Saturday, October 9, 2021

More Bond Tea Leaves

One chart in the "reading the tea leaves" technical analysis category.

The chart for 10 Year US Treasury futures has formed a pattern known as a Head and Shoulders.  In technical mumbo jumbo is is considered the most powerful reversal pattern, particularly if it is confirmed by other indicators such as trading volume, Relative Strength, etc.  

With head and shoulders it is also very important not to jump the gun, ie one must wait for prices to cross the neckline decisively. Once a break is confirmed, technical theory says that prices will move at least as much as the height of the head above the neckline.


 

Assuming a decisive break has occurred (a big IF in the chart above) the target "reads" to a price around 120, a level last seen in November 2018, well before COVID and massive MMT-driven QE. 

For reference, the current 10 year yield is at 1.61% vs. 3.00% in 2018 and the latest CPI inflation reading (Aug. 2021) at 5.2% year-over-year vs. 2.20% in November 2018.

The case for bond yields at these low levels, much lower than headline inflation, rests entirely on the premise that inflation will revert to 2% very, very soon. Given what is happening with energy, commodity and transportation prices globally, this premise is rapidly turning into wishful thinking, 

 Dow Jones/S&P Global Commodity Index Highest In 12 Years

Doing paper napkin economics the 10 year should be yielding 5.20+0.80 = 6.00% .. it's totally far fetched, of course... but 3.00% seems rather logical - to me, anyway.

As always, these posts ARE NOT INVESTMENT, TRADING, SPECULATION OR ANY OTHER KIND OF ADVICE. It's merely me, myself and I talking to my rubber ducky.

Enjoy the long US weekend!

 

14 comments:

  1. or it rest on the premise of accelerating QE? =)

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  2. I was thinking about what you said about the budget and U.S. being the world's policeman.... I am wondering if the U.S. could be the world's policeman but ask that each country being protected pay a tax of say (3%) of gdp.

    It is a step towards world govt, which we very much need if climate change is to be addressed.

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    1. The US has for years complained that most NATO members (eg Germany) do not spend enough on defense, relying instead on the American umbrella. I think 3% of GDP was EXACTLY the percentage discussed..

      Things are getting messy - but not so much across the Atlantic as in the Pacific. I am getting more and more concerned about a Chinese move to capture Taiwan and America's respone.

      From an article in today's NYT.
      https://www.nytimes.com/2021/10/09/world/asia/united-states-china-taiwan.html

      "You get to this issue of how far are you willing to go to defend Taiwan,” said Mr. Thomas, the former Seventh Fleet commander. “I’ve thought about it a lot, and I don’t know if the United States is willing to see U.S. young people coming back in body bags for the defense of Taiwan.”

      Question for you: Is China going to do things planning deliberately over a longer period of time, or is it adventurous enough to go quickly?

      What is the Chinese way of doing things?


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    2. Well, the U.S. could consider asking allies to pay it directly (so of like Athens's Delian League).... Germany would not accept, but many smaller countries would... Places like Poland, Georgia, maybe even India and Australia.

      If you are going to be the world's policeman, you may as well get paid for it...

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    3. About the Chinese, it varies drastically from region to region.

      The south Chinese Guangdong, Fujian, Hong Kong, Taiwan, Macau.... These people seem addicted to long term plans. They will not cheat you for short term gain but you can be sure they intend to profit over the long term. Cold blooded calculative folks. In terms of culture, they are most distant from the West but they understand the west the best. Most American Born Chinese (and overseas Chinese) will be descended from the southern Chinese.

      The Western Chinese are in Shanghai, Hangzhou area. They are more short term, with time horizons for a year to ten years. They are very appearance focused folks, they will cheat if the short term profit is sufficient. They like to ape the west but seem to lack true understanding.

      The Northern Chinese (Beijing, Tianjin) area have a surprisingly western culture. They are a more emotionally centered people but rather short term. Surprisingly, they are the least westernized of the coastal Chinese.

      The Shanxi region deserves some mention as the old heart of China... These guys are very Machiavellian. Short term people but good at spotting weakness and pouncing. These are tigers not cheetahs. As an inland province, they feel much less need to understand or accommodate the west.

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    4. Thanks you very much for the detailed answer!

      On a more current basis, what do you think China's leadership will do in re Taiwan? Jump at immediate opportunity or continue long term planning towards the ultimate goal of re-including Taiwan into China? (a polite and PC way of saying taking over)

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    5. I think (it is just an opinion) the Chinese leadership will not want to invade Taiwan. The current speech pattern does not sound like invasion talk as the Chinese typically try to hide their intentions. For example, with Vietnam and Korea, there is no long series of threats. Its just a short, clearly worded warning and then action.

      However, if the internal political struggle gets too serious, the leadership may opt for invasion as a means of staying in power. Hopefully, it does not come to that.

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    6. Biden was chosen as a leading Dem candidate pre-COVID, when Trump seemed like a sure bet to get re-elected. In other words, Biden was chosen to LOSE. Remember, no other really viable Dem candidates were running for the nomination. Biden was expendable face saving choice, an old horse that would lose the race and then be put out to pasture. Then COVID hit and Trump screwed up so badly that the old horse won!

      Sorry to say it, but Biden didn't "win" against Trump. Trump ran against himself and lost...hahahahaha.

      This brings us to today: the US has a President that was never supposed to be President...how weird is that? And he is certainly in a very, very, very weak position politically (Congress/Senate) and socially (huge chasm in American society).

      That's what China's leadership sees... so, do they evaluate it as a one time opportunity worth the risk of raising the stakes in Taiwan and elsewhere (eg making the yuan a reserve currency)?

      I've got to say, in my opinion they are constantly raising the heat, in all sectors. AND they are now urgently hoarding natgas and coal. Hmmmmmm......

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    7. sighz... I feel like China is this frightened kid with an M16.

      Most of the Chinese leadership have grown up in a horrifyingly brutal world. They don't believe in rule of law or fair play because no fairness was ever shown them. They are not acting from a greed for power but from a deep seated fear of what happens if you lose the power.

      They don't understand the west; even worse, they don't know they don't understand. So they are acting from their instincts. The Chinese tradition is to show strength in weakness, weakness in strength. There is no tradition of Gandhi. No tradition of appeal to justice... China is very much negotiating from a position of weakness and that is what makes it so frightening.

      P.S. Thanks for your perspective on Biden, appreciate it. =)

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  3. another aside. =)

    https://www.nytimes.com/2021/10/08/opinion/democrats-david-shor-education-polarization.html

    I thought this was a beautifully written article.

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    1. I agree, thank you!

      "The Democratic Party ..... had lost touch with the working-class voters of all races that it needs to win elections"

      Exactly what I have been thinking for years now. The Trumpist Republicans now have the ear of the disgruntled working class, once the exclusive domain of the Dems.

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    2. Great link Akoc, thanks for sharing.

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    3. The scary thing is I feel the democrats can't change.... Choosing Hillary over Sanders may have been an honest mistake; choosing Biden as candidate stinks so bad...

      It seems to be the same with QE and climate change and vaccination... some kind of collective death wish?

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  4. https://www.channelnewsasia.com/business/united-states-has-lost-ai-battle-china-pentagons-ex-software-chief-says-2235036

    unfortunately, that is kind of true... not saying U.S. cannot take back the lead; but it needs to consider unconventional strategy. Not just do more of the same.

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