Jim Grant On The Bond Bear Market, Jerome Powell And Much More
Well, everyone wants to talk about rates these days and it's no mystery why.
The Fed is under new leadership at a pivotal juncture. Balance sheet rundown has commenced and the Trump administration has embarked on what multiple sellside desks (see here, here, and here for a few takes) have described as an ill-advised quest to try and supercharge an already hot economy with late-cycle expansionary fiscal policy.
And so, the supply/demand dynamic in the Treasury market has shifted. Financing
I like his response to the risk parity question. It’s a problem I’ve been wrestling with. My gut has been telling me bonds are in trouble, but any equity vol spike brings back the bond bid… and then the BTD crowd in equities. Question is, where’s the bond & equity flow going to go in a coordinated decline? Commodities? That’s a tough one to stomach for me as well in a stagnant growth environment (even after reading Kevin Muirs take). Cash? Hell no. I just keep having this nagging feeling that says “it’s been a nice ride up to this point, but you’re fucked”
>Question is, where’s the bond & equity flow going to go in a coordinated decline? Commodities?
Well, the gold bugs would say gold.
Or maybe highest-quality short-term corporate bonds? We need to be more nuanced about bonds because the short-term T-bills are better than the T-bond. But the thing about corporates are that they’re often secured with collateral whereas gov’t bonds are backed by nothing except empty government promises which are worthless in the context of the coming great global sovereign debt crisis. Too many people forget that sovereigns have a long, perfect history of default. Europe and EM are the worst serial defaulters. It starts there.
What rose in February was Yen, of course, and much more surprisingly (to most) were the dim sum bonds (Chinese bonds that trade in Hong Kong). These aren’t really EM anymore, not with over $12-trillion of various sovereign wealth funds and cash reserves on-hand (plus the most gold in the world). So arguably, the dim sums are now safer than the US T-bonds in a global crisis (I said “arguably”, as the February price action suggests), although they’re probably two decades away from having anything nearly as deep & liquid a bond market, if ever.
By the way, that’s a great post and everyone should have the same concern. I assume you’re “hell no” on cash because it has to be held in a bank, right? More than ever now with the war on cash and proving source-of-funds etc. But there exist a very tiny number of 100% non-fractional-reserve custodian banks in the world, which may protect you from an insolvent bank or bail-in but NOT from currency devaluation (as in, $200-trillion of new reserves were issued overnight pursuant to an emergency meeting of the Treasury and Federal Reserve). Some of the uber-rich have recently moved into prime rental real estate and farmland (eg., many of the top Tech founders lately) in hopes of preserving wealth. But of course prices of these are already very inflated. Ditto for stocks and collectibles. And for anything debt-based there’s the increasing chatter/advocacy of a debt jubilee among the left, who seem likely to take office next. So yeah, it seems we’re fucked.
Don’t forget lithium miners / recyclers for safe haven.
Since I’m an Ag Producer, I see the seeds of a budding (get it?) in the next growth by way of automated crop management and enclosed near-hydro grow systems.
Look for the MJ businesses to take the sunk-cost hit. Then the long money is in leasing.
PS: The MJ Index is the best new rock-n-roll niche going. Weed will become steady like liquor or tobacco.
Yes, I just can’t find a damn thing I want to buy right now. It does feel like we will see another leg up in equities though… before the pin prick, as stockman put it. But everything’s just too rich at this point to be interesting. And the gold bugs, well, I can’t remember a time they didn’t say to buy gold. Personally, I don’t like gold as an investment or a hedge. There are other commodities I’d gamble on before going there.