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Daily Missive

These Two Things Don’t Go Together 

Loading ...John Rubino

November 7, 2024 • 3 minute, 55 second read


BondsInterest Ratesstocks

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


George Gilder: Morgan Stanley’s Memory Problem

October 7, 2025 • Addison Wiggin

Overspending during periods of rising ASPs is self-destructive. For most products, today’s ASP increases result less from natural demand pull and more from supplier-enforced discipline. If memory makers treat them as justification for a capex binge, they will repeat past mistakes and trigger another collapse.

The $50 billion bull case for WFE in 2026 rests on a faulty assumption. Lam and AMAT may benefit from selective investments, but the cycle-defining upturn Morgan Stanley describes is unlikely.

Investors should temper expectations. If history repeats — and memory markets have a way of doing so — the companies that preserve pricing power will outperform, while equipment suppliers may find that the promised order boom never fully materializes.

George Gilder: Morgan Stanley’s Memory Problem
Europe’s Increasing Irrelevancy

October 7, 2025 • Addison Wiggin

Europe’s GDP has flatlined over the past 15 years, against a doubling in GDP for the U.S. and even bigger GDP gains in China.

While the U.S. leads the world in AI spending, and China leads in technology like drones, what does Europe lead the world in? Regulation.

They spend more time penalizing U.S. tech firms for regulatory violations than encouraging their own tech ecosystem.

Europe’s Increasing Irrelevancy
Another Day, Another Circular AI Investment

October 7, 2025 • Addison Wiggin

Liquidity is flowing again, but conviction isn’t. U.S. M2 money supply has been expanding for months, even before the recent interest rate cut.

Currently, it’s up 4.8% year over year. That’s the fastest pace since 2022. That’s just enough to drive stocks higher in the short-term. Even algorithms and systematic funds will respond mechanically and buy stocks when they see liquidity rise. It’s the most fundamental indicator.

The volatility index (VIX)’s rise to 16.6, up over 2% this week, shows that big money is hedging, even as the market indices rise. After all, with signs of a slowing economy – and a government shut down – it’s hardly business as usual.

Another Day, Another Circular AI Investment
The Ghost of Bastiat

October 6, 2025 • Addison Wiggin

By then the receipts on my desk had arranged themselves into a sort of chorus. I heard, faintly, another refrain—one from Kentucky. In the first days of the shutdown, Senator Rand Paul stood alone among Republicans and voted against his party’s stopgap, telling interviewers that the numbers “don’t add up” and that he would not sign on to another year that piles $2 trillion onto the debt.

That, I realized, is what the tariff story shares with the broader budget theater: the habit of calling a tax something else, of shifting burdens into the fog and then celebrating the silhouette as victory. Even the vote tally made the point: he was the only Republican “no,” a lonely arithmetic lesson in a crowded room.

The Ghost of Bastiat