Hello QE my old friend.
Stocks rallied big time this afternoon after the Bank of England (BoE) called it quits on quantitative tightening (QT). The BoE announced that it would start buying British government bonds to support the spiraling UK financial system. Following the weekend pound crash, thousand of pensions were caught in a margin call “death spiral” that threatened to unravel UK government bonds.
As the pound fell, pensions were getting margin-called due to their exposure to leverage-driven investment (LDI) funds, which were provided by hedge funds (like BlackRock). These LDIs were being used to protect pensioners from rising interest rates and inflation. When the pound cratered, though, they became massive problems. Pensions were forced to sell government bonds to meet their margin requirements, which increased as the pound fell.
This resulted in a “death spiral” situation that could have taken British bonds to near zero as yields soared. The BoE then stepped in and purchased 1 billion pounds worth of government bonds. Yields collapsed in response.
The BoE says it’s a temporary measure. In reality, though, the bond-buying program should continue. Stocks rallied today as investors hoped the Fed would soon follow suit. The reality of the matter is that if the Fed keeps hiking rates and tightening, the US won’t be able to service its huge national debt.
Celebrity hedge fund manager Stanley Druckenmiller perhaps put it best in an interview today.
“Joe Biden has excoriated Rick Scott because he dared mention maybe we shouldn’t be increasing senior pays. But if you look at the reversal I just talked about and you use the CBO estimate, which is rates at 3.8 percent, which I think, frankly, is pretty optimistic given all the things we’ve talked about, by 2027, the interest expense alone on the debt eats all health care spending,” Druckenmiller said.
“By 2047, it eats all discretionary spending. So we’re now getting into fiscal dominance. By the way, by ’49, it eats all Social Security. We’re getting to the point now where the interest expense on the debt is so high that it’s going to eat up our ability to basically service the next generation, and I’m not even sure about the current one.”
CNBC’s Joe Kernen responded with a single somber word:
“Okay.”
The Fed truly is trapped. That’s why capitulation seems inevitable, and bulls bet on that during today’s trading session.
The positive momentum was enough to rescue many beaten-down names from the basement. Micron Technology (NASDAQ: MU) closed above the 10-day moving average and its minor bearish trend (yellow trendline) this afternoon, breaking its downtrend.
The stochastic indicator suggests the stock has plenty of room to run, too.
For those reasons, it might make sense to take MU long with a trade trigger of $52.01 as the market attempts to stage a trend reversal of its own.
