Equity Funding COST COLLAPSE Amid A Steepening Yield Curve

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Stocks closed the week with significant turbulence as liquidity constraints and rising rates continued to pressure the market. The steepening yield curve and climbing long-term rates are placing additional strain on already fragile conditions. Questions are mounting about whether this is the start of a fundamental shift or a temporary reaction to year-end balance sheet adjustments, with volatility and market sentiment on edge.

Following the Fed’s recent announcement, markets saw dramatic swings: a sharp two-day decline, a retracement rally, and another drop before recovering slightly on Friday. Liquidity has emerged as a growing concern, with levels contracting sharply post-Fed meeting. Key indicators, such as bid-ask spreads in S&P 500 futures and SPY ETFs, widened significantly, signaling tighter market conditions and heightened volatility.

Additionally, the demand for leveraged equities appears to be fading, as evidenced by collapsing funding costs in futures contracts and a sharp decline in repo market activity. With long-term rates like the 10-year nearing potential breakout levels, the pressure on equity markets may intensify. As we look ahead, the possibility of further yield curve steepening looms, creating a challenging environment for investors.

#sp500 #stocks #stockmarket #cpi #fed #qqq #spy #rates

Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

[cvrart]

With current levels of debt, it's hard to see rates on the long end of the curve getting very much higher before something big in the system breaks, so it seems fairly probable to me that we're heading towards GFC 2.0 (or maybe The Greater Depression). If measures of valuation like S&P 500 price/sale ratio revert back to historical mean, over a one to two year period, it's quite possible to have the S&P drop by 75%. I don't think any among the current crop of fledgling "investors" is ready for that kind of a relentless unwind.

[jjm]

use equities as collateral to get more leverage? This will be fun when it unwinds.

[steveh]

Markets are just too thin from 23 Dec - 6 or 7 Jan to call a systemic liquidity risk right now. Yes, could be a deep red Monday on 30 Dec but not systemic. I am very worried about DXY though, it's in a long up trend and will wreck currencies/economies around world above 110. Especially countries in LATAM, Japan, India, S Korea etc and can flood New York banks with international defaults.

[pr]

Great video. I like the idea that you are showing concerns in the market compared to other YouTube people!!

[dr.mikejohnson]

Mike... again .. THANK YOU for sharing your AMAZING knowledge and insights 🙏🙏🙏

[thehungergames]

What is your opinion about precious metals 🏅🥈 🤔

[Scott_]

I think rates can go up a little bit, but not dramatically. I think the 10 year in the low 5s is about it. We've been under the weight of relatively high rates (compared to the last decade or so) for long enough that I doubt the economy will hold up for much longer.

Refinancing windows are closing, and debt rollover dates have been pushed out about as far as they can go. Once the first credit domino falls, the rest will follow and rates will drop dramatically as we headed to recession.

[haadiP]

0:10 "yield curve is steepening" it has already un inverted on both the 2 year and 3 month.

[scottackley]

No cuts next year? Ouch. Excellent video, Mike!

[Eddie]

who needs liquidity when the only transactions being performed are by consumers exchanging their Christmas presents and gift cards for what they really wanted. What has NYSE volume been like for the past month? I doubt 'record breaking' would be used to describe it. You don't need capital when deals aren't being made and boardrooms are empty. The only thing you have is desperate sellers seeking quick cash for whatever urgent need they have. Few and far between. Talk to me on Monday Jan 6 (Oh, that date that never happened in 2021. >snark<). We'll see what happens for the last 3 weeks of January.

[mattatuckmanful]

The yen looks ready to break… prolly more carry trades falling apart.

[Hitzberger]

Does it make sense to you that rates going higher than 2022 levels when cpi was higher than 8% and oil was 120 a barrel?

[rogee]

I see how hard you’re always working. Keep up the great work!

[mattatuckmanful]

30 yr will be 20% by the end of the 2020s… mark it down.

[TheBrightSavant]

Markets are faceslapping on increasing probability of rate hikes next year.

[Kombaiyashii]

Great to see you back Michael and I hope you enjoyed the Christmas break! I have been meaning to ask you a question. I chart and trade btc exclusively, I have specialised in that area and am quite successful with it. However, I think I have the time to chart another asset which I would like to be complimentary to my current asset class. So I've been thinking about charting the vix or vix1d or perhaps CADUSD, USDJPY or maybe even the 10y-2y. However, I would like your opinion as to which would be the best complimentary asset class to chart which could potentially give me a heads up to possible incoming dangers in the market from a broad perspective. I am not necessarily interested in directly trading this asset, I really just want to do it to aid my current analysis. What would you recommend for this purpose?

[haronmyangel]

Vix is making a ronding bottom chart
And the ma 50 of vix crosses ma 200 its over

[reddy]

MAR to MAY is the bear time with GOLD and silver seeing new highs.

[dabronx]

Ok so I understood about half of that…lol
Thanks for the info brother

[joeblues]

Now you just need a musical opening with animated logo. Also, that’s a great looking shirt.