Very well put together piece this week David. I am convinced that bond space is a right place to focus. Your earlier piece suggested TEI, an EM bond fund, treated me very well. Many big thank you for that.
By the way, I am for the idea that you put out a pay service with "named" tradable ideas. It serves both ways as you can unlock more of your intellectual best ideas to benefit many more DIY not so rich folks. On that note, this serves as genuine ESG .... may be!!
Not so difficult to wait while getting N ot 5.25% free of state tax on risk free 3 momT bills tht may be going up more in the next 2 Fed meetings. Its possible that coreinflation stays sticky and the Fed keeps raising even though some industries are in recession.
Please, would someone explain the fault in my logic?
1) The Fed only started charging positive Real Rates in May 2023. The current real rate is 1%.
2) The “Real Yield Curve” is still not inverted.
Narrative 1: The Fed is tightening!!!
Reality: Until May 2023, the Fed was charging negative real rates. The Fed rate did finally become marginally restrictive in May 2023, reaching a “Real Fed Rate” of about +1%.
Explanation: The Fed rate did not exceed published CPI until May 2023. Therefore, the Fed has only been charging a steadily diminishing negative rate until May 2023. Going forward, if the Fed published rate stays constant, and if the CPI / PCE continues to decrease, then the short term “Real Fed Rate” will likely grow. The Jun 2023 Real Fed Rate is 1%, which is still under the 2% required by John Bull… We have just now reached the same restrictive rate that Powell reached about June of 2017. Restrictive is relative - can a zombie economy handle 1.0%? Or will it take 2.0%? P.s. Powell last increased the rate to about 1% in July 2017, and the market didn't feel the pain until July 2018...
Narrative 2: The (3 month / 10 year) Yield Curve inverted in Dec 2022!!!
Reality: “Real” interest rates have not inverted yet. The short term Real Fed Rate today is 1%. But the “Expected Real Rate” in 10 years is 2.0%. Ergo, the yield curve is not inverted.
Explanation: As described above, the 3 month rate is close to 1.0%. The Fed is expecting / targeting inflation to be 2% average. So, with the 10-year Treasury notes at about 4.0 % today, that is an “Expected Real Rate” of 2.0% above the expected inflation rate. This 2.0% expected 10 year rate is 1% higher than the 3 month rate today, which is not inverted. Call it a verted interest rate? (Verted is the opposite of Inverted. And these are the widely expected rates, not mine.)
We clearly have mistaken concepts of how inflation impacts a market. The market correction of 2022 was a result of this misunderstanding, the narrative was "The Fed Is Tightening", which was interpreted as "The Fed rate is Restrictive". In reality, the narrative should have been "The Fed Is Still Charging Negative Rates!"
With 10%+ inflation over the last two years, the broad market didn’t fall 20%, it fell 30% in real terms. So, neither the market nor our IRAs have recovered their losses. Most folks today have a higher dollar amount in their pockets, but lower real wages and a lower real IRA balance than 2022. As our increasing credit card balances show, the consumers haven't come to terms with our available discretionary spending... Neither has the government...
Very well put together piece this week David. I am convinced that bond space is a right place to focus. Your earlier piece suggested TEI, an EM bond fund, treated me very well. Many big thank you for that.
By the way, I am for the idea that you put out a pay service with "named" tradable ideas. It serves both ways as you can unlock more of your intellectual best ideas to benefit many more DIY not so rich folks. On that note, this serves as genuine ESG .... may be!!
Not so difficult to wait while getting N ot 5.25% free of state tax on risk free 3 momT bills tht may be going up more in the next 2 Fed meetings. Its possible that coreinflation stays sticky and the Fed keeps raising even though some industries are in recession.
Thank you for Today's Haymaker Update. Patience is a virtue, it is said...Too bad It's so difficult to wait for the Shoes to drop...
One of my ‘must reads’ each time you post. Thank you for the time and effort you put in.
Please, would someone explain the fault in my logic?
1) The Fed only started charging positive Real Rates in May 2023. The current real rate is 1%.
2) The “Real Yield Curve” is still not inverted.
Narrative 1: The Fed is tightening!!!
Reality: Until May 2023, the Fed was charging negative real rates. The Fed rate did finally become marginally restrictive in May 2023, reaching a “Real Fed Rate” of about +1%.
Explanation: The Fed rate did not exceed published CPI until May 2023. Therefore, the Fed has only been charging a steadily diminishing negative rate until May 2023. Going forward, if the Fed published rate stays constant, and if the CPI / PCE continues to decrease, then the short term “Real Fed Rate” will likely grow. The Jun 2023 Real Fed Rate is 1%, which is still under the 2% required by John Bull… We have just now reached the same restrictive rate that Powell reached about June of 2017. Restrictive is relative - can a zombie economy handle 1.0%? Or will it take 2.0%? P.s. Powell last increased the rate to about 1% in July 2017, and the market didn't feel the pain until July 2018...
Narrative 2: The (3 month / 10 year) Yield Curve inverted in Dec 2022!!!
Reality: “Real” interest rates have not inverted yet. The short term Real Fed Rate today is 1%. But the “Expected Real Rate” in 10 years is 2.0%. Ergo, the yield curve is not inverted.
Explanation: As described above, the 3 month rate is close to 1.0%. The Fed is expecting / targeting inflation to be 2% average. So, with the 10-year Treasury notes at about 4.0 % today, that is an “Expected Real Rate” of 2.0% above the expected inflation rate. This 2.0% expected 10 year rate is 1% higher than the 3 month rate today, which is not inverted. Call it a verted interest rate? (Verted is the opposite of Inverted. And these are the widely expected rates, not mine.)
We clearly have mistaken concepts of how inflation impacts a market. The market correction of 2022 was a result of this misunderstanding, the narrative was "The Fed Is Tightening", which was interpreted as "The Fed rate is Restrictive". In reality, the narrative should have been "The Fed Is Still Charging Negative Rates!"
With 10%+ inflation over the last two years, the broad market didn’t fall 20%, it fell 30% in real terms. So, neither the market nor our IRAs have recovered their losses. Most folks today have a higher dollar amount in their pockets, but lower real wages and a lower real IRA balance than 2022. As our increasing credit card balances show, the consumers haven't come to terms with our available discretionary spending... Neither has the government...