{"id":40522,"date":"2023-01-23T08:13:39","date_gmt":"2023-01-23T08:13:39","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=40522"},"modified":"2023-01-25T09:58:56","modified_gmt":"2023-01-25T09:58:56","slug":"a-bear-market-for-bonds","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2023\/01\/23\/a-bear-market-for-bonds\/","title":{"rendered":"A bear market for bonds?"},"content":{"rendered":"

In 2009, Warren Buffett wrote:<\/p>\n

“Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone\u2019s guess, though one likely consequence is an onslaught of inflation…..”<\/p><\/blockquote>\n

He was wrong about inflation. The next decade enjoyed low inflation, despite loose monetary policy, for two reasons. First, globalization had flooded the global economy with hundreds of millions of Chinese workers — earning a fraction of Western wages — a huge deflationary shock that depressed wages growth. Second, a contracting US economy, after the global financial crisis, added to deflationary pressures. The combined effect offset the inflationary impact from profligate monetary policy.<\/p>\n

\"Manufacturing<\/p>\n

The world has now changed. On-shoring of critical supply chains and geopolitical tensions with Russia and China are stoking inflationary pressures. Warren Buffett’s warning now seems prescient as the Fed struggles to cope with inflation fueled by combined fiscal and monetary policy during the pandemic.<\/p>\n

The abrupt reversal in Fed monetary policy has increased the risk of recession. All traces of the word “transitory” have disappeared from press announcements, switching to the mantra “higher for longer”. The Fed funds rate is expected to reach 5.0% in the next few months, causing job losses later in the year.<\/p>\n

\"Fed<\/p>\n

10-Year Treasury yields broke former resistance at 3.0%, reaching 4.0% before retracing. Respect of support at 3.0% would confirm that the almost forty-year bull market in bonds is over.<\/p>\n

\"10-Year<\/p>\n

Falling long-term yields caused a massive surge in private debt during the bull market, with non-bank debt more than doubling relative to GDP.<\/p>\n

\"Non-Financial<\/p>\n

Federal debt, even worse, grew four times relative to GDP.<\/p>\n

\"Federal<\/p>\n

The surge in debt inevitably fueled speculation in real assets, with a similar rise in stock market capitalization relative to GDP.<\/p>\n

\"Stock<\/p>\n

Conclusion<\/h2>\n

The significance of debt to GDP ratios should not be underestimated. <\/p>\n

Increasing debt to fund investment in real assets is a sound investment strategy in a bond bull market, so where’s the harm?<\/p>\n

When an individual or corporation invests, their goal is to generate income from the investment. The income stream is applied to pay the interest on the debt and repay loan capital over a reasonable period. An investment that fails to generate sufficient income and requires the borrower to capitalize interest against the loan is generally considered a failure. And likely to lead to a forced sale when the economy contracts and access to credit dries up.<\/p>\n

The overall economy is headed for a similar predicament. When debt growth outstrips income, it warns that borrowers are capitalizing interest and headed for a disaster. The Fed can attempt to postpone the day of reckoning by suppressing interest rates and injecting liquidity. But this just encourages more debt growth and investment in even riskier assets, compounding the problem.<\/p>\n

We are now approaching a watershed. An inverted yield curve warns that credit growth is about to dry up. Banks borrow short and lend long, so a negative spread between long-term and short-term interest rates discourages lending.<\/p>\n

\"Treasury<\/p>\n

The Fed faces a tough choice: (A) allow a bond market to cause a sharp fall in asset prices and an inevitable deep recession; or (B) kick the can down the road, suppressing long-term yields to postpone the inevitable collapse, but make the problem even bigger.<\/p>\n

Recent falls in CPI do not mean that the Fed has won the fight against inflation. This is likely to be a long, protracted battle. Winning the first round is a good start, but does the Fed have the political cover to stay the distance?<\/p>\n

The bond market is pricing in rate cuts by the end of the year, expecting that the Fed will pivot to plan B.<\/p>\n

Gold investors appear to share their conviction.<\/p>\n

\"Spot<\/p>\n","protected":false},"excerpt":{"rendered":"

In 2009, Warren Buffett wrote: “Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone\u2019s guess, though one likely consequence is an onslaught of inflation…..” He was wrong about inflation. The next decade … <\/p>\n

