(Kitco News) - Credit spreads are breaking out. Treasury yields are spiking. And the mood among investors is deteriorating fast. That’s according to Steven Hochberg, Chief Market Analyst at Elliott Wave International, who warns that the current bear market is far from over and that a deeper financial reckoning is still ahead.
"The denial stage is where we’re at right now," Hochberg told Kitco News in a wide-ranging interview. "Based on the patterns that we see unfolding in the market, we don’t look like we’re there yet."
The warning comes as U.S. Treasury yields remain elevated despite cooling inflation. According to the Bureau of Labor Statistics, the March Consumer Price Index rose 2.4 percent year over year, with core inflation easing to 2.8 percent. Yet the 30-year Treasury yield remains above 4.5 percent, near its highest level in months.
"There’s some sort of dislocation going on underneath the surface of the bond market because you rarely, if ever, have bond prices drop 10 points in a matter of several days," Hochberg said. "It seems to me there’s some sort of forced liquidation going on here."
He pointed to junk bond spreads as one of the clearest signs of stress.
"This is the junk bond credit spread – it is junk bond yields relative to comparably dated U.S. Treasuries," he said, referring to a chart published by his firm. "They have really spiked higher. They have broken a three-year declining trend line. They’ve gone from about 2.56 percent spread, almost doubling – up 70 percent – in a matter of a very short period of time."
"Credit spreads, when they start widening like they are here, tend to precede broader financial trouble," he added. "It is a canary in a coal mine."
Hochberg noted that his team at Elliott Wave International had been watching a regular 3.4-year cycle in credit spreads – and that the timing of this breakout fits the model.
"This was January, and here we are now in April," he said. "We are starting to see those problems come to the forefront."
He also raised concerns about broader Treasury market instability.
"You can speculate maybe a hedge fund’s in trouble or whatever," he said. "If the market keeps going down, you’re going to get a call from Mr. Margin Clerk. We need some capital here."
Asked if the Federal Reserve could step in as it did in 2020, Hochberg was blunt.
"At some point, it’s too big to bail," he said. "We’re 36 trillion dollars in debt. A trillion dollars every year just to service the debt."
"Usually the Fed comes in closer to a low than it does at a high. The market starts tumbling, spreads go wild, yields go wild, and then the Fed finally steps in. It looks like they’re controlling the market, but they’re really not."
While some are optimistic about disinflation, Hochberg said the bigger risk is debt deflation.
"You can get short-term bouts of inflation, but I think the ultimate outcome here is really a debt deflation," he said. "We have so much outstanding debt in society right now we can’t service it all."
"In a fiat-based credit system like we have right now, that’s very deflationary," he said. "I think people have to be very careful and be very safe in this environment."
He believes gold has significantly outperformed stocks since 1999 and remains a relative outperformer. But he flagged silver’s weakness as a concern.
"Gold is up over a thousand percent. Dow is up maybe four to five hundred percent. Not many people realize the performance that gold’s had," he said. "The problem that gold has right now is silver. Silver peaked at fifty dollars an ounce in 1980, matched that basically in 2011, and it’s down 38 percent from its 2011 high."
"I think what silver is forecasting is a softening in the economy going forward," he added.
On stocks, Hochberg said many investors are still psychologically clinging to the bull market.
"People are buying stocks and they’re holding on and they’re not selling," he said. "This tension has to be relieved at some point."
"When the market goes down, the value of cash gets much more valuable," he said. "Safety is paramount for investors."
As for the U.S. dollar, he said its rally from 2008 to 2022 is now reversing, and further declines are likely.
"We’ve been forecasting a decline in the U.S. dollar. It’s followed our forecast very well," he said. "We’re probably going to go well below par, maybe in the mid-90s on the U.S. Dollar Index."
He said the Elliott Wave model views the coming downturn as a natural psychological rotation.
"It is psychology. It’s all of us interacting," he said. "There’s not outside triggers. It’s more endogenously regulated."
"All the psychology that moves the market is internally generated from people interacting," he added. "We don’t know exactly when the low’s going to come, but when we get closer, we’ll be able to see it through the indicators we follow."
Watch the full interview with Steven Hochberg in the video embedded above. Subscribe to Kitco News on YouTube for expert market insights and real-time analysis.