Mean Reversion Trading

The Fed confirmed that they are going to raise interest rates .75 percent.The 10-Year Note is trading below three-quarters of a point at 2.69, which makes the S&P and stocks undervalued.With higher interest rates, Third World debt is at grave risk, as is anyone who was heavily in debt to invest in stocks, commodities, real estate, or anything else.We are reaching a point where we are going to place real value on real assets, such as precious metals.

Reuters reported on July 15, 2022, that a dozen countries are at risk of defaulting on their loans.Lebanon, Sri Lanka, Russia, Suriname, and Zambia are already in default.Many more are at risk as borrowing costs and inflation rise on top of record debt levels around the world.The entire developing world is at risk.The World Bank says that in the next year as many as a dozen countries will not be able to service their debt.

For Latin America, the 1980s were a “Lost Decade.” Many Latin American countries failed to make the payments on their foreign debt.In the 1970s, oil spiked to record highs twice, which led to many Latin American countries experiencing current account deficits.Banks began to stop foreign lending as they tried to collect on their existing loans. The sudden cut-off of lending sent many Latin American economies into deep recessions.Despite evidence of the problem, most involved did not recognize the problem until it had become a crisis.

The fundamentals usually lag the markets, and Main Street seems to be behind in relation to the fundamentals.We had another high inflation report as earnings season begins.Bond yields are falling as inflation fears swirl.Inflation talk is all over the news, the Internet, and Main Street.

The talk is about how the Fed is going to control the record level of inflation, which is at a 40-year high, by increasing interest rates.Fundamentals always lag the market, so the market has already factored in more inflation and higher interest rates.The fundamentals appear to be out of sync with the technical landscape.We could see some tremendous volatility in the markets over the next few months.

The 10-Year Note has been volatile recently as a consequence of the Fed's announcement to raise rates .75 percent.It is the biggest increase in 28 years.The Fed has been behind the curve since 2021.Now, interest rates have sharply reversed, contrary to the Fed’s expectation that inflation was going to be transitory.