Continue reading “A bear market for bonds?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,45,3761,13,34],"tags":[69,4228,1524,5763,5764,5645],"class_list":["post-40522","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-debt-levels","category-gdp-and-activity","category-inflation-economy","category-us-canada-countries-regions","tag-10-year-treasury-yield","tag-federal-debt","tag-gdp","tag-manufacturing-wages-growth","tag-non-financial-debt","tag-stock-market-capitalization-gdp"],"yoast_head":"\nA bear market for bonds? - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"A bear market for bonds? - the patient investor\" \/>\n<meta property=\"og:description\" content=\"In 2009, Warren Buffett wrote: “Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. 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BUT wages growth is\u2026","rel":"","context":"In "Deficit Spending & Employment"","block_context":{"text":"Deficit Spending & Employment","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/deficit-spending-employment\/"},"img":{"alt_text":"Average Hourly Wages Growth: Total Private & Services Sector","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-12-01-hourlywages-services.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-12-01-hourlywages-services.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-12-01-hourlywages-services.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-12-01-hourlywages-services.png?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":41398,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/03\/29\/australia-team-transitory\/","url_meta":{"origin":40522,"position":1},"title":"Australia: Team Transitory","author":"Colin Twiggs","date":"March 29, 2023","format":false,"excerpt":"Monthly CPI dipped to 6.8% for the 12 months ended February, with core CPI not far behind at 6.9%, feeding speculation that the RBA will hike rates one more time, by 25 basis points on April 4, and then pause. That would mean a peak cash rate of 3.85% if\u2026","rel":"","context":"In "Australia & NZ"","block_context":{"text":"Australia & NZ","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/australia-nz-countries-regions\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":39471,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/12\/10\/australia-hard-times\/","url_meta":{"origin":40522,"position":2},"title":"Australia: Hard times","author":"Colin Twiggs","date":"December 10, 2022","format":false,"excerpt":"You don't have to be an Einstein to figure out that 2023 is going to be a tough year. Australian consumers have already worked this out, with sentiment plunging to record lows. The bellwether of the Australian economy is housing. Prices are tumbling, with annual growth now close to zero.\u2026","rel":"","context":"In "Australia & NZ"","block_context":{"text":"Australia & NZ","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/australia-nz-countries-regions\/"},"img":{"alt_text":"Australia: Consumer Sentiment","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-12-09-aus-sentiment.png?resize=350%2C200&ssl=1","width":350,"height":200},"classes":[]},{"id":35614,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/07\/09\/strong-wages-growth-warns-of-higher-interest-rates\/","url_meta":{"origin":40522,"position":3},"title":"Strong wages growth warns of higher interest rates","author":"Colin Twiggs","date":"July 9, 2022","format":false,"excerpt":"The US economy added 372,00 new jobs in June -- despite talk of hiring freezes at large retailers -- similar to the previous two months. Average hourly earnings continues to grow, coming in at 6.35% for the 12 months to June. Strong earnings growth reflects the labor shortage, where job\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Employment Growth","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-07-08-jobs.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-07-08-jobs.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-07-08-jobs.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-07-08-jobs.png?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":26099,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/06\/02\/death-of-the-dollar\/","url_meta":{"origin":40522,"position":4},"title":"Death of the Dollar","author":"Colin Twiggs","date":"June 2, 2021","format":false,"excerpt":"The Dollar, as the global reserve currency, is the single pillar holding up the global economy. It is in turn supported by six stays: interest rates, low inflation, a robust US economy, capital account inflows, a stable political system, and the military. Interest rates and employment Fed monetary policy sets\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":27511,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/08\/21\/inflation-we-have-the-tools-but-are-scared-to-use-them\/","url_meta":{"origin":40522,"position":5},"title":"Inflation: “We have the tools but are scared to use them”","author":"Colin Twiggs","date":"August 21, 2021","format":false,"excerpt":"Jay Powell and Janet Yellen are not fools. They know exactly what they are doing. Federal debt is at a precarious level of more than 120% of GDP. Inflation is the only viable course to restore government solvency. Default is another option, but that would be a political and economic\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/40522","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=40522"}],"version-history":[{"count":4,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/40522\/revisions"}],"predecessor-version":[{"id":40583,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/40522\/revisions\/40583"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=40522"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=40522"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=40522"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}