Treasuries As Trash

 Bill Gross recently said that bonds may become trash and, as an old bond hound myself, I must sadly agree. His reasoning is very simple and common sense: 

1. The US is running enormous fiscal deficits, currently financed at least 60% by the Fed, ie it buys 60% of all Treasury bonds issued.

2. The Fed “prints” an equal number of dollars, thus increasing money supply - the “fuel” for inflation.

3. Inflation, predictably, is now at multi year highs = currently at 5.3% year over year.

4. Ten year Treasury bonds are yielding 1.3%, obviously due solely to the Fed’s constant massive buying. A bond investor is now “enjoying” a real, inflation adjusted return of negative 4%. That’s unprecedented, particularly if you see it as a ratio of the nominal yield, ie -4/1.3 - chart below.

5. The Fed is entrusted with keeping inflation low and safeguarding the value of the dollar.  It knows very well that “printing” $120 billion per month to monetize the governments deficits has the exact opposite effect and must soon stop. To be clear: the US is financing itself via the printing press. You know the fate of other economies that did the same, unthinkable as it may now seem for the US.

6.  Once the Fed scales back its bond buying, other buyers must step in. If the government does not rein in its deficit drastically to reduce new bond supply, who in his/her right mind will buy bonds yielding -4%? No one, absolutely no one.

7. Ok, maybe inflation will come back down to…. What? 1%? How likely is this without a serious economic and asset price crash? (Maybe that’s exactly what will happen, given the crazy valuations of everything.)

8. Let’s take a middle of the road scenario: the Fed cuts back bond purchases gradually, the government also reduces fiscal deficits and inflation goes back to 2%. Still and all, do you want to own bonds at 1.3%, ie at minus 0.7%? Nope, you would like a positive, say, 0.5% meaning around 2.5% nominal yield.

9. Compare 2.5% with 1.3% and figure out what your total return will be down the road if you buy or hold a 10 year treasury bond today… your mark to market will get massacred (the price of your bond will drop from 100 to around 90 in the secondary market)

10. All of the above explains why Bill Gross is calling bonds trash…and perhaps he’s being conservative, because if inflation stays significantly above 2%, say around 3-5%, bond prices will literally collapse.

The Flight To Trash

We are all familiar with “flight to safety”, the tendency of investors to choose safe investments like bonds and precious metals in times of crisis and uncertainty. What constitutes “safe” is, of course, always up for debate, but you get the picture…

Well, we are now becoming very familiar with “flight to trash”, the notion that just about anything can be an investment vehicle. From cryptos and NFT “art”,  all the way to dubious SPACs, wacko IPOs and meme stocks boosted by rabid teenagers using their phone trading apps.

This lunacy is possible only because the Fed (and ECB) are continuing their cash deluge, blackmailing even belt-and-suspenders type investors to participate in this “flight to trash”. Cash is obviously (?) trash, investment grade bonds nearly so (or worse, in negative-yield Eurozone), even junk bonds are at record low yields. Hooray, let’s buy it all - dear me, even serial bankrupt Greece is at 0% yields 😱😱

The Fed keeps pumping and the cash is spilling over, backwashing into its own reverse overnight repo, now at $1.1 trillion. I know, I’ve posted about this a zillion times, but the sheer audacity of central banks ballooning their balance sheets still amazes me - charts below.

I wonder, like Bill Gross did in yesterday’s post, what the following chart will look like if/when (a) the Fed stops pumping and (b) earnings don’t match the extreme stock valuations. Maybe we should all start thinking about flight FROM trash… Note: current P/E for S&P 500 is at 35x while the median since 1950 is 15x.

Bill Gross: Bonds (and stocks) May Be Garbage

 In a recent post Bill Gross is once again ringing the alarm on bonds and, maybe, stocks.  Very logically, he asks how can bonds survive the end of QE plus high inflation without yields rising over 2% for the 10 year Treasury? Ditto for stocks if earnings don’t grow at double digits.

Here’s his post

https://williamhgross.com/wp-content/uploads/2021/08/Bill-Gross-8.30.21-Investment-Outlook.pdf

PS I’m still on Blanche DuBois vacay mode, relying on the charity of others’ posts 😜😜

The Ancient Mariner Market

There is so much liquidity out there that money has no place to go but right back where it came from: the Fed. Its overnight reverse repo facility just reached $1.04 trillion, paying participating banks and funds 0.05% annualized. And they feel lucky to get even that… How crazy is this? 

In this crazy time, the Fed is buying $120 billion of bills and bonds every month, including a lot of mortgage-backed securities, thus adding almost the same amount to the dollar money supply every month. Why? Because it says the economy is still not fully recovered.  But, all this cash has nowhere to go so banks and money market funds give it right back to the Fed via the reverse repo.

All the while, the Fed’s balance sheet keeps ballooning, going from $4 trillion to $8.2 trillion in just 18 months. 

To paraphrase Coleridge’s Ancient Mariner, “money, money everywhere and not any place to use it.” So, why keep printing it? Frankly, I am certain that the Fed has painted itself into a corner. It knows, without a shadow of a doubt, that its cash torrent is creating a speculative bubble of unprecedented size across all asset classes, from lumber, cryptos and  penny stocks all the way to real estate and Treasurys. It knows that the bubble will eventually blow up, but it doesn’t want to be blamed for bursting it by tapering. So it keeps pumping, hoping the bubble will, somehow, deflate gradually.

