As expected, our beloved elected officials waited until the very last moment and then cut a deal that does little for the budget but does avert a financial calamity. I can’t tell you all how happy I am not to be discussing the debt ceiling issue until late 2024. It really is just dinner theater that helps sell ads on CNBC.
CDS stands for “credit default swap” – it’s basically how Wall Street quotes the default probability on bonds. The lower the number, the lower the probability of default…and vice versa. The chart below captures near term CDS contract rates on our national debt. It’s been rising for the months leading up to this week, and now has utterly collapsed back to normal as the debt ceiling deal was cut. This picture says the crisis is over…onward.
The bigger thing to focus on now is (1) investor sentiment is extremely weak (too much cash on sidelines), (2) institutional investor positioning is very weak (record short SP500 futures contracts), the Fed is taking June rate hike off (maybe they do 25bps hike in July but I doubt it), and this morning’s labor report was truly a “goldilocks” report (not too hot, not too cold…just right). Those short the market now need to chase the market – what’s happening today is called the “pain trade”. For those record shorts, the most painful thing now is chasing a market that is breaking out. Sean has been pounding the table on the need for SP500 to clear the all-important technical level of 4200, and today’s price action is helping the market clear that hurdle.
Sometimes markets trip, sometimes markets flip, and sometimes markets rip. The VIX volatility contract just crashed to an 18mo low. If it looks like a rip, and trades like a rip…it’s a rip. As we often say, you just can’t sit out and miss +600 pt days on the DJIA. You have to be there to catch them when they happen.
Source: EISI as of June 2, 2023
Richard Barrett
Chief Investment Officer
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