Until They Aren't Anymore

"Everybody's talking about a new way of walking," go the lines of  a long forgotten popular tune.

And that seems to be the case with investors now and their growing concerns about rising volatility. Just how out of wack is current volatility? Not much by one criterion since after years of suffering a bad case of somnambulism, thanks mostly to the Fed, it has simply reverted to normal levels.

That new way of walking appears to be in the Treasury market as in bonds. Until recently bonds softened investor fears about falling equity prices and rising volatility. As investors in previous scary times flooded into bonds, bond prices escalated and bond yields declined. It was a safe no-brainer for many.  For others it became the average investor's version of the Federal Reserve under Fed Chair Yellen's put option. It was always there.

We've now had a 10 percent correction. But unlike the previous four 10 percent corrections, bond yields have not declined and bond prices have failed to rally, according to data on the benchmark 10-year Treasury note. Still another interesting indicator this time is the change in investor sentiment as they shy away from the long end of the bond parade and pile into shorter-term offerings.

So just walk right in and sit right down. Everybody's talking about a new way of walking. Daddy let your mind roll on. Like all of us, most things are there until they aren't any more. Some people refer to such as a paradigm change. Good or nay? As zen master said: "We shall see!"

For Now

As we noted yesterday the unseen gorilla in the room could be inflation--that is, it will surprise to the upside more than most economic gurus and market soothsayers expect. That would no doubt cause the Fed to hike rates even higher than many anticipate and Monday's decline could be the first of other signs to come. Hard hat time.

With Monday's drop the S&P 500 unofficially touched a 10% decline from its late January high. And with China rattling its economic sabers, saying it will respond proportionately to the U.S. imposed trade tariffs, investor jitters might be with us for awhile.

Bloomberg reported: China will respond to any tariffs imposed by the U.S. against alleged violations of intellectual property rights with the same proportion, scale and intensity, said its U.S. ambassador Cui Tiankai.

Cui’s comments, in an interview with state-run CGTN English news channel Tuesday, are the first to indicate that China will retaliate on a scale that matches U.S. plans for additional duties on Chinese imports. The U.S. is readying duties on $50 billion of Chinese products as punishment for what Washington sees as widespread violations of intellectual property rights. U.S. Trade Representative Robert Lighthizer has until Friday to propose a list of Chinese products to be targeted to compensate for what he said was harm caused to the U.S. economy by China’s policies.

How much is bluster and how much is real remains to be seen, but Cui warned of a tit-for-tat development that could prove interesting. “If they do, we will certainly take counter measures of the same proportion and of the same scale, same intensity,” Cui said in the television interview. He said China has made good progress strengthening protection of intellectual property rights and is ready to look at cases where violations have occurred.

After announcing that tariffs on 128 kinds of imported goods from the U.S. would take effect Monday, China urged trade talks with the U.S. to prevent greater damage to relations. The reciprocal tariffs, a response to U.S. tariffs on metals announced in March on national security grounds, are imposed on goods valued at about $3 billion, a tiny fraction of its U.S. imports.

China holds a lot of U.S. Treasuries. So stay tuned. Now might be as good of time as any to expect the unexpected. As for money, that's what we like for now--cash.

Looking Out

                       

If you look now it looks like a breath of divergence is wafting its way into the market as the usual safe-haven seeking suspects apparently aren't so usual this time around.

The Dow topped at it latest high in late-January and since then, a recent Wall Street Journal article noted, gold, U.S. Treasuries and the Swiss franc have broken ranks by not following the dollar and Japanese yen higher.

It's divergence that, some say, is confusing analysts and investors, pinpointing a sharp reversal from other recent turmoil in the market. To be blunt this has been a market on fire for some time and
change is scary in such environments. The big question is unchanging, however: Is this the prelude to the big correction nearly everyone thinks is more than a day and a whole lot of dollars late?

Unwinding the Federal Reserve's full throttle-ahead monetary spigot is one explanation for investor jitters, some offer. Rising interest rates bode ill for competitive investments like gold and outstanding bonds. And then there's the volatility issue, now perhaps moving from the back to the front burner.

Shadows hide many things and despite recent calm inflation could be one. A recent report noted Washington policy has crimped certain labor supplies, possibly giving existing labor more leverage at the wage bargaining table.

Then, too, trouble in FANG paradise hasn't helped as many investors search for another, new pony to safely ride. The carry trade--borrowing cheap to invest riskier in higher yields--seems to have dried up. See the yen's two percent-plus rise against the dollar since January. Another safe haven, utility shares, have also declined uncharacteristally given past performance.

New computer games come along almost daily. So far we've not heard of any called, Looking Out. However, that might be one investors become exceedingly more interested in if a real market sea-change washes ashore.