CARNAGE IN THE BOND MARKET AND THE DISCONNECT IN THE STOCK MARKET

A lot has happened in recent weeks. But lets tackle one issue at a time.

Saudi Arabia and China are dumping US Treasuries, thereby causing the yield to rise. Dumping US Treasuries by billions (USD375B in the last 12 months to be exact) is akin to dumping of USD. By right, it should cause a fall in the value of USD. However, the increase in yield is prompting many to speculate that the Fed will raise interest rates aggressively, which boosted the value USD.

Herein lies the disconnect.

1) A strong USD will hurt US multi-nationals as Emerging Markets currencies have collapsed vs the USD. This could cause a fall in earnings in Q4.

2) Similarly, US exports could hurt as a stronger USD will make US made goods more expensive. So export based companies could see their earnings being hit in Q4.

Yet, the Trump euphoria continues unabated as the various indices made record highs. If 1) and 2) is likely to happen, with new record highs being made, this means that the PE ratio could explode higher, pushing the risk to reward ratio higher in the process.

3) High interest rates means that mortgage rates will spike. In fact, right now the US mortgage rate has spiked above 4% which is a 50 basis point move. Meanwhile property price in Miami, San Francisco and NY are under pressure. Foreclosures in the month of October rose 27% vs September. So with higher mortgage rates, expect more foreclosures culminating in a Housing Crash 2.0. Yet investors choose to ignore this underlying problem.

4) While Trump's fiscal stimulus looks good on paper, how are they going to be finance remains a BIG question. On this question, this is what his chief strategist, Bannon has to say:

"The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks.”

Is he inferring that Trump would squeeze the Fed for more QE?

What about the US debt? Higher interest rates would mean higher debt service. So how will the budget conservative House react to the fiscal stimulus? Will it be trimmed down? Watered down? Full support?

As it is, the market has got ahead of itself which make the coming weeks and months dangerous.

Two events to look out for are the early December voting by the Italians and Austrians. According to the polls, the right-wing and Leave EU parties in both Italy and Austria are forging ahead.

In France Le Pen who is anti EU is also ahead of the polls.

Rest assured, there will be a lot of volatility and with the EU facing a banking crisis, any major disruption in the EU could snowball into a major crisis due to the interlinked financial derivatives.

Meanwhile, the Fed refused to commit a rate hike December even as the market priced in a 100% chance of a rate hike. Yellen kept on repeating that the case to raise interest rate is high and likely to be soon. As Peter Schiff, a well known economist said, "Why say soon? Why not just say in December?"

The reason as he reasoned out, even the Fed is not 100% sure.