Goldman Asks The Big Question: Is This The End Of The Low Vol. Regime?
The narrative in 2017 revolved around two things: "Goldilocks" and the low vol. regime.
"Goldilocks" of course refers to the synchronous upturn in global growth and well-anchored inflation. Inflation needed to be low enough to keep DM central banks from falling behind the curve or, perhaps more importantly (because really, with all of the models now broken, what even is "the curve"?), to keep the market from thinking that policymakers are behind the curve.
Of course there was always an inh
I don’t agree with the implication that real yields are heading higher and so is the Vix. Real growth is headed lower, and so real yields on long term T’s will follow suit. QT and funding needs will keep the short end of the curve high, leading to an inverted yield curve. And it will be the fundamental decline in real growth that leads to a dramatic repricing of equity multiples, sending the Vix far higher. Basically, this positive correlation will be short lived (is a 0.4 R squared even significant? On wall street it is!), Just like it was short-lived the four other times correlation reached 0.4 since 2013.
Rudy, I would be interested to hear your views on the likelihood of long term rates moving up due to increased treasury supply later this year and beyond (perhaps coupled with decreased overseas demand for treasurys) to an extent sufficient to offset what would otherwise be lower yields resulting from lower growth. I happen to agree with your lower growth forecast.
I don’t see long term treasury yields rising meaningfully. The 30-year is the market’s closest gauge of long-term real growth and inflation expectations in the US. Demographics and technology will keep a lid on inflation, and peak debt will prevent the pull-forward of future demand into the present. I’m increasingly of the view that we are in the “mature” stage of our economic systems lifecycle, hence all the optimization efforts around logistics (Amazon), transportation (Uber, autonomous cars), and even housing (tiny houses!). Foreign demand declining is a well documented threat to yields, but to me it’s only a threat, not something the Chinese will actually employ. They’re too deeply in bed with us to fuck us like that. The real wildcard in all this, in my view, is helicopter money from the US government. Contrary to popular belief, QE did not involve “printing money.” But faced with declining real growth and potential deflation, the US will be forced to consider actually printing money and paying it out to citizens. We could see a 5% 30-year yield then comprised of -2% real growth and 7% inflation, so that would change my view.