Treasury Department Draws Financial Crisis Parallel With $25 Billion Move

The markets continue to generally rally even as the Strait of Hormuz has been effectively closed for two-and-a-half months now.

There is also no clear path to reopening this global chokepoint. I continue to believe investors are much too complacent around the longer-term and cumulative impacts to the global economy from the conflict in the Middle East. Energy and commodity prices have surged since the end of February. The cutoff of roughly one-third of globe’s fertilizer components could not have come at a worse time for the spring planting season in the Northern Hemisphere. Farmers in the Midwest were already dealing with drought conditions across most of the region. This will result in the lowest wheat harvest since 1972 this year.

Food inflation is now firmly in the pipeline. Inflation pressures are already quite evident in the U.S. economy. Investors got a taste of what lies ahead this week with a worse-than-expected April CPI reading, which was followed by a much hotter-than-the-consensus April PPI report. Rate cuts are now off the table, and if inflation levels continue to rise, the next move by central banks might end up being a rate hike, something that markets are clearly not pricing in right now.

The Treasury Department sold $25 billion in 30-year bonds this week as they do a yeoman’s job in financing the nearly $40 trillion in federal debt and the approximate $2 trillion annual fiscal deficit. It was the first time that these instruments sported a five handle since August 2007, just before the markets and economy fell apart in 2008. What could possibly go wrong?

Technology and technology related stocks now make up roughly 57% of overall market capitalization — a concentration not even seen during the peak of the Internet Boom.

AI continues to be the straw that stirs the drink and the main driver of the robust earnings growth experienced in Q1. However, AI is a double-edged sword in my view. This was demonstrated yet again by Cisco Systems (CSCO) this week. The shares powered 13% higher on Thursday after the company easily beat expectations due to robust infrastructure spending by the hyperscalers. At the same time, Cisco announced it would be laying off 4,000 from its global workforce. This follows significant and recent reductions in force at the likes of Meta Platforms (META) and Oracle (ORCL) to free up funds those companies massive AI related cap ex budgets.

This burst of tech spending is the main driver of the U.S. economy right now and accounted for roughly 70% of GDP growth in the first quarter. Even with that, economic growth has slowed markedly over the past two quarters from the robust levels of Q2 and Q3 of last year. And this was before the full impact from the Strait of Hormuz started to play out across the global economy.

Combined with new inflation pressure, this is a recipe for stagflation, something that the markets are not assigning much of a probability to despite this increasingly likely possibility. I am finding little value in the current market. I find myself having a lot of empathy for Warren Buffett, who built up a record near $400 billion of cash at Berkshire Hathaway (BRK.B) before he stepped down from the helm after six decades as CEO.

Nonetheless, I have some covered-call holdings expiring in the money later on Friday. Therefore, in my columns next week, I will highlight some of the few values I am finding in an overbought market.

At the time of publication, Jensen had no positions in any securities mentioned.