Yields Will Trigger “Serious Earthquakes” Across The Economy, Former Floor Trader Says

Submitted by QTR’s Fringe Finance

Jack Boroudjian is a legendary former floor trader and now Chairman of SmartXData. Aside from over 30 years of industry experience, Jack is a published author “Secrets of the Trading”, Wiley 2007 and has countless articles published in industry periodicals and websites. Jack appears regularly as a paid, guest contributor for CNBC, both domestic and Asia, and has done over 5000 global guest Television appearances. Jack graduated with honors and distinctions from Loyola University of Chicago and is happily married with two adult children.

Jack and I discussed monetary policy, fiscal policy, the move in gold, politics and why the bond market may take the spending keys away from the Biden administration for more than an hour last weekend.

“People have been conditioned to buy dips, and quite frankly, it was almost forced upon us,” Jack explains. He points to several factors that shaped this behavior: “The Fed keeping money very loose, the lack of alternative investment avenues, and no real competition for capital—all of these elements contributed to creating a market condition that was, if you think about it, almost obscene.”

Boroudjian draws on his experiences from the trading floors to illustrate his point: “It almost feels like what we used to call on the floor of the exchange, the big sucking noise. You’d hear people getting sucked into positions, all chasing the same strategy, and then, suddenly, the market would correct.”

He reflects on the impact of such corrections: “I’ve seen the market correct by 20%, 30% numerous times in my life. But consider this: a 30% correction now equates to 1,500 S&P points. That’s more than most people have ever witnessed in their lifetimes.”

“Because there are still way too many people convinced that this little 5% pullback is a blip—it’s nothing more than a hiccup. I’ve had at least half a dozen people tell me it’s an election year; there’s no way they’ll let the market break. But the reality is this: if anybody really wants to know what’s going on, I would suggest reading Nassim Taleb’s book, ‘Black Swan.’ It talks about it.”

Jack continues: “Nassim was a trader at First Boston—many don’t know his story, but I used to handle him on the floor. He was an options trader in the pit and he went broke. This is one of the most brilliant minds on Wall Street, and he went broke as a floor trader. He got off the floor and ended up making billions of dollars. What took him down was a black swan, something that came out of nowhere that he did not expect, and that’s exactly what we could see happening now. Could it be something that we’ve already seen the beginnings of?”

Talking about gold, Jack said: “So fundamentally, something has shifted in the last few months in the gold market. If you’ve noticed, central bank buying has never been this strong before. All of a sudden, you’re starting to see Russia pay for things with gold. People are now paying for Russian oil with gold.”

“Gold is becoming the currency that Bitcoin was hoping to be one day. And it’s really starting to turn into something more tangible than fiat currency. It gives you a reflection of how people are starting to feel about paper money. They’re starting to realize that maybe there’s a problem there. So when central banks start to buy gold, that tells you there is more than just a technical breakout. There’s a fundamental shift happening, whether they believe that there is a debasement that is going to occur and continue to occur. And if that’s the case, then you will see them stockpile gold, or they see it as a safe haven and see huge problems down the road. And I hope that’s not the case,” he continued.

Jack explained that watching the 10 year is going to be the way to gauge the health of the economy.

“This is what I keep telling people: watch the 10-year yield. Keep an eye on the 10-year and the 30, but more importantly, the 10, because that’s the part of the curve that the Fed really cannot manipulate. They can do the short end of the curve, but they can’t do the long end.”

He continued: “Why do I say that? We used to call them the bond vigilantes in the old days. They were the people that would come in and you’d start to see them hitting that bond market, especially on the long end, because of what you just described. When the bond market starts to understand that the biggest expenditure on the balance sheet now is going to be servicing the debt, bigger than defense, bigger than anything else, you’ll start to see bonds get hit, especially on the long end. That’s one of the reasons we’ve started to see the 10-year doing what it’s been doing.”

“I think we see a five, maybe even five and a half percent 10-year before we’re done here,” Jack said. “And if that’s the case, that is going to trigger some serious earthquakes within real estate and other sectors of the economy. So to me, we’re on the precipice. You can feel it. But how long will we be here? I don’t know. It feels like something can break at any time. But then again, you know what? We could be two years early. And if that’s the case, it could stay ridiculously overbought for two years.”

“The 10-year bond is the most liquid. It’s the one that everybody—the Chinese, the Saudis—is holding. That’s the fixed income note of choice for the entire world.”

“The one thing that I know about the Treasury market is that less than 5% of the people in finance understand the Treasury market, which is scary when you think about it. And that’s the truth, Chris. Think about that. Less than 5%. That’s the going rate. And everyone knows stocks. And as you were talking about it, people that have been in the market for the last 10 years have seen the stock market go nothing but up and seen a bond market that’s gone nothing but down. But the reality is that this bond market is poised to do something historical in my mind.”

You can listen to my full interview with Jack at this link and for more on how treasury auctions work, you can read this piece: Treasury Auctions Explained For People With Short Attention Spans

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