Sincere thanks for reading my Diary today and all week. 

I am only a few days from launching my new hedge fund, Seabreeze Capital Partners LP. 

As a result of this venture you are going to see many more actionable trading and investing ideas ahead. 

And I can't wait! 

Enjoy the weekend.

And now, the rest of the Mudrick/AMC (AMC) story... here. 

Right!

Look what happened

Vaccination rates and the reopening trade gathered significant steam, way more than what was expected and fuelled a general risk-on trade; it wasn't just bonds; gold and defensive growth got crushed

Next came the Georgia runoffs which allowed Biden to go extreme on fiscal stimulus just a few months after Trump's last hurrah ... again, fueling the risk-on trade ... so bond yields adjusted to that new reality

Now the bond market has moved on and sees through the CPI data since 20% of the index is causing this massive runup which is clearly unsustainable and the other 80% has actually been slowing on the price front; the former is up 22% SAAR in past six months; the former is +1.6%

Plus, the latest jobs data, real incomes and consumer spending have been soft; my analysis shows that 80% of that last round of fiscal largess has already been spent; and Biden all of a sudden can't seem to get much done

That's the story

"Yeah, but the ten year yield is still up 56 basis points this year and the five year yield has doubled!"

Rosie (Dave Rosenberg) responds to my opener, What is Going on With Interest Rates?

The Q1 Fed flow of funds that just came out hold the key to your question on rates 

Mired in a private sector savings glut that has swamped the desavings at the government level 

I shall be penning about this 

Savings>investment = low real yields

Here's Scott Galloway's No Mercy No Malice!

My meeting trip converted to Zoom so I am back in the saddle.

* The MIT Bitcoin experiment yielded a fortune. 

* The lure of H Mart.

* Why rates will stay low for a long time.

From Dennis:

"One must hedge against inflation and gold remains my first choice given its centuries of history. Bitcoin and any one of the myriad other cryptos are not in any way to be considered as inflation hedges and the theory that they are is massively ill-founded. But will I recommend buying "new" gold here or adding to gold already owned? No; not now and not at or near to $1900/oz. Be patient; slightly lower prices...or a consolidation... shall come sooner than we think. Yes, I understand the younger generation's allegiance to crypto currencies. And, Yes, I have missed one of the great bull markets of any "asset" in history; but had I been around then I would have missed the Tulip Bulb Mania in Holland as well as the South Sea Affair and other such "Bubbles." However, I would have also missed the crashes that followed each as night follows day. As for equities, if they must be owned, I still suggest steel, ball bearings, railroads and tire manufacturers for again these are, have been and shall continue to be the basic requirements of sturdy, economic growth. Even if electric cars are the future, they will need steel, ball bearings and tires. But be careful!"

* The recent 25 basis basis point fall in the 10- year U.S. note yield has surprised many

* There is likely a limited window for any further declines in interest rates

* I expect the Fed to upgrade its expectation of inflation risks in the next few months

Bond yields have declined by a surprisingly large amount, 20-30 basis points,  over the last several weeks relative to expectations. 

The ten year yield, at 1.44%, has dropped to the lowest level since early March. 

I believe there are at least five contributing factors to the lower fixed income yields: 

* A very dovish Christine Lagarde may have resulted in some U.S. yield grab by Euro-based investors.

* Mortgage related buying exaggerated the move lower in yields as pre payment risks have increased with the concurrent drop in mortgage rates.

* Some believe that inflation is temporary based on the increased number of negative economic data points

* Higher inflation tends to put a damper on economic growth.
- A very good example is home prices as affordability pressures that come with climbing home prices tend to damper demand, particularly of first time buyers. This helps to explain the recent drop in homebuilder share prices.
- This morning Danielle DiMartino Booth writes: "The market sees stagflation risk rising, evidenced by seasonally adjusted (SA) retail sales ex-autos falling 0.6% in May, per BofA credit and debit card data; if the 3.4% MoM SA gain in restaurant spend is removed from the picture, retail sales would have seen a 1.2% decline."

* The sheer size of the April and May upside to inflation may argue in favor that inflation has reached a point where the Federal Reserve should dramatically move up their timetable for possible rate hikes. 

The recent rate drop has helped stocks - particularly of a growth-kind, like Amazon (AMZN) and Alphabet  (GOOGL) . 

It is my current view that there is a limited scope for any further rate drop as recent inflationary prints are not likely transitory. 

Indeed, the April and May inflation prints were well above expectations suggesting that the Fed could pull forward their rate rise timetable. 

The Fed uses various calculations to guide its decision making. 

