've got to hike rates here, because what he's suggesting is when you overlay the consumer price index in red against the funds rate still in blue, what you can see from his view is when you hike rates, that inflation becomes transitory and rolls over, and he can say look throughout history this is the Fed's role is to quash inflation, and he says look at the data here, he claims the productivity growth is strong, and the capital investment is robust, and the job gains have kept pace with the workforce, and the unemployment rate has changed a little, we know the unemployment rate hasn't changed much because people are dropping out of the workforce, but let's take a look at the macro view here, because he's claiming productivity is rising, and what that means is fewer workers are doing more work, and that's not inflationary at all, let's take a look because we've got labor productivity now in blue against the consumer price index in red, and what Warsh is suggesting here is look if productivity rises while inflation it actually comes down, this isn't an effective interest rate policy or anything else, this is just one worker doing more output than he was doing before, and you can see very clearly going into the dot-com bubble productivity rose, and what happened inflation dropped, we can see it around 2003 and again coming out of the financial crisis, again 2012 you see it right before the pandemic, and look at 2022 you see this big surge in productivity and inflation came crashing down, so his notion here that rising productivity is a good thing for the economy, it isn't, it's telling us very clearly that demand is dropping, and when that happens you don't need as many workers, and that means your existing workforce gets suddenly more productive, and here's the evidence because he says look the labor market's okay, but I want you to see very clearly here, when you now overlay continued claims against labor productivity, what do you see? Rising productivity, it accelerates job losses, you can see it again in the dot-com bubble, the financial crisis, again the pandemic very obvious, but look at 2022, we see this big surge in productivity, and what happens continued claims bottom, and they start to increase, and he's saying look productivity is high, is likely to continue to go higher for the labor market, this isn't a good sign, so when you start to see labor markets slow down, you start to see demand drop, what happens to growth and inflation expectations? Well they start to come down, and this is how you start to get the basis of a massive bond short squeeze, because as we go back to that chart of TLT, and we're going to dig into this a whole lot deeper, because again I don't want you to miss out on this, even if you're the biggest bond bear out there, I need you to see this, because over the last couple months what happened? There was a big drop in the long bond, interest rates went up, everybody was piling in and shorting here, not to mention we saw the Bank of Japan selling treasuries to buy back the yen, now from the moment that has stopped, I think it's going to go away, but what we're setting up for is a huge rally, potentially breaking all the way up here around $90 on TLT, and this could be a big opportunity, and if you want to know when it's time to buy the long bond, so you can profit on this massive short squeeze, well it's time to sign up for my CTA Timer Pro report, where we trade against machine positioning each and every day, in fact recently we nailed a call on GDX, that trade closed out for over a 34% gain, and we're looking at something big on the long bond here, now all you need to do is grab that link in the description below for CTA Timer Pro, use the coupon code for your free 30-day trial, because I want you to be in on this trade, and I want you to make a ton of money, because what did we see again after the FOMC mean, is treasuries gain as growing confidence in Washcom's market, so how can this be possible, how can you get higher interest rates from the Fed leading to lower interest rates across the curve, well keep in mind, if you start to squeeze consumers here even more, if you raise interest rates, how is this going to affect them, think about revolving credit, like credit cards, well we know banks are sensitive to this, they're going to even more, and as it squeezes consumer walls, means less spending in the real economy, so you can see kind of how this backflows a bit, but let's talk about the bond market specifically here, and the squeeze, because when you take a look at labor productivity, and we overlay to your treasurals now in red, I want you to see that typically, not always, but typically rising productivity leads to lower interest rates, again you think about this from a growth and inflation expectations, you don't get growth when fewer workers are putting out more output, you get growth when you have a lot of workers putting out a ton of output, so you can see this throughout the cycles that rising productivity tends to lead to lower interest rates, so in this case if Wash is right and productivity is about to rise, that means of course the labor market is going to get even weaker, and in that case you're going to see interest rates go down, and that's why we're likely now facing a massive short squeeze, because bond