And here’s something almost no one is talking about: the Fed is a BANK. Yes, a bank… with assets and liabilities, and as such it can go bankrupt if its assets stop performing and it can’t easily refinance itself. I think it is high time that we start looking at the Fed’s risk profile, no? Is anyone doing a stress test on the Fed - or the ECB?

A Life On Our Plenet - Watch It, Now!

 I have been watching Sir David Attenborough’s nature documentaries since at least 1979. His mastery of the subject in unparalleled and his eloquence unrivaled. He was never an extremist green ninja, instead he was a celebrant of our Earth’s spectacular biodiversity.  

So, when he comes up with A Life On Our Planet and very soberly says we are very close to disaster, a man-made cataclysmic extinction event, we must listen and act, now! 

Honestly, I’ve never seen a scarier presentation, precisely because it is so sober and thoughtful, avoiding all unnecessary hyperbole. The facts are scary enough. What is best, he proposes common sense solutions.

Watch it.

Recession Is Good

 In the 1987 movie “Wall Street”  Gordon Gecko (played by Michael Douglas) utters the line “greed is good”. It was a time of supreme greediness, indeed: buyouts, LBOs, junk bonds, Drexel, Milken… and it was all followed by the Crash of October 1987. It was the largest one day drop in stock prices, bigger even than 1929 and, despite what you may read, it was NOT technical in nature but very much the result of extreme overvaluation driven by… yup, you guessed it, greed. Just like today, may I say.. But today’s post is not about that. Instead, I’m borrowing Gecko’s infamous line not for its message but in order to paraphrase it. So, Recession Is Good. 

Why?

Yesterday I had a discussion with my niece who is a brilliant university student in Geography. We quickly came to the subject of climate change and she astonished me by saying that every time she has to look at data for her research she starts crying! She is horrified by the destruction of our Earth by humanity and the immense danger to our biosphere. 

How bad is it? It’s  really, really bad. 

From melting ice caps to methane emissions the destruction of our ecosystem is fast and accelerating. As a chemical engineer I used the example of a reaction which proceeds hundreds of times faster when a catalyst is added. 

Her summation was simpler: We are approaching the Tipping Point.

We then discussed ways to solve the problem. She suggested involving industry, ie make the necessary changes attractive, or at least palatable, to big economic players. My suggestion was that you cannot cure gangrene with aspirin, and proposed a complete upheaval of our global economic Permagrowth model. 

My solution: We need Permarecession.

Is it realistic? Definitely not, right now. We cannot turn centuries of ingrained economic dogma on its head, not without some astonishing event(s) which will stun people and force them into the necessary changes in their daily habits. Sadly, it may be too late by then… 

Anyway here are the 5 necessary R’s to get us started. Obviously, they are anathema to 99% of industry and 100% of mainstream politicians…in order of importance and effect:

Reject

Reduce

Repair

Reuse

Recycle (this is a sop, thus acceptable. Notice, it’s  last)

A last thought: Man’s hubris against Nature is currently at an all time high. Instead of seeing COVID as Nature’s warning we are already declaring us winners, what with vaccines and trillion$$.  We may indeed win this battle, but the war is raging and we are losing - badly.

It Ain’t Over Until It’s Over

Markets are getting a chilly feeling down their spine these days.  Over-confident of humanity’s victory over the viral world, they are ridiculously over-extended to a degree never seen in history, when adjusted for risk. For share valuations to make any sense at all everything must go 100% right, and right away: COVID, inflation, geopolitical tensions, all must end, now!!

Professional money managers are always cautious under normal circumstances, carefully assessing the risk-reward balance. But they are not the ones driving the market now: it’s the very young, very clueless speculators who know nothing but momentum. And when upward momentum shifts, as it always does, what will happen? 

Pros will certainly not try to catch a falling knife, so no buying from there. Will the young and the clueless jump in? Some will see a drop as a buying opportunity and jump in - this is exactly what has been happening in the last 3-6 months, with varying degrees of success:  Equities were ok, but cryptos not.

I see cryptos as the leading indicator of market mania, the canary in the mine. And the canary is very much in trouble, if not quite dead - yet.

And The Oscar Goes To…

 I’m willing to bet that when the dust settles the Oscar for worst performance in history as Fed Chairman will go to Mr. Jerome Powell.  One picture (snicker) tells the whole story…

 Consumer core inflation has just reached 4.5% year over year - the highest level in 30 years - while Fed Funds are stuck at 0.05% AND the Fed continues to pump some $120 billion in freshly printed dollars every month.

But, hey, it will all go away soon. Won’t it?

China Loosens, Why?

 In a surprise move, China reversed its recent monetary policy-tightening and is now geared towards loosening.  What do they know?  Apparently, a lot.  Their economic recovery is not as steep as they liked, yes, but my guess is that they see the Delta variant as a real game changer for the global economy.

The UK is in the midst of a sharp upturn in cases and so are various other European countries. Should Delta make its way to China (it will, its only a matter of time) things could turn really challenging.  And when it really hits the under-vaccinated and way overconfident US… well…. It could be ugly.

In other news, I’m on vacation mode so expect fewer and shorter posts. Later….

A Must Read By Roubini

 By far the most cogent and well reasoned analysis of the current quandary, plus a scary prediction for stagflation leading to global depression. I hasten to add that Nouriel Roubini was 100% accurate about the Debt/Asset Bubble crash of 2006-08 (I was in good company 😜).

https://www.project-syndicate.org/commentary/stagflation-debt-crisis-2020s-by-nouriel-roubini-2021-06