"Big Short" investor Steve Eisman says markets have narrowed to two things: oil and interest rates. With Brent crude above $100 and long-term Treasury yields near multi-decade highs, he says markets may be getting closer to a breaking point.
"We are in an odd period right now where the only two variables that matter are oil prices and interest rates," Eisman said on Friday’s Weekly Wrap episode of The Real Eisman Playbook.
The 10-year Treasury yield was around 5.3% when Eisman recorded the episode Thursday night, a level he noted had not been seen since around 2002.
"It feels like we are getting closer to something breaking," he said.
Oil and Rates Move Together
Oil and rates have become unusually closely linked.
Cboe Global Markets found the three-month correlation between WTI crude and the U.S. 10-year Treasury yield reached 65% in September, the highest in 35 years and just below the 66% record reached around the first Gulf War in 1990.
Brent traded around $101 a barrel Monday morning, while the 10-year yield remained elevated near 5.3%.
Responding to a viewer question, Eisman said one could argue the Fed “is acting as if everything is a nail.”
"The Fed has zero control over oil prices," he said.
If oil stays elevated, however, Eisman said higher energy costs can spread through the economy. He pointed to oil pushing up fertilizer costs, which can then raise food prices.
The Fed may then try to slow the broader economy to bring inflation down.
"Admittedly, it’s a very blunt instrument, but the best we got," Eisman said.
Elsewhere in the episode, Eisman said higher rates have already hit the earnings and cash flow of private-equity-backed software companies, many of which were financed with variable-rate debt.
Prediction Markets Bet on a Fed Pause
Eisman spoke before Friday’s jobs report sent expectations for another Fed hike plunging.
Polymarket traders now give an 83% chance of no change and a 17% chance of another 25-basis-point hike, with more than $25 million traded on the market.
Hike odds had been around 69% earlier in the week before the U.S. added just 29,000 jobs in September, far below the 90,000 expected. CME FedWatch odds of an October hike fell to around 18% by Monday.
That leaves investors watching the same two forces Eisman highlighted.
The United States Oil Fund (NYSE:USO), which tracks oil futures, has rallied in early Monday trading after being down 1.5% in premarket.
The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), which falls as long-term yields rise, closed Friday at $77.48, near a record low as investors continued selling long-dated Treasuries.
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