This is excellent. During the financial crisis a generalist long-only fund manager said to me: "House prices can't fall -30%, Gordon Brown would never win the next election if that happened." Their analysis was correct, but they lost lots of money....
with all the noise around because of the policy changes that are being implemented, it is very difficult to see signal. I think this is a very valid observation. and simply a different way of saying buy gold, sell bonds a la your GLD/TLT trade
In all your comments on the topic I am yet to see you address the elephant in the room - the level of government (as well as total) debt as well as deficit. The examples you are referring to (both EMs as well as DMs in the 70s) a) started off at much lower debt and deficit levels and b) did not entail a major shift in global trade on top.
I do believe the trend of increasing rates will continue (many fundamental reasons for it), but I believe price discovery will cease way before we approach those levels (and no, Fed dropping rates and doing QE will not be enough).
Jeffrey Gundlach's suggestion that yields are instead capped at 1% (on all debt) as well as selective default (China is the obvious candidate here) and restrictions on movement of capital seem more probable than 10yr at 10%.
So Fed can end up (BoJ style) owning most of the UST market but other assets ie IG / HY bonds / equity earnings yields will need to clear at much higher rates? Doesn’t the Fed just end up buying everything (again BoJ style towards the end of deflation period)?
I agree with you that given the general economy strength they can’t do a BoJ without usd currency collapse or capital controls, but trying to steelman that logic it as politically US system will do whatever they can…
To seed, build, and nurture timeless, intangible human capitals — such as resilience, trust, truth, evolution, fulfilment, quality, peace, patience, discipline, relationships and conviction — in order to elevate human judgment, deepen relationships, and restore sacred trusteeship and stewardship of long-term firm value across generations.
A refreshing take on our business world and capitalism.
A reflection on why today’s capital architectures—PE, VC, Hedge funds, SPAC, Alt funds, Rollups—mostly fail to build and nuture what time can trust.
“Built to Be Left.”
A quiet anatomy of extraction, abandonment, and the collapse of stewardship.
"Principal-Agent Risk is not a flaw in the system.
To seed, build, and nurture timeless, intangible human capitals — such as resilience, trust, truth, evolution, fulfilment, quality, peace, patience, discipline, relationships and conviction — in order to elevate human judgment, deepen relationships, and restore sacred trusteeship and stewardship of long-term firm value across generations.
A refreshing take on our business world and capitalism.
A reflection on why today’s capital architectures—PE, VC, Hedge funds, SPAC, Alt funds, Rollups—mostly fail to build and nuture what time can trust.
“Built to Be Left.”
A quiet anatomy of extraction, abandonment, and the collapse of stewardship.
"Principal-Agent Risk is not a flaw in the system.
Well, howeever you slice it, there are many underlying distortions in the world economy and I can see a deflation scenario, as well. US is not an isolated case, it has ripple effects on world economy..
Take this: Now that US is forcing the exporters' hand with the tariffs, it is basically saying US no more the dumping ground for those merchantilist countries, i.e. Germany, China, EU, Japan and so on.
With this, all that excess capacity across the world needs to be absorbed unless they want to deal with deflation with already high debt levels (both public and private) and hidden unsustainable debt levels.
If they don't , they will be facing deflation and US treasuries might as well rally (i.e. yields tank, in that scenario).. Last I checked, with a ton of hands on experience, I would take US 'rule of law' at bankruptcy courts, any day, comparing to EU or Japana or god forbid, China..
Otherwise, if they don't want to face this deflation, these merhantalists will need to boost their internal consumptions. If they do so, it will require a lot of fiscal space and debt funded stimulus, which would be inflationary. In that case, well, I guess capital can flow to US, and push the yields lower. This might play out counter to inflationary pressures US will be facing, as you laid out in your scenario.
I think my point was that any country, other than the US, that became reliant on capital flows suffered a crisis at some point - so nations that a crisis adverse tended to become exporters.
Another observation, is that only countires with strong currencies became wealthy, and these were countries that tended to export. There is a reason that Germany is the cornerstone of Europe and not Italy.
The US made these rules (as with limited defence spending) - to turn around and blame Japan and Europe for following rules that the US set is extremely unfair. That is why no one outside of the US understands it.
The recent election results seemed to indicate that people voted against inflation. Is the idea that wage growth will cause some amount of inflation so people just get used to it and as long as they get higher wages they are happy? Otherwise it seems like pushing inflationary policy would be contrary to politicians’ interests
Beginner question here. Why bond yields tend to go up when government are pro labour? Does that mean the government are leaning into having more debt to spur local industries?
Russell! Your best ever post! Look after the elbow and the knees!
This is excellent. During the financial crisis a generalist long-only fund manager said to me: "House prices can't fall -30%, Gordon Brown would never win the next election if that happened." Their analysis was correct, but they lost lots of money....
with all the noise around because of the policy changes that are being implemented, it is very difficult to see signal. I think this is a very valid observation. and simply a different way of saying buy gold, sell bonds a la your GLD/TLT trade
In all your comments on the topic I am yet to see you address the elephant in the room - the level of government (as well as total) debt as well as deficit. The examples you are referring to (both EMs as well as DMs in the 70s) a) started off at much lower debt and deficit levels and b) did not entail a major shift in global trade on top.
