The Good, The Bad, The Ugly
After a continued jack up in rates at the long end of the US Govt Bond Yield curve last week, markets are serious questioning how long the US Fed allow this to continue.
Before we look put our 2c worth into an answer, lets assess the state of some key players.
The Good,
The Bad,
More Bad,
The Ugly,
Quasimodo,
Totally Awesome!
In the first “bad” chart above, you’ll hopefully notice the correlation between Gold and said rising rates. As Rates have risen, the US Gold price has come off, this has been the trend since last August.
USD gold has been in a downward channel since last August but certainly not a -40% channel that gold stocks have produced! Cripes, AUD Gold still sits at $2270 this morning.
As stated above, for investors and markets, the biggest question of the moment is, “how long will the US Fed allow rates to rise”.?
There are some pretty large effects of rising rates in a world drowned in debt.
Louis Gave, of Gavekal fame, was asked on Macro Voices last week, whether he thought Central banks will resort to “Yield control” (rate suppression through printing money to buy more bonds), or, let rates run.
He said, “A 50basis point (0.5%) increases borrowing costs to the US govt that which is equivalent to the cost of running the entire US Navy”. “A 30 basis point rise is close to the cost of running the US Marine Corp”. “The US 10 year has risen by at least 80 points since August last year”.
It’s fair to say he thought rising rates are quite damaging to the US budget position.
Furthermore, The Fed (without having decided on Yield Control yet) printed another $100 BILLION last week alone, to help things out. If you add up all the money the US has ever printed, 40% was in 2020 alone. In three months last year, the US increased its deficit by more than it had in the previous 5 recessions, COMBINED!! Under Jerome Powell, the Fed bought more Treasuries in 6 WEEKS than in 10 years under Bernanke and Yellen.
And coming to you soon, from all quarters of Central Banking is the “Build Back Better” BS rhetoric and associated “stimulus” chatter.
It’s with this background we find it very difficult to imagine anything but more of the same and rates not to rise. As usual, we could be wrong and timing is the ultimate unknown.
We raise the rate issue, again, to reiterate how important it is to have a view on rates when making asset allocation decisions.
The reality so far is, after 12 years of rate compression and “mission accomplished”, Central Banks have completely distorted the price of money and cost of capital to the point where the steep “blow off” charts in this note above, have become the new normal.
For us, meaningful tinkering in December, such as increasing allocations to industrial metal commodity positions have been rewarding. As well, we continue to add to our “non ethical” energy positions.
It’s also been entertaining watching the crypto space as we’ve long held small Ethereum and Bitcoin positions. They have now reached the moon, on their way to another galaxy.
And, we’d love to see some real time weakness in global equities in the near future in order to increase emerging market positions, Asia specific.
As far as Asia goes, you just need to look at the container ships continuing to line up off the West Coast of America to appreciate how much better certain Asian economies are going to come out of this Covid funk.
A view we’ve been sharing for a few years now is that Central Banks have signalled, globally, that they are going to continue to de base currencies through inflation, whatever acronyms they may use as disguise.
The reason is quite simply known as “TINA”!! There Is No Alternative!!
Place your bets accordingly!!
And none of the above is advice!! DYOR!!
On a side note, Could this:
Be related to this:
Peace,