shorts, they're sitting at an extreme, we're talking the third biggest short position in 17 years, and a hike, even the experts are saying look it could trigger a rally here, because there's another factor I want you to understand, that big drop in bond prices, it was because the market believed in Wash, they believed that he was keeping financial conditions too loose, so if he tightens them up, and inflation drops, what happens to interest rates, well they go down, so the market would say look we want you to hike rates here, in fact we want you to continue to do it, of course we know going into oil shocks, this is a huge massive mistake, but let's talk about the positioning here, because the positioning backdrop makes the setup more asymmetric, in fact Deutsche Bank's composite bond position measures around the fifth percentile of its historic distribution, close to the most bearish end of the range, and let's go back to the period right before the pandemic, massive short position, now we're not going to look at the price chart here, because we know what happened, the pandemic hit, interest rates collapsed, bond prices went screaming higher, but let's move forward to the next period, we can see right around 22 going into 2023 what happens, you get this big build up in bond shorts, in fact we're almost there now, and keep in mind we're looking at aggregate bonds, we're looking at sulfur futures, bond flows, we're looking at risk parity, cta bonds, we're looking at everybody in the pool here that is short the bond market, but let's go back to what happens in 2023, and let's take a look at that price chart of TLT, because what happens, there was massive selling, everybody thought interest rates are going higher, just like we're seeing today, and what happened, TLT gets down to somewhere right around mid 82 dollars in price, and what happens, the squeeze kicks in, the bottom starts to hold, it gaps up, and it takes off running all the way up to right around 100, and that rally, it only lasted a couple of months, but that squeeze put a ton of money in the pockets of people who are complete contrarians, and say look, I see the opportunity here, I see when you get big short positions, you get big price rallies, now who's going to kick all this stuff, who could be the big buyer here, well it's the machines, and let me show you, because we talk about machine positioning all the time, and a reversal lower in yields could quickly turn dynamic as momentum chasers are forced to cover, this is a one-way convexity, and it's really big, because keep in mind, machines don't wait around a lot of professional traders or retail investors, they'll wait and get squeezed for a while, machines, they don't like that at all, now let's take a look at 10-year position here, then we'll look at the 30 here, and what we see is conditional flows, except an up small position, we're seeing buying across the board, but you notice this green line that goes straight vertical, in an up big move of bond prices, what you see is a huge short covering behind the machines on the 10-year, and of course we know what's going to happen if they start driving prices up, that means everybody's going to follow, now let's go out to the long bond, conditional flows change in a flat up small, down small, or down big, you've got buying across the board on the 30-year, but look what happens again in an up big move of bond prices, it's going vertical, and again these are opportunities you don't often see, so from a portfolio perspective you should be thinking, or wait a minute, should I be looking at the bond allocation of my model and start building up in treasuries, you bet, you want to be looking at the intermediate to the long of the curve, from a trade you're just waiting for the green light here, because let's talk about the counter argument, let's say what if this is completely wrong and these shorts get bigger, well Deutsche Bank's historical work shows that the hiking cycle can remain structurally bearish for duration, while the first hike still produces a tactical bond rally, now many people are thinking hey this is just a one of many, but reality is we already know what happens during energy shocks, particularly when consumers are not seeing their pay increase, the labor market's weakening, we know it doesn't last, we know there's real demand destruction here, now what I think, I think we get one hike and then we're going to get a series of cuts, because the thesis would also weaken if the Fed explicitly endorsed a longer hiking cycle, or if the energy shock intensified materially, well here's the thing, and we know there's a strong correlation between energy and inflation, in fact we'll link on the chart here, because I want you to understand that even if energy prices go higher, it just squeezes consumers even more, now let's take a look, we've got the consumer price index still in red, now overlaid against U.S. regular formations gas prices, that in blue, and we can see the strong link here that as gas prices go up, inflation rises, this isn't a money printing thing, this is just gasoline, of course we know the same relationship with producer prices in diesel, but keep in mind, as prices go up, what do you see in these red boxes, that eventually starts collapsing, and that's the risk here, if we see gas