I do believe the trend of increasing rates will continue (many fundamental reasons for it), but I believe price discovery will cease way before we approach those levels (and no, Fed dropping rates and doing QE will not be enough).
Jeffrey Gundlach's suggestion that yields are instead capped at 1% (on all debt) as well as selective default (China is the obvious candidate here) and restrictions on movement of capital seem more probable than 10yr at 10%.
Rapidly increasing nominal GDP will help a lot... as it did in 50s 60s and 70s - and even Greece in 20s.
Yield control on treasuries are possible. But commercially set rates will.be higher
So Fed can end up (BoJ style) owning most of the UST market but other assets ie IG / HY bonds / equity earnings yields will need to clear at much higher rates? Doesn’t the Fed just end up buying everything (again BoJ style towards the end of deflation period)?
Could do... but gold is already suggesting monetary policy is too loose
I agree with you that given the general economy strength they can’t do a BoJ without usd currency collapse or capital controls, but trying to steelman that logic it as politically US system will do whatever they can…
Hello there,
Huge Respect for your work!
New here. No huge reader base Yet.
But the work has waited long to be spoken.
Its truths have roots older than this platform.
My Sub-stack Purpose
To seed, build, and nurture timeless, intangible human capitals — such as resilience, trust, truth, evolution, fulfilment, quality, peace, patience, discipline, relationships and conviction — in order to elevate human judgment, deepen relationships, and restore sacred trusteeship and stewardship of long-term firm value across generations.
A refreshing take on our business world and capitalism.
A reflection on why today’s capital architectures—PE, VC, Hedge funds, SPAC, Alt funds, Rollups—mostly fail to build and nuture what time can trust.
“Built to Be Left.”
A quiet anatomy of extraction, abandonment, and the collapse of stewardship.
"Principal-Agent Risk is not a flaw in the system.
It is the system’s operating principle”
Experience first. Return if it speaks to you.
- The Silent Treasury
https://tinyurl.com/48m97w5e
Hello there,
Huge Respect for your work!
New here. No huge reader base Yet.
But the work has waited long to be spoken.
Its truths have roots older than this platform.
My Sub-stack Purpose
To seed, build, and nurture timeless, intangible human capitals — such as resilience, trust, truth, evolution, fulfilment, quality, peace, patience, discipline, relationships and conviction — in order to elevate human judgment, deepen relationships, and restore sacred trusteeship and stewardship of long-term firm value across generations.
A refreshing take on our business world and capitalism.
A reflection on why today’s capital architectures—PE, VC, Hedge funds, SPAC, Alt funds, Rollups—mostly fail to build and nuture what time can trust.
“Built to Be Left.”
A quiet anatomy of extraction, abandonment, and the collapse of stewardship.
"Principal-Agent Risk is not a flaw in the system.
It is the system’s operating principle”
Experience first. Return if it speaks to you.
- The Silent Treasury
https://tinyurl.com/48m97w5e
Well, howeever you slice it, there are many underlying distortions in the world economy and I can see a deflation scenario, as well. US is not an isolated case, it has ripple effects on world economy..
Take this: Now that US is forcing the exporters' hand with the tariffs, it is basically saying US no more the dumping ground for those merchantilist countries, i.e. Germany, China, EU, Japan and so on.
With this, all that excess capacity across the world needs to be absorbed unless they want to deal with deflation with already high debt levels (both public and private) and hidden unsustainable debt levels.
If they don't , they will be facing deflation and US treasuries might as well rally (i.e. yields tank, in that scenario).. Last I checked, with a ton of hands on experience, I would take US 'rule of law' at bankruptcy courts, any day, comparing to EU or Japana or god forbid, China..
Otherwise, if they don't want to face this deflation, these merhantalists will need to boost their internal consumptions. If they do so, it will require a lot of fiscal space and debt funded stimulus, which would be inflationary. In that case, well, I guess capital can flow to US, and push the yields lower. This might play out counter to inflationary pressures US will be facing, as you laid out in your scenario.
I think my point was that any country, other than the US, that became reliant on capital flows suffered a crisis at some point - so nations that a crisis adverse tended to become exporters.
Another observation, is that only countires with strong currencies became wealthy, and these were countries that tended to export. There is a reason that Germany is the cornerstone of Europe and not Italy.
The US made these rules (as with limited defence spending) - to turn around and blame Japan and Europe for following rules that the US set is extremely unfair. That is why no one outside of the US understands it.
I think tariff could have prohibited cheap goods flowing from deflationary places to inflationary places, so I double that could tank the yields in US
And capital to US… well I think this would also be interrupted since US is not “exporting” US dollar through trade anymore
Russell wcan asset prices fall with ought higher rates just do to simple unaffordability?
Sure. My guess profitability will decline as costs continue to rise
The recent election results seemed to indicate that people voted against inflation. Is the idea that wage growth will cause some amount of inflation so people just get used to it and as long as they get higher wages they are happy? Otherwise it seems like pushing inflationary policy would be contrary to politicians’ interests
Higher wages lower prices... tariffs and doing a deal with OPEC fits that
Beginner question here. Why bond yields tend to go up when government are pro labour? Does that mean the government are leaning into having more debt to spur local industries?
Wages are the true source of inflation... technology is naturally deflationary