Bond Bull STILL bullish - news at 11, some context (and REALZ back to 1870s); Xi Jinping warns JPOW
"Inflation has been one of the most widely reported and discussed economic factors in the past year ..." and WHY, "... the faster observed inflation of last year should unwind noticeably in 2022..."
Its different this time. He’s FINALLY gonna be wrong. Look at what yields have done so far YTD. Maybe the Fed will not only hike rates but stop QE cold turkey? Rates will continue to go UP for, you know, all the right reasons … OR, maybe, just maybe, this is the PERFECT TIME TO PAUSE AND READ what follows. Nobody likes the bond market. 60/40 is dead and buried and the ONLY way to stay ahead of inflation is, you know, ticker: TINA?
Seriously, though, this is the perfect time to pause and read a counter argument TO the most common refrain on global Wall Street — rates are going up.
Earlier I posted a quick summary of HIMCOs Q4 note via BBG,
When someone of this caliber writes 4x / year, there is some longer-term thinking going in to these pieces. The fund he works for/with,
The Wasatch-Hoisington U.S. Treasury Fund has lost about 7.8% over the past month as long-term government debt yields rose; last year it lost 4.9% after gaining 20% in 2020 …
Vigilantes vs. Heroes (BMO) and main informant of what happened while we slept ALSO writes a closing ‘call’
These guys have been EXTREMELY helpful over the years perhaps because they write so much, they are somewhat more easily dismissed.
By now you’ve probably decided whether or not you want to READ THIS LATEST and I know that haters gonna hate. There’s simply nobody who has presented a more compelling argument and is able to do it and present visuals of REAL YIELDS dating back to 1870s,
… Excluding the 1914-20 and the 1939-53 periods from the post 1870 sample still leaves a robust sample of 130 readings (Chart 2). During this lengthy span, cyclical and secular economic conditions resulted in a negative yearly average for real Treasury bond yields twelve times, or just 8% of the time. In the eleven cases prior to 2021, nine of the negative real yield periods coincided with recessions – 1902-03, 1907, 1910, 1912, 1937, 1974-75, and 1980. Real long maturity yields were negative in 1934, which while not a recession year, happened during the horrific conditions of the Great Depression (1929-1939). In only one case, 1979, does the negative real yield happen during an economic expansion when the economy is not in a highly depressed state. Filtered by the five year sustained level of indebtedness criteria, the 2021 negative real yield was a singular event (Table 1).
Inflation has been one of the most widely reported and discussed economic factors in the past year. Surging energy, rents, building materials, automotive, food and supply disruptions have boosted the year-over-year rise in the inflation rate to the fastest pace in decades. While some see this increase as a good economic sign, its increase actually had the effect of reducing real earnings by 2%. Even though unemployment fell in 2021, consumers became more alarmed by the drop in real wages according to surveys. The faster inflation shredded the budgets of about 75% of our households. In November, the level of real per capita disposable income equaled the year ago level which was also the lowest level since March of 2020. Consistently, The University of Michigan indicates consumer sentiment in the fourth quarter was worse than during the height of the 2020 pandemic and at the levels of the beginning of the very deep 2008-09 recession. Consumers cut back significantly on their buying plans as expectations for increases in future income slumped. To fund the sharply higher cost of necessities, households have been forced to reduce the personal saving rate in November to 6.9%, or 0.4% less than in December 2019. Needing to tap credit card lines undoubtedly contributed to the erosion in consumer confidence measures. Without the sizable cut in personal saving, real consumer expenditures were barely positive in the fourth quarter. With money growth likely to slow even more sharply in response to tapering by the FOMC, the velocity of money in a major downward trend, coupled with increased global over-indebtedness, poor demographics and other headwinds at work, the faster observed inflation of last year should unwind noticeably in 2022.
Due to poor economic conditions in major overseas economies, 10- and 30-year government bond yields in Japan, Germany, France, and many other European countries are much lower than in the United States. Foreign investors will continue to be attracted to long-term U.S. Treasury bond yields. Investment in Treasury bonds should also have further appeal to domestic investors, as economic growth disappoints and inflation recedes in 2022.
Chinese President Xi Jinping took to the virtual Davos stage to address Fed Chairman Jerome Powell with this message: Please don’t lift interest rates.
“If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers. They would present challenges to global economic and financial stability, and developing countries would bear the brunt of it,” said Xi, according to a transcript of his remarks on Monday …
… Xi has reason to be nervous about Fed tightening.
