These Two Things Don’t Go Together

John Rubino, John Rubino’s Substack

The election is over, and the result is pretty close to a best-case scenario. The victory margin is big enough to head off the expected civil unrest, giving us a more-or-less peaceful transfer of power. And if Trump and his team keep their promises, they’ll quickly address the existential threats of global war and mass illegal immigration, while protecting free speech.

There is, in short, reason for optimism — or at least relief — on several fronts.

Now for the bad news. This morning the financial markets responded to the election in two completely incompatible ways. First, traders bid up stocks:

Dow soars 1,300 points to a record, Russell 2000 jumps 4% as Trump defeats Harris: Live updates

(CNBC) – Former US President and Republican presidential candidate Donald Trump speaks during an election night event at the West Palm Beach Convention Center in West Palm Beach, Florida, on November 6, 2024. Republican former president Donald Trump closed in on a new term in the White House early November 6, 2024, just needing a handful of electoral votes to defeat Democratic Vice President Kamala Harris.

Stocks rallied sharply on Wednesday, with major benchmarks hitting record highs, as Donald Trump won the 2024 presidential election.

The Dow Jones Industrial Average surged 1,319 points to a record high, or around 3%. The last time the blue-chip Dow jumped more than 1,000 points in a single day was in November 2022. The S&P 500 also hit an all-time high, popping 2.1%. The Nasdaq Composite climbed 2.4% to a record of its own.

Investments seen as beneficiaries under a Trump presidency erupted as the former president appeared set to claim victory. Tesla, whose CEO Elon Musk is a prominent backer of Trump, saw shares surge 13%. Bank shares got a boost with JPMorgan Chase climbing 10% and Wells Fargo jumping 13%.

The small cap benchmark Russell 2000 surged 4.7%. Small companies, which are more domestic-oriented and cyclical, are believed to enjoy outsized benefits from Trump’s tax cuts and protectionist policies.

“For now, investor sentiment is pro-growth, pro-deregulation, and pro-markets, as seen in the overnight market action,” David Bahnsen, chief investment officer at The Bahnsen Group. “There is also an assumption that M&A activity will pickup and that more tax cuts are coming or the existing ones will be extended. This creates a strong backdrop for stocks.”

At the same time, interest rates spiked:

Longer-term Treasury Yields & Mortgage Rates Explode, Yield Curve Un-Inverts Further as Bond Market Gets Spooked

Going to further crush demand for existing homes. Bondholders feel the pain.

(Wolf Street) – Longer-term Treasury yields spiked this morning, on top of the surge since the September rate cut. Spiking yields means plunging prices, and it has been a bloodbath for bondholders.

The 10-year Treasury yield spiked by 20 basis points this morning, to 4.46% at the moment, the highest since June 10. Since the Fed’s September 18 rate cut, the 10-year yield has shot up by 81 basis points. 5% here we come?

Mortgage rates too. They roughly parallel the 10-year yield, and they spiked today 7.13%, according to the daily measure from Mortgage News Daily.

Mortgage applications through the latest reporting week, which doesn’t capture the last two days, already dropped further from the frozen levels before, pushing down further the demand for existing homes, which is on track to plunge to the lowest levels since 1995 this year.

For the housing industry, and for home sellers, this U-turn was a painful slap in the face. At this pace, the yield curve will enter the normal range soon – but in the opposite way of what the real estate industry had hoped. It had hoped that the Fed would cause short-term yields to plunge to super-low levels in no time, which would drag down longer-term yields, and mortgage rates would follow.

But mortgage rates had already plunged from nearly 8% in November last year to 6.1% by mid-September this year, without any rate cuts, on just a wing and a prayer, thereby pricing in all kinds rate cuts and whatnot. And since the rate cut, much of the wing-and-a-prayer plunge in longer-term yields has reversed, that’s all that has really happened.

The real estate industry was expecting about 5.x% mortgages by about right now, and they were already close in mid-September with 6.1% mortgages, and some were talking about 4.x% mortgages just in time for spring selling season, and today they’re looking at 7.13% mortgages.

Which Trend Wins?

If stocks and interest rates can’t both rise in the long run, which trend is right and which is wrong? This chart contains the probable answer:

We’re so deeply in debt that rising interest rates have become intolerable. So if the Fed doesn’t intervene, the markets will. ~~John Rubino, John Rubino’s Substack

John Rubino, John Rubino’s Substack

There is, in short, reason for optimism — or at least relief — on several fronts.

Now for the bad news. This morning the financial markets responded to the election in two completely incompatible ways. First, traders bid up stocks:

Dow soars 1,300 points to a record, Russell 2000 jumps 4% as Trump defeats Harris: Live updates

Stocks rallied sharply on Wednesday, with major benchmarks hitting record highs, as Donald Trump won the 2024 presidential election.

At the same time, interest rates spiked:

Longer-term Treasury Yields & Mortgage Rates Explode, Yield Curve Un-Inverts Further as Bond Market Gets Spooked

Going to further crush demand for existing homes. Bondholders feel the pain.

Mortgage rates too. They roughly parallel the 10-year yield, and they spiked today 7.13%, according to the daily measure from Mortgage News Daily.

Which Trend Wins?

If stocks and interest rates can’t both rise in the long run, which trend is right and which is wrong? This chart contains the probable answer:

We’re so deeply in debt that rising interest rates have become intolerable. So if the Fed doesn’t intervene, the markets will. ~~John Rubino, John Rubino’s Substack

Real assets in general tend to hold their value during inflationary periods — because they’re not just paper promises. They’re tangible. They’re productive. They’re the raw inputs the economy is actually built on.

One of the most obvious opportunities right now — possibly the most mispriced sector in the entire market — is energy.

The world does not exist without energy. Full stop. People have been fed a ridiculous lie that oil is going to disappear and we’re all going to drive solar-powered EVs and Exxon is going to go out of business.

In the U.S., stablecoin rules remain tangled between crypto exchanges eager for new customers and small banks afraid of losing deposits.

China’s Ant Group is filing trademarks for “Antcoin” while the Party debates whether digital dollars threaten national sovereignty. And in Singapore, StraitsX cofounder Samson Leo frets about regulatory fragmentation: “If every jurisdiction requires us to split reserves across their banking systems, customer protection will diminish.”

Stablecoins today are where email was when businesses still faxed each other printouts of their inbox goes an apt analogy suggested by Bloomberg’s Andy Mukherjee.

The rails are there — the habits aren’t. But the shift is coming. And when it does, it won’t just change how we pay — it’ll change who gets paid.

Anticipating a sluggish labor market, the Fed has cut rates twice this fall.

Unfortunately, you can’t fix a reorganization with cheaper money. AI will eat the easy tasks first, so the pain you see — pink slips — is only half the story. Those jobs will likely never return.

If you’re from New York—or know anyone there—you’ll probably agree: most New Yorkers are fed up with crime, the outrageous cost of living, government incompetence and corruption—and, yes, the rats.

But the fact that a hard-core socialist like Mamdani is their favorite pick to solve those problems tells you that most voters have no idea why any of it is happening.