prices rising, could consumer prices increase, yeah absolutely they can, but we already know consumers can't afford it, and that's why we see the link between the 10-year treasury yields and oil prices, it's been fairly consistent here, but we're starting to see an inflection point, where higher energy prices means growth and inflation expectations are going to start to come down, now let's dive into the charts here, because I want to look at what's going on with the long bond, I want to show you the markets and the dollar here, let's start out with TLT, and let's zoom right in, this is the 10-day chart, and I want you to see this red line going across the bottom of your screen, this is a 10-day volume profile, where most of the shares have been traded, so I want you to see over the last 10 days, there's been a lot of buyers coming in here, and the evidence, well take a look at the volume, you can see it's spiking above normal, and now all of a sudden price is starting to rally off of it, now let's talk about the headwinds here, this is a 90-day chart, now this is really where we see the long bond needing to break through to validate a major short squeeze, but you can already see the initial stages here, so as we get up into this level here, right around 82.25, if the CTAs start kicking in from their short and cover, well all of a sudden now we're talking about a massive breakout potential, now where could this go, well let's zoom out to the one-year chart, you've got the one-year volume profile sitting around 87.17, this would be the first target here, breaking through that 200-day moving average, and I think if you continue to get people squeezed, because keep in mind you go back on the chart, and you can see all the way back from April, everybody's been shorting every move higher in the long bond, we can potentially break out upward, maybe even in the 90s, which would make for a very impressive, very rapid trade, a big fast way to make money on the long bond on a completely contrarian view, but let's talk about Japan here for a minute, because we can't talk about the long bond without excluding the biggest seller recently, and that was of course the Bank of Japan, but what were they doing, they were buying Yen, now the problem here is we could see a dollar rally here, and that would lead to a weaker Yen, so we're going to be fixated on what happens with the dollar here, but if the cent gets his way, we already know that Japan is going to be hiking rates instead of selling treasury, so that's the key here, we're going to be watching the Bank of Japan's move very closely, but how does this all come back to the broad market here, well let's talk about the S&P 500, because in the past seven tightening cycles, Goldman Sachs knows that the S&P usually struggles at the start, so again the view here is we're at the beginning of something that the Fed is going to continue to do, now I don't think that's the case, but what they're noting here is it falls an average of two percent over the first three months, and again that's no big deal, that that's what we call a buying opportunity, because if you believe history, well what suggests is the Fed's going to hike, and then next thing you know the market's going to take off, and of course why would we see that throughout history, because hiking cycles come with economic expansions, not a weakening labor market, so let's take a look at triple Q's here, this is again the Nasdaq 100 ETF, and I've been kind of structurally bearish here thinking it's going to get to the bottom of this range, but every time I think it's going to happen, it pops right back above its six-month volume profile, setting up for again a potential move to the top of the range before it breaks down, or maybe we get a breakdown all the way down to the April 1st levels, now I think if that happens, it's setting up for again a monster move in the stock market as the Fed eventually comes back and cuts, of course my shot calling on the range there is pretty tough, because again every time I try to pick a direction just goes the other way the next day, but let's talk about gold here, because Goldman Sachs, Tony Kim expects a chopping near-term path for gold, that Fed hike, higher energy prices, and yields remain headwinds, but he claims they're all priced in, but a stronger dollar is not constructive for gold, particularly if people believe there's more hikes coming, so let's take a look at GDX here, this is a one-year chart, and this is what I'm watching for, if GDX, and this is looking like a topping pattern to me, breaks down here, and comes all the way down to its one-year volume profile, even just gets close to it, I think this is setting up a massive move, and why is that? Because I think the Fed from this point isn't going to continue hiking, I think they're going to hike, and then turn around and cut, so now that you start to understand the big picture here, how can a rate hike actually lead to a bond rally? It's very simple, when you crush inflation, at least that's the Fed's goal here, well next thing you know, inflation expectations drop, right along with growth expectations, and next thing you know, you trigger a massive bond rally, and a huge squirt squeeze. And with that, I'm Steve Van Meter, thanks for watching, thanks for being a fan, bye now.