Yesterday the “Bond King” Jeff Gundlach said the bond bull market is over since the ten year Note hit 2.4%. He’s has been concerned that rates will rise a lot. I disagree. I strongly believe in fundamentals rather than technicals. So what if a data point broke thru a line on a chart? The fundamentals for bonds are ultimately governed by unemployment. But unemployment data is misleading and unclear since people with fake jobs like independent contractors, temps, rookie Realtors with no customers, Uber drivers, waiters with a tipable job with a $2.50 an hour minimum wage are distorting labor market data. First these people lost a good traditional job, then they remained unemployed several years, and finally re-enter
Janet Yellen wonders why inflation remains low and why traditional metrics no longer work to predict inflation. I believe this is explained by structural changes over three eras since the 1929 crash. The first era was during the depression of 1930s and continued through to the great inflation era of the 1970’s business managers were very cautious not to over-expand their businesses and thus there was a tight correlation between wage inflation, and economic growth, etc. The second era was when people got used to the 1970’s inflation they forgot some of the lessons of the Great Depression and began to take on more risk. But even then, they still made reasonable decisions not to unduly over-expand their businesses.
The Federal Reserve today announced it would slowly sell off its holdings of bonds over many years. Selling bonds raises interest rates. Does this mean the Fed will accidentally start a significant movement towards much higher rates? I doubt it. The Fed is extremely sensitive to that risk and will let their fear of accidentally triggering recession act to inhibit them from selling too many bonds too quickly. The movement of rates is what will control the quantity of sales of the Fed’s bond holdings. If rates explode upwards the Fed would immediately stop the asset sales. There is no need for them to sell their bond holdings, it simply is a matter of wanting to feel they are
On Friday, September 29 it is the deadline to raise the federal budget deficit before a crisis starts on October 1. Trump threatens to not to cooperate unless a border wall is built. To get the budget done Congress would have to authorize paying $30 billion to $60 billion for the wall. But this is a capital expenditure, so the amortized cost might be 3% of the capital cost a year. That’s only $3 to $6 per person a year, plus interest. Trump may find that the senators who can protect him from impeachment are a valuable resource of contacts to build alliances with, rather than to antagonize, so there will be room for compromise. The idea that U.S.
An article in FT.com “Bond bubble brews as central banks retreat from QE” today expressed worry that global central banks will end Quantitative Easing thus triggering a rise in rates. I disagree. Ultimately central banks will act to avoid triggering a crisis and will let any tapering plans be controlled by a need to taper gradually so as to avoid a crisis. What is more powerful than central banks and their ownership of bonds is the marketplace. By “marketplace” I mean the global market for all types of goods and services. I expect global GDP to continue to have a weak growth rate with minimal chances of it suddenly improving. Unemployment will also have minimal chances of suddenly improving,
Clearly the Fed is tightening, raising short term rates, to fight the stock market bubble and not because of inflation. It is inevitable that it will end in a recession as did other acts of Fed tightening. The Conference Board’s labor conditions index “jobs harder to fill” will provoke the Fed to raise rates when data released is released next month. Rates went up today because of a slight upward revision of GDP. This is normal for GDP to get revised several times. I think the new paradigm is that real reference rates (Treasuries and Fed funds) return to more normal levels, because it was a dangerous deflationary mistake for central banks to make real rates so low, and
The monthly employment payroll based report was released by the BLS today showing only a 138,000 jobs gain. When netted against the 125,000 monthly population increase this is almost no net gain at all. The labor force participation rate continues to be about 2% below normal which implies 2% of the population are the hidden unemployed and thus the real unemployment rate is about 6.3% instead of the official 4.3%. The normal trend for wages is for them to increase about 4.5% a year at the top of an economic cycle, yet now despite being near the top of a cycle the wages are only increasing 2.5% a year. This 2% shortfall below expected wage inflation is a sign
Central banks and foreign flight capital investors have taken actions that warped the U.S. bond market. However, one possible uncontaminated (or less contaminated) segment of the bond market are Muni bonds. Since they are tax free they are usually not purchased by foreign investors who are exempt from tax on passive income. Central banks have never bought any U.S. Muni bonds. Currently investment grade Muni bonds held in some of the lowest cost mutual funds with a portfolio of bonds rated as “A” quality, are yielding about 2.58%, after netting out the mutual fund’s fee, using the SEC 30 day yield method, which adjusts for bond premiums and discounts. Using a 2.58% federally tax free rate implies roughly
Stock market investors often discuss the topic that there is a “new era” where the old economics rules allegedly don’t apply. This concept usually happens when bullish people try to justify the high price of stocks after a huge runup. The stereotype is that a wise person says there is no new era, so avoid bubbles, etc. But there could be a new era. The new era maybe one where the Federal Reserve ceases their 30 years of massive rate cuts and bailouts that started in the crash of 1987. The Federal Reserve needs to raise rates to a “normal” level of rates. Based on that fact that the U-3 unemployment rate is very low, at 4.4%, the appropriate
The Labor Force Participation Rate dropped from 66.2% in January, 2008 to 62.9% today. The 3.3% underperformance means that 3.3 percentage points of workers divided by 66.2% who were participating has declined by 5% since the economy topped out in 4Q2007. Today the unemployment rate was released showing it went down to 4.4%, yet PCE inflation is only 1.6%, workers are not getting real wage increases, and the ten year Treasury yield today was unchanged from yesterday at 2.35%. If those missing 3.3 percentage points of workers were willing to go back and search for work and insist on being counted as an unemployed person then the unemployment rate would be 3.3 plus 4.4% equals 7.7% unemployment rate. However, due