Bonds Build Back Bigger
There was an important theme laid out by Herbert Hoover(1874-1964) back in the 1930’s. There are only 3 ways to meet the unpaid bills/promises of a nation. The first is taxation. The second is repudiation. The third is inflation. What do you think the current crop of Western global leaders think of this thesis? Invest accordingly. But right now in investment markets, Bond Markets Matter, more than usual, particularly those of the US, Japan and Europe.
There has been an unusual level of volatility in bond markets in recent weeks, particularly at the long (duration) end. The result, rates have continued to rise at this long end, smoking many a “balanced” fund return along the way. The reasons may revolve around inflation fears, removal of Japanese yield curve control (leading to Japanese institutions selling foreign bonds) or investors are just plainly demanding more yield.
In the case of the US, running budget deficits at a lazy Trillion dollars every six months accompanied by falling taxation revenues must also concern bond markets. A massive trade deficit can’t help but doesn’t seem to have mattered much so far. And what about the dearth of previous “natural” buyers for US Treasuries? Buyers that have naturally fallen away since the US and Europe decided if it doesn’t approve of a nation’s geopolitics, such a nations “pristine” collateral reserves could be rolled up and confiscated, by way of “sanction”. Who wants to be next?
When one combines all the above reasons together, it makes it much easier to understand why investors are demanding higher rates of return. What will it take to make it stop? Panic rate cuts? We’re not there yet. Yield curve control? Sends a signal of capitulation so not yet. Either of these scenarios would be accompanied by MORE stimulus but not there yet soonward and upward rates go until something breaks, again.
If central Banks did move back to ZIRP rapidly, can you imagine what currency markets would look like? Race to the bottom, currency debasement for all participants. But against what, is what investors should consider.
These are big numbers for the US.
Free sh!t and ever expanding beaurocracies cost money.
Those wondering if rising rates are really a cause for concern as nothing too “bad” has happened yet should remember, the general time lag taken from the peak of interest rates to the recessionary environment is around 10 months. Have we peaked yet?
For example, rates peaked in late 2006, market ructions started in Feb 2007, deepened in August 2007, and didn’t capitulate until September 2008 with the collapse of Lehman Bros.
As far as we’re concerned, recession is most easily identified in the rear vision mirror but we’re looking to make investment decisions now. As such, we must have a view, which we do, and the illustration below best summarises it. For those who confused about the inflation part, lets single out just two potential drivers.
Firstly, the inevitable Central Bank response when their team of PhD’s conclude we are in a recession and cut rates accordingly. Secondly…. we hesitate…. ESG climate change policy, the massive industry that surrounds its “regulation” and its multi-level negative economic knock on effects.
Oh yes, shoot us for asking the question, is there a cost to virtue signalling policies. The cost is inflation, the most basic tax for all. If you don’t think these policies are pushing the price of everything up, you’re just not looking hard enough. Just look at energy prices.
This brings us to an area we’ve been slowly but steadily increasing our investment allocation, Energy. The reliable type, by way of listed oil and gas producers, again, shoot us, again.
Looks like some value here, this below.
Some serious Bidenomics below.
Then there is Gold. Going back to the beginning of this note and re reading the “possible” reasons for the Bond bubble bursting, would you still rather own US Treasuries (UST’s) or Gold? Seems many investors are waking up.
We find it actually quite incredible that investors want nothing to do with gold stocks at the moment, particularly in Australia, where the price of Gold is still over $2,950 per ounce. Capital markets are also like, “we can’t raise for your gold project, you’ve got no Lithium”!
But really, just sit back and enjoy the opportunity to buy cashed up, multi mine producers and collect the gold in the ground for almost nothing. There is no bull market like a gold bull market. But we’ll add one more cautionary tale for the timid, such is the potential for gold to reveal the fragility of currencies and bonds, particularly the USD and UST’s, it may become a terrorist act to buy the precious one day!
Another market we’ve entered in a small way in the last few weeks is this one, below. Brazil can be a frustrating place to do anything at most times but its neutrality in the current geopolitical mayhem may well be a heavy counter.
Finally, this investment strategy, illustrated below, may have paid off over the last 10 or more years as governments and central banks came up with one fiscal and monetary boondoggle after another to sustain market stability. Honestly, this strategy may still work.
Peace.
