What about bonds?
Financology has asserted on multiple occasions that the late great secular bull market in bonds that began circa 1980 ended in 2020. And that we’ve since entered a secular bear market. We’re not the only ones, but most of the financial establishment seems to just be waking up to that prospect. For the better part of the last few years, the Big Question has been when and how much rates would fall. That they might rise seems to just be coming onto the radar.
It’s almost difficult to believe something so obvious could be missed by so many. The post-crisis era of ultralow rates and yields was pathological, not normal. A mere return to normality should have been the central expectation.
Now thirty year treasury yields are making news for having nosed above pre-crisis levels for the first time since, well, pre-crisis. Even short yields which normally track close to overnight Fed targets are trading well above those Fed targets, indicating the Fed is behind the curve and below market. Of course this comes as a great surprise to us as we always thought the Fed was in charge (he says with sarcasm).
This, partly due to the massive size of the near forty trillion dollar US treasury market and the still dominant if fading role of the US dollar in global finance, means that other markets are obliged to follow its lead on the time value of money. If anything, it’s remarkable that stocks have held up as well as they have … in an imitation of Wile E Coyote after he’s run off the edge of the cliff but hadn’t yet looked down. Commodity prices are feeding into this as inflation has become too obvious to continue to dismiss. Gold prices, too, have run into a glass ceiling as markets anticipate that even if the Fed fails to tighten, the bond market will do it for them.
All markets are in bondage to US Treasuries.
Now that the media are almost in hysterics over plunging bond prices and rising yields. the time has come for the opposite. While I remain bearish on bonds long term, sentiment and oversold positioning make a good setup for a short term counter trend rally.
Two days late. Bonds bottomed 0519 and have been rallying nicely since. Maybe a bit more steam left in the engine but the next leg down is probably near.
[The actual date of this comment is May 28. Apparently some kind of WordPress bug is preventing it from being displayed properly.]
When you say you are bearish on bonds long term, does that mean you expect long term bond prices to fall? Is that because you expect higher interest rates?
Short answer, yes. Long answer, yyeeessssss. In terms of cycles, look at a chart of treasury yields going back several decades. You see a long rise into a ~1980 peak, then a long decline into 2020. Those trends are decorated with cyclical rises and declines outlining a channel of highs and lows. Yields have now broken out of that channel to the upside. Bear in mind that prices and yields are inverses.
The fundamentals tell a similar story. US debt has grown to the point where the government now must borrow just to pay interest on the accumulated debt. Consumer prices, after decades of moderating increase, are now zig-zagging their way higher.
There will continue to be cyclical bull and bear markets within the new secular bear market, and it’s still worth owning at least some treasuries, though less than during the previous secular bull market, and actually netting positive returns will require dynamically varying exposure with the position of the cycles, and maintaining a position in commodities (eg COMT) which tend to trade counter to treasuries (eg GOVT).
The dangerous brew that’s rattling bond markets
Bloomberg TV was just running a regular segment on the bond market called “Real Yield”. Naturally rising rates and bond yields were in focus. Just as naturally, the culprit was identified as inflation. But there was no mention of the Fed’s decade of ZIRP and QE, nor of the Fed’s printing of trillions in 2020-2022, nor of the Fed ceasing its rate hikes and even cutting rates in 2023-2025 while consumer price inflation was still well above even its own inflated target, nor of it restarting QE in December, nor of oil prices starting to rise that same month, nor of the massive supply of debt hitting the markets. Tariffs and the Iran war were however repeatedly cited.
Just innocent amnesia I’m sure.
It’s exactly what you referred to as the media’s role in not laying out the real reasons. Amnesia is one way of explaining it, myopia would be another.
You made an interesting point about gold hitting a glass ceiling. Linking this with your view on commodities vs treasuries, the long term trend for gold is up. I’m curious to better understand how this plays out, given how gold prices behaved in the decades between the 80s to 2020.
Donning my tin foil hat, I would go even further to suggest that there’s a heavy media bias involved. Mainstream financial outlets are Wall Street mouthpieces. Wall Street profits immensely from inflation and created the Fed to make it happen. I can’t prove it, but the circumstantial evidence is overwhelming. These media have a stake in keeping the sunlight off the Fed.
Major bull markets usually start when something gets too cheap, and a few investors begin to notice the potential. Later, even after the asset has surpassed fair value, it keeps going, as later speculators pile in just because it’s “going up”. So it was with gold in the 1970s. It began the decade a generational bargain and ended it in a bubble. It had been deeply depressed by being pegged to the dollar as the dollar lost value for decades. We did a deep dive on this in Copper & Gold. The seventies rebound was at least part “beach ball effect”, as a beach ball held under water shoots to the upside when released.
