Chicken Little Sells Stocks

Chicken Little is no longer not bearish on US stocks. For the last year, Chicken Little has been bullish. See "Chicken Little Respects Dow 30,000" After a 16% rise in the Dow since that bullish post, I have started a bear market operation. 

Bear Market operations have commenced

Was Dow 35,625 an historic top in the Dow Jones Industrial Average? Probably not, but possibly. Chicken Little has a short position in US stocks. The position will close if the Dow makes a new all-time high. The risk in the trade is less than 3% from today's level of 34,800. 

Why put the short trade on now? The answer is that moves in interest rates are consistent with the long-term pessimistic view of the economy. Additionally, the set up of a big rally toward the old high presents a good risk-reward. Let us recap the big picture thesis then take a look at rates.  

Default looms

We are in a debt crisis. Debt crises end when debtors are no longer able to borrow. The world has not yet cut off the supply of easy money, but such a cutoff could be coming. 

Loose money continues for now

Governments around the world can borrow for better than free. The German 10-year bund pays negative 0.15% per year, thereby guaranteeing a loss to bondholders. US interest rates are positive, but are negative after taking inflation into account.

 

Nominal US 10-year Treasury yield	1.61%
US inflation (CPI, 12 months trailing)	5.30%
Real US 10-year Treasury yield	-3.69%

The print and spend party can't end until the bond market chokes off the profligacy. The end could happen, and when it does happen, it may come with surprising speed.

Long Term Treasuries have lost 20%

The US 30 year bond has lost over 20% of its value since early 2020.  Furthermore, the long-term bond price is approaching a new low since last year's high.  An important level on the TLT is $130. If the bond prices continue to decline, investors may flee. Negative real yields and accelerating losses may become painful. 

Still, why sell stocks now? Two reasons. First, when markets move, they tend to move very quickly. It is tough to sell something that you could have sold a few days earlier for much more. Second, the risk-reward seems favorable. Chicken Little will cover the short if the Dow makes a new high. The loss would be under 3%. 

Dow: 34,813

10-year US Treasury: 1.61%

Gold: $1,758 US/oz.

Bitcoin: $55,657

Ether: $3,639