You Cannot Fool All of the Markets, All of the Time

“You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all the people all the time.” -Abraham Lincoln 

Within the hour we will finally have that explosive candlestick for rates on the 10-Year Note officially in the books, as the third quarter of trading ends today. 

On the updated TNX (Index for rates on the 10-Year) quarterly chart, below, you can see the green, imposing, breakout Q3 candlestick pushing rates to multi-decade highs. 

Inside Market Chess Subscription Services, we have been consistently calling for, and betting on, higher rates for years now.

That conviction has been to a fault at times, as I expected the Nasdaq to get hit by now from the higher rates and for volatility to pick up. However, we know equities have a long history of being the last market to "catch on," so to speak.

But my long-term view always hinged on the long end of the curve eventually revolting against The Fed and federal government. In effect, the bond market vigilantes would make a comeback after nearly half a century in the wilderness, to the point where even the most arrogant power players inside the Beltway would be humbled. It is a process, indeed, of the bond market taking away easy monetary policies and the wild spending in Washington. Recall, for example, that The Fed only controls the overnight or Federal Funds Rates, and not the long end of the curve.

Ultimately, this breakout for the 10-Year has caught several generations of fund managers and analysts on Wall Street by surprise, including tons of veterans who only know Wall Street since the 1980s bull run began. As you can tell, my view is that this is a major sea change and regime which will seem like a totally different beast for anyone who only knows the Reagan bull market and beyond. 

With the breakout underway and clearly intact, alongside the lack of panic and fear in the bond market amongst bond bulls, I still see the pain trade much higher for rates. A move to 6% (to 60 on the chart below) is much more viable than most would believe at this point, especially in a much shorter-term timeframe. Again, the Nasdaq is asleep at the switch as far as pricing in these risks, which raises the left tail/fat tail event risk even higher.