This background shows why it’s hard to draw firm inferences about how gold might perform in the future from the earlier experience alone. That would require similar initial conditions, beginning in bubble prices due to having been released from decades of suppression. Beginning in 1980, gold underperformed dollars for two decades due to having begun the period near a bubble peak.
Not that the experience is useless, but we have to augment it with other angles. It takes a two handed economist. On one hand, gold is richly priced relative to most of its physical commodity peers. On the other hand, its physical commodity peers don’t have the monetary qualifications gold does, especially at a time when the modern world’s most popular money is on the decline.
Gold has already risen by around twenty times versus dollars since its early century lows, and has even smartly outperformed stocks on the millennium to date. You have to wonder how much is left. But there’s no limit to how low dollars can go … whatever their current value, they can always lose another 10%, 90% or whatever. And stocks, at least US stocks, are near all time record valuations. So it’s all in what you compare it to. For these reasons, in the long run, it compares favorably to US dollars and US stocks. Other commodities are more of a contest. Fortunately the real world does not require us to choose only one investment, but rather encourages us to own a combination.
Nearer term is a tougher call. After the sprint it’s been on the past year or few, it deserves a bit of a rest. Base case is it zigs zags its way sideways in dollar terms for a while, possibly for the balance of the year, before taking another leg up. But the dollar price is at least as much a bet on the value of the dollar as it is on gold, and while in the short run, especially given the widespread belated recognition that inflation is a problem, policymakers are under pressure to support the dollar (keeping a lid on gold prices), in the long run they’re sure to inflate, especially given the government’s massive debt load (setting gold prices free).
Thank you for the detailed response. The referenced post, “Copper & Gold” provides additional, valuable, context.
Dudley Says Fed Credibility At Risk On Years Of Missing 2% Goal
Years late and trillions short. Where was Dudley’s concern when the Fed stopped tightening and actually started cutting rates with consumer inflation still well above 2%? Where was Dudley when the Fed kneecapped its cred by announcing a 2% goal in the first place? Why is he just getting worked up about this now? Why is Bloomberg running a headline like this now? Could agitating for a tighter Fed have anything to do with political bias?
You bet your bottom dollar:
Dudley Urges Fed to Sway Election Against Trump
Former Fed Official: Fed Should Try to Hurt Trump’s 2020 Chances
This was from August 2019. Bloomberg may have a Swiss cheese memory but Financology does not.
For what it’s worth I happen to agree that monetary policy should be tighter. But I didn’t just wake up to the notion in the middle of an election year.
Mega’s dispatch from England:-Electric dreams…………& nightmares.
I leave Trump reporting for now as he 100% off his head. I rather focus on a few developments in the EV space.
1st of all let me say i am delighted that our very own Finster has just become an EV owner. I think his timing is spot on, i fear the next few months will show just how well. As many will know that i watch the EV/Battery tec space like a hawk.
China has this market by the balls!
CATL/BYD/GOTION now have almost World wide battery dominance. There is a small chance that the West could right the sinking ship by leap froging via Solid State battery tec….but it looks unlikely.
The only SSB that seems to work is a Silver carbon type that requires a lot of silver (YYEESS!!)
Only the most expensive cars will have them.
Meantime Honda seems to have a bit hit on their hands with the “Super one”. This tiny little car, not much bigger than a Washing machine is selling in Japan like hot cakes! They planed for a run of 10,000 cars for the year, its been out for 3 weeks & they got more than 7,000 orders!
Its selling point is it has a sound generator & can mimic gear changes. Its only got a 30 kwh battery thus limited range but if you live in Japan its not that much trouble. I looking at it because it looks fun, but early reports spoke 0-60 in 7-8 secs, now looks rather disappointing almost 10!…………..Bugger.
This week we also had Ferrari showing its 1st EV…………..OMG!!!!!!!!!!!
Its a 4 door, 5 seat lump of sh1t ………..it uses already out of date battery tec. They named it “Light”……strange because this turd weights in at over 2.2 tons!
Yes it got 1000HP+ but so what………….oh they want $650K for it.
Cant wait when Toyota produce the Lexus LFA ev with SSB tec……………
Cheers
Mike
It’s an improvement over 2%.
18 words from Fed Chair Kevin Warsh that could keep interest rates higher for years
“I believe that price stability should be a change in prices such that no one’s talking about it.”