The Bond Phoenix

The kind of official inflation data that would have kited stocks a few months ago today leaves them nonplussed. This morning’s PCE deflator release showed October prices up 3.0% versus October of last year. Mellow compared with media expectations for 3.1% and a September figure of 3.4%. Not long ago such data would have lit a fire under stock prices amid a barrage of breathless speculation about an easier Fed dead ahead.

That fire is conspicuous by its absence, suggesting the effect of the data is being counterbalanced by something else. Flagging corporate profits perhaps?

The softening of the consumer price data is unsurprising, reflecting the exhaust fumes of the mild deflationary squall reflected first in declining stock prices between July 31 and October 27, which in turn reflects an increase in the value of the dollar in real time markets. Stocks have since rallied hard though, as the dollar has since given back much of its strength, so forgive me if I’m not getting excited about the prospects for continued declines in consumer price inflation.

Unlike most of the financial media, including the most erudite and sophisticated analyses of popular econometric statistica of everything from GDP and employment to PMI and diffusion indices. They are lagging indicators. If you want real time data, the only place to go is real time markets.

The monster rally out of the October 27 bottom in stock prices has also reverberated through commodities prices, including both copper and gold. Because it’s not as much about the stocks and copper and gold as it is about the dollar we’re pricing them in.

What about bonds?

Same story. Treasuries bottomed on October 19. We won’t know with certainty until much longer after the fact, but it appears the Great Bear Market of 2020-2023 ended on that date, and a new bull market began. If so, I will finally be right on bonds. But no victory lap here; I was a year early, which isn’t that different from being wrong.

So what makes me think we are, after all this time, there yet? Too much to capture everything in words, most of which has been covered in numerous prior posts over the past year, and some of which appears directly above. A conspicuous new addition is the apparent completion of a full five waves down in Elliott Wave terms, sometimes colloquially referred to as a triple waterfall. In the spirit of a picture is worth a thousand words:

10 thoughts on “The Bond Phoenix

  1. jk says:

    long rates may go somewhat lower in the near term, but i think they will ultimately exceed their recent ~5% highs. janet’s gimmick to increase the % of bills can only work as long as there’s still money in rrp, and i think that well will be dry within about another quarter. then we will have the ongoing flood of issuance without an obvious population of buyers.
    expect more regulatory efforts to force money into treasuries – e.g. pensions and insurers will have mandated allocations. it’s already happened in europe. [e.g. France mandates 50% of pension assets in eu gov’t bonds. also Solvency II rules in the EU require insurers to pay a capital charge for assets they invest in. And the riskier the assets, the higher the charge – a fact that directs insurers to buy lower-risk bonds.]
    limiting the issuance of coupons will tend tp lower what their rates would be otherwise – this is a must given how sloppy the auctions have been lately. so a the flood will be channeled into bills, em style.
    thus, an inverted curve may be the new normal, and no longer presage recession.

    1. Finster says:

      Make no mistake, my bullish take on Treasuries is cyclical, not secular. That is, regarding where we are in the give and take that spans 2-4 years. The longer term outlook, the next 10-20, is bleak. Prices will fall, yields will rise. But it won’t go there in a straight line … there will both declines and rallies, with the latter exceeding the former. In the scheme of things, we’re looking for higher prices and lower yields before another big decline.

      That Washington implements forced Treasury investment mandates may well come to pass, but if it’s counting on it to solve its budget woes it will be disappointed. American investors already are huge lenders, and the supply of real capital is finite. Any forced diversion to Treasury will come from elsewhere … mortgages, car loans, corporate and municipal borrowing, even stocks. Big corporations are pulling the strings and won’t part with their cheap and abundant capital without a fight.

      The jury’s still out on the yield curve. Rate hikes don’t work the way they used to. The Fed’s paying interest to support its target, not using scarcity to raise borrowing costs. So the value of precedent is diminished. But remember the QT paint drying in the background. And we haven’t even had as long since the initial inversion as we did between 2006 – 2008. So the absence of obvious implications to date doesn’t tell us anything.

      All things considered, it’s a burden of proof kind of thing. Be wary that anything’s possible, but until shown otherwise my base case is the yield curve signal is still in play, and that the next shoe to drop is it uninverts before the full ramifications are evident. Especially when short rates begin to fall.

    1. Finster says:

      We just exited a period of the lowest interest rates in centuries. Millennia according to some measures. The only place you go from there is higher.

      Bonds and rates tend to move in multi-decade trends. The secular bull market in Treasuries lasted nearly four decades, from the early 1980s to 2020. It ended with trillions worth of bonds around the world trading at such high prices their yields went negative. The epic cyclical bear market since is the big, bold, all-caps headline announcing a change of trend.

      We are now in a secular bear market likely to last for decades. Like those that came before it, it too will comprise a series of cyclical bull and bear markets. The You Are Here sign points to the early part of the first cyclical bull market within the context of the new secular bear.

      This has broad implications for stocks too. Stocks and bonds, both being securities deriving their value from future cash flows, are more alike than different. The financial environment most investors have spent their entire careers in will do little to prepare them for what lies ahead.

  2. Mega says:

    As i see it its Hyperinflation or an attempt to scrub some speed off via higher rates. Trouble is all the Baby boomers are retiring & don’t want to save or invest……they just want to spend.
    Limited workforce, lots of demand

    1. Finster says:

      That South America, Europe and Africa are their economic oyster would be news to most ordinary Americans too…

    1. Finster says:

      Indeed gold has outperformed most other assets so far this millennium. Including stocks. If you bought gold on January 1 2000 and just stuffed it in a box, you would have come out ahead of buying stocks. Even copper outperformed. Imagine that, mere chunks of inert metal outperformed our great industrial corporations.

      Those great industrial corporations have been a poor investment. Not because they’re unproductive, but because they were way overpriced. They’ve lost value in terms of real money. They’ve only looked like good investments for those who price them in a currency that has lost even more.

      Even including reinvested dividends, stocks have lost -11.76% in terms of copper, -46.72% in terms of gold. Over 24 years, not so great for such vaunted “for the long run” investments.

      Even the ostensibly unbeatable S&P has lost ground. If you had put $100 into the S&P at the beginning of 2000, and reinvested dividends, you would have about $488 near the end of 2023.

      If you had put $100 into gold at the beginning of 2000, you would have about $718.

      But don’t expect to hear it on CNBC.