The Return of The Bond Vigilante?
We appear to be in a game of chicken with mathematics.
I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody. - James Carville
I don’t watch CNBC anymore. I used to back when I worked for PoopCorp TGNA 0.00%↑ as I had the network on in my office everyday. But things changed. I don’t pay for a linear TV subscription anymore and I no longer have access to what many on FinTwit have dubbed “bubble vision.”
When I did watch, there were actually a couple CNBC personalities that I liked; Guy Adami and Rick Santelli. Perusing the big club that X is quickly becoming, I came across this unbelievable 6 minute video from Fast Money yesterday. Unbelievable for two reasons. First, I’ve never seen Rick Santelli get that kind of airtime before. 6 minutes in front of a white board forecasting future bond prices without any interruption from his peers. Second, the bigger takeaway from what Santelli was actually saying.
If somebody asked me and held a gun to my head and said, listen, the worst case scenario, where are treasury rates gonna go? Ten year, I’d say the next 7 years you should be able see 13.5 to 14%.
Uhm… what?
When you look at the current rate of the 10 year at 4.75%, 13% seems absolutely preposterous. But when you pull the view out and look at it over a much longer timeframe, Santelli might be on to something:
I’m going to freely admit that I never thought rates would get this high. I’ve been expecting a Fed pivot essentially since the central bank started hiking. Why? Because I’ve held the view that the maturity profile of US debt outstanding, much of which is shorter term, simply wouldn’t allow it. Janet would be on the phone begging Jerome to “cut the shit” because things start breaking when everybody has to refinance from low rates to high rates.
And yet, here we are. With interest payments on the federal debt already going utterly parabolic. This all reminds of the fantastic car scene from the movie Margin Call. I’ve shared the video before but will now share the text of Will Emerson’s parting advice to a somber colleague again:
If you really wanna do this with your life than you have to believe you’re necessary and you are. People want to live like this with their car and their big fucking houses that they can’t even pay for, then you’re necessary. The only reason they all get to keep living like kings is ‘cause we’ve got our fingers on the scales in their favor. I take my hand off? Well then the whole world gets really fucking fair really fucking quickly and nobody actually wants that. They say they do but they don’t.
A fair world. I’d argue that’s not possible in an environment where the cost of capital is centrally controlled and managed by about ten people. And now we might be finding out what happens when that cost of capital rerates. If Santelli is correct, things are going to look very different and likely not in a good way. Of course, Santelli may not be right. Frankly, the fact that these kinds of conversations are happening on CNBC now might be an indicator all by itself.
Regardless, higher yields are crushing everything. And in a time when real yields are actually positive, assets that don’t generate cashflow may not look great by comparison. As such, Gold is in absolute meltdown mode:
Or is it? As of right now, we’re simply retesting the long term trend rather than breaking through it. The last time Gold was this oversold was December 2016. 9 months later, it was 20% higher.
Here’s another admission; I’m just a schlub with a laptop. I don’t have an econ degree or any experience whatsoever in a financial institution. But it’s difficult for me to get to a place where Gold isn’t much higher in 12-24 months. The fed has to fight high, sticky inflation through demand destruction. That’s the bad news. But is a currency that is slowly dying the best way to hedge that? I don’t know. What happened to Gold when rates were rising at the end of the 1970’s?
Turns out, the ten year and gold were actually rising together. Food for thought. Perhaps its different this time. Or perhaps in an environment where rates are rising because currency purchasing power is collapsing, the asset that isn’t a liability on someone else’s balance sheet might make some sense after all. The only thing I’m fairly certain of is we’re all about to find out.
Disclaimer: I’m not an investment advisor. May father still has to put my ties on for me.
Great post!!