The most famous is the rule established by John Taylor - lowering fed funds by -0.5% for each 1.0% of excess employment and raising fed funds by 1.5% for each 1.0% of inflation above target. 

If we look at core CPI, using Taylor's method, a fed funds rate of 4.0% is suggested. The difference between 4.0% and the current federal funds rate is at the largest spread in 30 years! 

If correct, the likelihood that the Fed will upgrade inflation risks this summer coupled with the specter of a far earlier resumption of Fed rate hikes - in 2022 vs. the consensus of 2023 - could be anathema for equities.

* TGIF!

Some brief observations before I move on to a several hour meeting: 

* Mr. Market's upside momentum remains impressive.

* Investors, along with higher prices, have grown more confident.

* As I will discuss in my opening missive, lower rates have catalyzed the recent up leg in the markets, but I expect limited downside in yields from here and a rising risk of 2022 stagflation.

* Speculation continues and has not dented the markets.

* And though (GME) and (AMC) have recently gotten schmeissed, the speculation seems to just move on to a new group of targeted gewgaws.

Summarily, it has not paid to short the Indices. 

While there is some sub surface signs of important sector weakness - in transports, homebuilders, etc. - the weakness is certainly not broad based. 

Yet... 

In my launch of Seabreeze I will be more sensitive to price action than I have been in the past - being somewhat more reactionary than anticipatory. 

But I will still be focused on my calculus of "fair market value" that suggests stocks are overpriced - by about 20%.

I will have more on the subject of interest rates that Peter dwells on in an hour or so:

I'll repeat my belief that part of the US Treasury rally was due to the comments and uber dovish stance of ECB president Christine Lagarde and most of her colleagues. That rally in European bonds continues today with the German 10 yr bund yield in particular down for the 4th straight day and by 2.5 bps to -.28%, the most negative since mid April. I will say this though, the inflation figures that will be seen in Germany this year will not go over well there and we are on the road towards a Bundesbank vs ECB battle I believe. The ECB has essentially had free reign ever since Mario Draghi said 'whatever it takes' and no one could have ever imagined the extent to which it has led with respect to negative rates and the size of the ECB balance sheet. The only benefit however has been the financing of European governments but inflation in Germany crosses a line.

With US Treasury yields deeply negative on a real basis, I found this chart on Twitter from Chris Cole mapping real rates back to the mid 1960's using core CPI. Quite a reflection of how far behind the 8 ball the Fed is but of course purposely. With respect to the FOMC meeting next week, we know 'substantial progress', whatever that means, is their guiding light but here are two sentences in the April FOMC statement that is no longer applicable and if it comes out next week, which it should, takes away another excuse in continuing on with current policy. "The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain." With the US at or near herd immunity when including the number of vaccinated citizens in addition to those with natural immunity, these comments are now stale. That said, I acknowledge that Covid could be with us for a while but life and medicine will power thru it and monetary policy should no longer use it as a crutch.

To the debate on transitory or not, you know where I stand but I'll say this. I understand it will be hard to maintain the aggressive increases in used car prices that many are cherry picking as a reason for transitory, but I also believe that we are just at the beginning of broad price increases in just about everything else. And rent increases on the services side, the biggest component of CPI, you ain't seen nothin' yet.

We also hear from some central bankers both in the US and abroad that they have the tools to deal with inflation if they need to use them. Yes, they have the tools, that is not the question. The question is whether they have the guts to use them because of the risks those tools pose to the economy and markets. Today, ECB Governing Council member Klaas Knot said the "ECB is absolutely capable of controlling inflation." They can't create it but they can sure stamp it out I guess.

While the Fed, ECB and some others are afraid to change policy, the Bank of Russia raised rates by 50 bps to 5.5% and said "Inflationary pressure in the context of the completing economic recovery can lead to a more substantial and prolonged deviation of inflation upward from the target. This creates the necessity of further increases in the key rate at upcoming meetings." Regardless of whether inflation is transitory or not, the Bank of Russia at least thinks that current policy needs to be adjusted based on what they are seeing now.

The only thing of note in Europe was the UK GDP figure for April which rose 2.3% m/o/m about as expected as the economy further reopened with the very successful vaccination campaign. It was the services side in turn that led the way. With us half way thru June, the number is not market moving.

This tweet modifies my opener, which is coming up later this morning:

S&P 500 real earnings yield continue to plunge; now at its lowest since November 1980.

From Liz Ann:

I had an unexpected call out of town for an important business meeting this morning.

I will be out of the office between 10 a.m. and 1 p.m. ET so my posts will be less frequent and shorter.

Another record high (of $7.952 trillion) in the Fed's balance sheet last week:

The best-performing S&P 500 over the last three decades:

Talking skew: