We have to wonder if people realize how big the bond market truly is. This is a behemoth that outsizes anything else out there. It is $110 trillion and growing. Here is what truly runs the world. Everything is contained here. In other words, it can overwhelm governments, central banks, and any industry.
It is interesting how people always want to discount what the bond market is saying. This processes everything. There is nothing outside the scope of the bond market. We can have all the theories we want about what is going to happen and what causes it. However, that speculation is worthless as compared to what the bond market tells us.
For example, we can espouse all we want about oil prices and the impact that is going to have. We can claim hyper-inflation is on the way because oil is going to $600 a barrel. The reality is that is only a valid concern if the bond market tells us that is a concern. Whatever we come up with, the bond market is pricing it in.
Keep in mind this is a market that isnt full of speculators in the sense of what occupies the equities market. When people buy bonds, they know exactly what their return is going to be if they carry the bond to term. It is there at the time of purchase.
Hence, return is not something that is part of the equation. Instead, the bond market is driven by risk, specifically of default. The main question is not how much am I going to make out of this like with the equities market. Instead, purchasers of bonds ask how likely am I to get paid?
For this reason, we get a completely different story.
There are bad times ahead. This is a certainty. We hear a lot of talk of inflation, improving economy, and year over year growth numbers. Do not buy any of it. None of it is true.
Everything we are seeing here indeed transitory. Powell and the Fed has it right to begin with. Of course, since they are the manager of expectations since they truly do not have the power to control what most thing they do, they have to play the game with the markets. This talk of taper was always nonsense, the bond market has been screaming that.
The Yield Curve is a forecaster of future inflation and economic circumstances. When the curve is increasing, investors are telling us that the expectations are for better economic growth down the road as well as inflation. Of course, if the curve is going the other way, the exact opposite is projected.
Here is what the chart is looking like. Notice the change in the last few months.
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At present the 30Y has a lower yield than the 20Y. That is an inversion. When people are less confident about the longer term debt, preferring shorter-term securities, that is a major signal that things will end up reversing. The bond market is a reliable indicator in this regard, going back 100 years.
What this is also telling us is that the Fed's actions are going to cause interest rates to go down, not up like they are expecting. We often can see markets do the opposite of what the central bank is trying to accomplish. They try to get people to buy into what they are doing and prime the market action.
Unfortunately for them, the major players, especially those internationally, do not buy into the "Don't Fight The Fed" mantra that CNBC and Bloomberg espouse. They fight the Fed all the time and make money off it.
The masses, of course, tend to buy into what is being sold by the different entities, which is why they are wrong most of the time.
At this point, the Fed might have one job: prop up asset prices.
We have so much debt that is back by less than stellar collateral that asset prices need to remain elevated. If they start to pull back, the risk of default skyrockets. We simply are overloaded with debt to the point that the collateral backing it is very precarious.
So what happens if it starts to decline? Lenders start to require more to be put forth, since what was put up before is now worth less. Of course, internationally, this is a major problem since much of the debt is written in USD yet the money to pay it is earned in another currency. If the USD appreciates, these borrowers get hit with a double whammy, more collateral required along with a decreasing currency against the USD.
The reality is we never know what will set things off. Could it be another strain of COVID? Lockdowns due to it? A larger conflict between Beijing and Washington? The event is not of much importance.
What is important is the bond market is telling us there is a higher likelihood that something bad is going to happen. The optimism about the future simply is not there.
This is one of those instances where we can see ahead of time what is coming. While the when it a mystery along with the cause, we know the path most of the financial media and the masses are predicting is not going to happen.
Those who watch what bonds are telling us tend not to be caught off guard.
And right now, the Yield Curve is telling us a truly different story from the mainstream narrative.
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