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Behold: The Great Golden Disconnect
Gold's an inverse real yields play. Everyone knows that. It's axiomatic.
If you're not enamored with shiny objects, yellow metal has one thing, and one thing only, going for it: It's an inflation hedge. It has no internal rate of return.
So, if inflation-adjusted yields on safe-haven bonds are high, the opportunity cost for holding gold is too. If the price doesn't rise enough to compensate for forgone interest (plus any storage costs or ETF fees you might incur to own it safely), gold's an al
I, and presumably tens of thousands of others, have been reflecting on the debt explosion for a few years now and how to invest for it. In my amateur, humble view, the last paragraph is the only way out. It’s not hard to understand as there are only a few ways out: taxes, spending cuts, default, and inflation. I also understand MMT, but it does seem that inflation is/will keep that somewhat limited.
The political environment is so bad, we are unlikely to get a combination of the first two. Maybe around the edges a bit, but no grand bargain. That leaves default (not really possible for US Debt) and inflation. Therefore, unless I misunderstand (always possible), Mr. Hartnett’s view seems accurate.
Hence the increase in real assets. I for one have shortened up my bond duration, increased exposure to gold, oil, copper, and real estate.
I know they you don’t give investment advice H, but I’d love to hear your thoughts on the $36T in federal debt and some further thoughts on positioning. Unfortunately, it’s not just the government who is highly levered. Credit card, automotive, student, and HELOC are all very high. When does it all hit and what is the way out? How do we invest in that environment?
I think you’re over-dramatizing it. All of this stuff’s just entertainment. Here’s what’s going to happen. Debt’s going to keep piling up all around the world, most of it won’t be paid back and certainly not in our lifetimes. People will fret about it, but the proverbial “can” will continue to be kicked. And the overwhelming odds are that anyone who’s at least 30 today will die (long) before any kind of “reckoning.” So, don’t worry about it.
(I’ll continue to pretend to be worried about it, though. The world needs entertainment after all.)
Thanks. Fair enough. I hope that you’re correct. And, to be fair, it’s not just Hartnett. Other more “serious” people have raised the issue in the recent past.
I tend to naturally be worried. In the medium term, it’s not hard to imagine that the marginal buyer of US debt disappears. Then the Fed needs to step in with YCC and other measures. And, as much I understand MMT and generally agree, I do think it will lead to high inflation. So, perhaps it’s that straight-forward. Position the total portfolio with a larger allocation to inflation hedges than during the Great Moderation.
Thanks, as always.
The other thing I’d say is that MMT isn’t prescriptive. It’s descriptive. Nobody seems to really get that, even MMT advocates, which is why I stopped talking about it. “MMT” is a misnomer because it’s not a “theory” and it’s not an idea about how things should work. Rather, MMT’s just a description of how the system already works in advanced, reserve currency-issuing nations. And Treasurys aren’t debt. You can’t “owe” a sum that’s denominated in something you can issue at will. Well, you can in the sense that you can be obligated to pay it, but if you can issue the relevant unit of account at your discretion in unlimited quantities, then does “owe” have any real meaning? “Owe” doesn’t make a lot of philosophical sense there. But, again, I long ago gave up on debating these points. It’s fruitless. And who cares, right? Life’s too short.
Or we continue to grow our domestic economy through higher levels of immigration of workers (not retirees) to offset money printing/debt.
Granted- this will result in a bumpy ride going forward.
I couldn’t agree more. Particularly for the US.
Thank you for this discussion, both of you. I learn more about what is important from this type of exchange in the comments than I do by hours of other reading. However, I think the hours of other reading are needed to understand the exchange below.
I do not know if anyone has truly kicked a can down a road before. Did so in my youth. Was great fun. Better fun than kicking a ball down the road.
I’ve thought that some of the demand for gold and crypto came from people growing fearful of the inflationary impact on the dollar from Trump’s policies now that it looks like he may well win in November.
But last night I read a Bank of America analyst attributing the rise in gold prices partly to buying by foreign central banks, especially China. A scary read of that is that the PRC is trying to sanction-proof some of their reserves. Now why would they want to do that?
Ask a Chinese, who probably doesn’t know what real yields are, let alone the relationship between gold and real yields, and he or she, while hoarding all the physical gold in a hurry, would tell you that between the proximity of what could be an epoch-making election in America, the likely permanent shift in advanced economy fiscal policy away from anything that even vaguely resembles austerity (i.e. infinite money printing), and the immediacy of multiplying geopolitical flashpoints, the gold’s rally makes every sense. Or at least it makes more sense than saying gold is discounting a collapse in real rates, to me anyway.
Part of Tommy’s comment is a quote from the latest Weekly — just FYI for anybody who still doesn’t get the Weekly.