Let's assume, as you do, that we are in a secular inflation.
Let's also assume that the 2022 rate hikes will impact the economy with the usual lag.
This means, at some point, higher unemployment, which is what the Fed is apparently looking for.
You must be assuming either (or both);
1. high number of boomer retirees and low immigration would force the Fed to raise much higher to achieve their desired impact on labour and inflation
Or
2. politically expedient fiscal stimulus will soften the blow and force the Fed to raise further.
Or, they may slow/stop and somehow achieve the miraculous soft landing.
However, in case they do achieve their desired outcome and cause a rise in unemployment, this may get sufficiently out of hand to convince them to, yes, 'pivot', with a result of a temporary drop in yields before inflation takes hold again - which is what I think the market is betting on.
Both you and the market may be right - but at different points in the future?
So when you publish your position, are you talking about the long term trend or a tactical trade?
When World War II ended, investors were buying bonds and selling equities as they prepared for deflation, but governments did not reduce spending as they did after World War I, they increased it. Rebuilding destroyed nations, building social safety nets, and a policy that focused on full employment and rising wages meant that the 1950s and 1960s are largely devoid of any recession - recession really only returned in the 1970s, and when bond yields were much higher - and that is where I think we are going. China is a model, you might get slowdowns - but no financial crisis, at least not yet!
Hi Russell, thanks for the update. What do you make of: 1) the net short position of of non-commercials in USTs according to COT reports and 2) the decline in the FAO food price index (https://www.fao.org/worldfoodsituation/foodpricesindex/en/) and most food commodity price indices? I don't have a lot of experience interpreting these, but they seem to run counter to your thesis, at least in the short run? Like I said before don't disagree with your long-term secular thesis but unsure about how it plays out in the next 6 to 12 months.
Hi Cyril - there is a strong trend following bias in treasuries. So the COT data is doing what I would expect, be short after a sell off. That what the TLT was also doing, but this time its different to the COT data by being long all the way down... COT data is still less short than what we saw in 2018.. so maybe bonds need to rally to get the CTAs to go flat - but not convincing.
On food pricing, I am using Chinese beef and pork pricing as a lead on world food prices - and both have rallied this year. Chinese pork is up from CNY17 per kg in March to CNY31 per kg today. Chinese pork prices rallied in 2019, a good year before global food prices rallied, so I see current weakness as a buying opportunity, particulalr if the USD continues to weaken.
Phew I was beginning to worry. Was an interesting Russel Napier interview (from April) highlighting that Long end Bonds could be pushed down the markets throats. Ie political influence could be brought to bare - podcast was Behind the Balance Sheet (Stephen Clapham)
My question is about timing.
Let's assume, as you do, that we are in a secular inflation.
Let's also assume that the 2022 rate hikes will impact the economy with the usual lag.
This means, at some point, higher unemployment, which is what the Fed is apparently looking for.
You must be assuming either (or both);
1. high number of boomer retirees and low immigration would force the Fed to raise much higher to achieve their desired impact on labour and inflation
Or
2. politically expedient fiscal stimulus will soften the blow and force the Fed to raise further.
Or, they may slow/stop and somehow achieve the miraculous soft landing.
However, in case they do achieve their desired outcome and cause a rise in unemployment, this may get sufficiently out of hand to convince them to, yes, 'pivot', with a result of a temporary drop in yields before inflation takes hold again - which is what I think the market is betting on.
Both you and the market may be right - but at different points in the future?
So when you publish your position, are you talking about the long term trend or a tactical trade?
Very good question - and how I deal with this is the subject of post soon...
Hi. Do you not think the recent action of TLT is simple short covering that may have been aided by trnd traders hoping aboard as year ends?
Coupled with this, it would be interesting to hear your no recession thesis too.
When World War II ended, investors were buying bonds and selling equities as they prepared for deflation, but governments did not reduce spending as they did after World War I, they increased it. Rebuilding destroyed nations, building social safety nets, and a policy that focused on full employment and rising wages meant that the 1950s and 1960s are largely devoid of any recession - recession really only returned in the 1970s, and when bond yields were much higher - and that is where I think we are going. China is a model, you might get slowdowns - but no financial crisis, at least not yet!
Hi Russell, thanks for the update. What do you make of: 1) the net short position of of non-commercials in USTs according to COT reports and 2) the decline in the FAO food price index (https://www.fao.org/worldfoodsituation/foodpricesindex/en/) and most food commodity price indices? I don't have a lot of experience interpreting these, but they seem to run counter to your thesis, at least in the short run? Like I said before don't disagree with your long-term secular thesis but unsure about how it plays out in the next 6 to 12 months.
Hi Cyril - there is a strong trend following bias in treasuries. So the COT data is doing what I would expect, be short after a sell off. That what the TLT was also doing, but this time its different to the COT data by being long all the way down... COT data is still less short than what we saw in 2018.. so maybe bonds need to rally to get the CTAs to go flat - but not convincing.
On food pricing, I am using Chinese beef and pork pricing as a lead on world food prices - and both have rallied this year. Chinese pork is up from CNY17 per kg in March to CNY31 per kg today. Chinese pork prices rallied in 2019, a good year before global food prices rallied, so I see current weakness as a buying opportunity, particulalr if the USD continues to weaken.
Phew I was beginning to worry. Was an interesting Russel Napier interview (from April) highlighting that Long end Bonds could be pushed down the markets throats. Ie political influence could be brought to bare - podcast was Behind the Balance Sheet (Stephen Clapham)
The other thing it implies is curves could invert even more!
Give me a one armed economist... Well I’m short TLT right now. Entered yesterday 108.75, looks like it’s turning but these days nothing surprises me.