The bias comes to mind. Most people developed a bias to justify their thoughts and actions. We see it today in economic, climate, health, crime, & education data. A lot of this topic are taboo but if you look through the data you generally find that the narrative does not follow the truth. We hear phrases, like yea but or I feel instead of this is what the data says. As I have become older I see this more and more to the point where I find myself not wanting to engage with my follow citizen because it is self defeating. We have never have more information available than we do today, yet people do not want to believe it. They rather cherry pick making the narrative stick. Review what happen with Covid-which is happen with climate change today.
“Having talked to a lot of people in recent months, the truth is that most people have built their financial plans around yields staying low, or even worse have large mortgages that they cannot finance at higher levels.”
I absolutely agree with this statement but this holds true for old people who have paid off their mortgage as equally as for the young as well, because of 401k plans and the fact that basically the entire wealth of some societies in the west (especially AU,CA,UK + the US) is tied to stock and bond markets.
Everyone is aware of this so how should it be possible for yields to rise materially further if it becomes the most serious political risk?
It’s the same behavior and incentive scheme for governments acting as “wealth cartels” as for tech companies building price cartels.
I find it very difficult to believe that governments in the west would let a central bank independently push rates higher, even if it’d be the “right thing to do”.
Brilliantly stated! I started my career as an Forex analyst in March 1986 in the early stages of what is probably the greatest dollar bear market in history. I was confidently bearish too because I didn’t live through the earlier bull market. The “seasoned” guys kept trying to buy it and get clobbered.
Later, when I ran a futures research department I would have the ag guys offer an opinion on the financial futures on the idea that a smart analyst casually looking at another market could sometimes see the “forest” better than the analyst assigned to the sector.
It’s hard to be flexible on markets when you create a narrative. There were several guys who got out of equities in 2008. I don’t know of many who got back in at a good spot.
Love that way of thinking of it, and love the short 30Y.
At the same time, at some point, the Fed and the Treasury find another 4-letter bazooka to save the long end. They've proven willing and able to do that many times over now. Can I see a 5.5% 30Y, yep.
Above that, they come in riding horse YCC style. They need a buyer of treasuries - if it's not end users then it has to be the Fed.
In our deeply financialized economy, I can't imagine rates hitting 10% without triggering a recession and bank insolvency crisis that gives the Fed cover to cut rates and resume QE. I fear the political pressure on the Fed to accommodate government spending will soon overwhelm the stable dollar and low unemployment mandates anyway. The free market price may be 10%, but we'll never see it.
With 15 years of ultra-low rates, many companies & gov'ts have gotten addicted to easy money. They don't want to believe that rates will remain higher.
Watching the post-FOMC press confrences, some of the financial reporters are practically begging Powell for rate cuts. The Fed Funds futures market (& SOFR 3-month curves etc) constantly "predict" rates will be lower and end up correcting up...
You're right about many not seeing the truth of higher rates.
I believe Hugh Hendry has commentary on this and I think his sense is that there’s a path to getting to higher rates but first there will be lower rates.
I just read a recent note from another favorite, Albert Edwards. What happens if the US does adopt yield curve control? Will the truth be 3% 10-year rates? Will inflation be expressed in commodities?
The bias comes to mind. Most people developed a bias to justify their thoughts and actions. We see it today in economic, climate, health, crime, & education data. A lot of this topic are taboo but if you look through the data you generally find that the narrative does not follow the truth. We hear phrases, like yea but or I feel instead of this is what the data says. As I have become older I see this more and more to the point where I find myself not wanting to engage with my follow citizen because it is self defeating. We have never have more information available than we do today, yet people do not want to believe it. They rather cherry pick making the narrative stick. Review what happen with Covid-which is happen with climate change today.
You say:
“Having talked to a lot of people in recent months, the truth is that most people have built their financial plans around yields staying low, or even worse have large mortgages that they cannot finance at higher levels.”
I absolutely agree with this statement but this holds true for old people who have paid off their mortgage as equally as for the young as well, because of 401k plans and the fact that basically the entire wealth of some societies in the west (especially AU,CA,UK + the US) is tied to stock and bond markets.
Everyone is aware of this so how should it be possible for yields to rise materially further if it becomes the most serious political risk?
It’s the same behavior and incentive scheme for governments acting as “wealth cartels” as for tech companies building price cartels.
I find it very difficult to believe that governments in the west would let a central bank independently push rates higher, even if it’d be the “right thing to do”.
Maybe the answer is fiscal policy….
Brilliantly stated! I started my career as an Forex analyst in March 1986 in the early stages of what is probably the greatest dollar bear market in history. I was confidently bearish too because I didn’t live through the earlier bull market. The “seasoned” guys kept trying to buy it and get clobbered.
Later, when I ran a futures research department I would have the ag guys offer an opinion on the financial futures on the idea that a smart analyst casually looking at another market could sometimes see the “forest” better than the analyst assigned to the sector.
It’s hard to be flexible on markets when you create a narrative. There were several guys who got out of equities in 2008. I don’t know of many who got back in at a good spot.
Good observations. Of course, the fact that PRICE = TRUTH is what makes such a fan of Trend Following.
I can see the US 30 year at 6% but without a signpost on inflation it's not meaningful.
The key question is where CPI stabilises, a 2% real yield on TIPS is too high in my opinion.
Love that way of thinking of it, and love the short 30Y.
At the same time, at some point, the Fed and the Treasury find another 4-letter bazooka to save the long end. They've proven willing and able to do that many times over now. Can I see a 5.5% 30Y, yep.
Above that, they come in riding horse YCC style. They need a buyer of treasuries - if it's not end users then it has to be the Fed.
In our deeply financialized economy, I can't imagine rates hitting 10% without triggering a recession and bank insolvency crisis that gives the Fed cover to cut rates and resume QE. I fear the political pressure on the Fed to accommodate government spending will soon overwhelm the stable dollar and low unemployment mandates anyway. The free market price may be 10%, but we'll never see it.
With 15 years of ultra-low rates, many companies & gov'ts have gotten addicted to easy money. They don't want to believe that rates will remain higher.
Watching the post-FOMC press confrences, some of the financial reporters are practically begging Powell for rate cuts. The Fed Funds futures market (& SOFR 3-month curves etc) constantly "predict" rates will be lower and end up correcting up...
You're right about many not seeing the truth of higher rates.
I believe Hugh Hendry has commentary on this and I think his sense is that there’s a path to getting to higher rates but first there will be lower rates.
I just read a recent note from another favorite, Albert Edwards. What happens if the US does adopt yield curve control? Will the truth be 3% 10-year rates? Will inflation be expressed in commodities?