"Loss of Faith" narratives abound with respect to the UST and USD with the recent Bear Steepening. I argue that this was entirely predictable and driven by Macro/Cyclical factors.
I like the duo: USD Wreaking Ball & the UST Disco Ball.
I've got to say, the recency bias I'm most concerned with is Jay Powell's. He's convinced, based on multiple past experiences, that if things sputter he can't just step on the gas of lower rates/QE (he's said this multiple times and repeated it at the last presser). That may juice financial markets but I think he's vastly underestimating the difficulty of putting an economy back together. This paired with their commitment to not "repeat the mistake of the 1970s" (ie. stay tight way too long, failing to recognize the different factors in play) really makes me think this ends badly.
Great write-up, and agree, recent analogs or no. The devil is always in the details.
We can try to understand
The New York Times' effect on man
I’d like to propose a combination - the disco wrecking ball. Great work as always, Michael.
I really appreciate your analysis Michael. This may be a fool‘s errand, but if someone put a gun to my head and said I had to guess the price of oil three years out, I think I would pick $110-$120 range. Would you think I’m high, low or close?
Feel free to make the obvious joke that I’m simply high. On fumes.
Thanks again for your insights. Eye opening as always.
Latest from Lakshmi on Oil, which I 100% agree with:
"We have built up nearly 8-9$/BBL of war premium in a market that has seen no supply disruption, Asian and EU demand showing significant cracks, and the US just about a q behind them."
So if stagflationary 70s is the theme, how is oil and gold NOT the play here? Seems like you are talking out of both sides of your mouth?
I absolutely agree that the bear steepening has been due to an acceptance of H4L and closing of "inversion jaws" with the rest of the world. Awesome calls.
But, in a global recession that I also think is likely, bond yields across the globe will ultimately fall, and treasuries will again have safe haven status. I don't think that's just recency bias. Treasuries were indeed a safety trade and when the recession didn't show (thank you covid backlogs, even more so than "red bull/vodka" fiscal stimulus, imo), we get an unwinding and bear steepening. But I think we may be in a momentum trade at risk of whipsawing depending on the macro.
The Fed will likely delay cutting upon a global recession, but they ultimately will, esp in the face of possible deflation. But, the long end is indeed controlled much more by macro, and facing true falling GDP, yields should adjust, even without the Fed.
I read this three times and I still don't know what side of the fence you stand on. Still bearish gold, oil and bullish USD? Would you buy TLT here? Thanks.