Are The Fed And Treasury Aiming Their Bazookas?
1.) BIG PRINT – Are the Fed and Treasury on a path to pull the triggers on their monetary bazookas? I think based on the evidence, math and history of the Fed and Treasury that more money printing is inevitable.
That may sound hyperbolic, but once you consider the math, I think you’ll see it that way as well. The point is much simpler than some want to make it.
The fact is that base money must expand to support the growth in debt. Otherwise the debt collapses.
IT IS JUST MATH! And one thing that the US cannot allow is for the debt to collapse.
So, again, based on math, evidence and history it would appear that another “big print” is coming.
When? No one has any idea. Unfortunately, the Fed’s history is that the print doesn’t come until something breaks. The bond market has bent…but it has not broken.
2.) BONDS – As note above, the bond market has been bending…but it has not broken. Is it possible that we’re on the precipice of a turnaround in interest rates? Perhaps!
For one, investors are aggressively betting on a sudden turnaround in interest rates. They're using call options on exchange-traded funds tied to utilities stocks and long-dated Treasury bonds to do it.
Then we have the famous “cover indicator”…and this one is beautiful.
The set up for buying bonds has been getting better recently with the MOVE Index (bond volatility) spiking above trend to over 114, and now contracting to 98 this morning. I wrote about the MOVE on Sept 24 (post here) and that the spike could be very positive for stocks and bonds.
Volatility indicators are mean reverting. Spikes often mark good buying opportunities. So the fact that this magazine cover shows up now is very interesting.
There’s a famous rule in journalism that makes this even better. It’s called “Betteridge’s Law of Headlines,” named after British journalist Ian Betteridge, who popularized it back in 2009. The rule is simple. Any headline that ends with a question mark can usually be answered with one word.
“No.”
The idea is that if the publisher knew the answer was “yes,” they probably wouldn’t be asking the question in the first place. They’d just tell you. So when The Economist asks, “Will Bonds Blow Up?” According to Betteridge, probably not. And based on what I’ve seen from magazine covers over the years, I’m inclined to agree.
Some of the greatest turning points in financial markets have come around the same time that a major magazine decided to put the prevailing trend on its cover. Sometimes it’s Bitcoin. Sometimes it’s gold. Sometimes it’s crude oil. Sometimes it’s the stock market. Right now, it’s bonds.
Why has the cover indicator been so good for so long? Think about everything that has to happen before a magazine ends up on the shelf at the airport. First, the journalists have to recognize what everybody is talking about. Then somebody has to decide that the subject is important enough to put on the cover. Then they have to write the story. Then somebody has to edit it. Then the artists have to come up with an illustration. The editors have to approve it. The magazine has to be printed and distributed. And, finally, after all of that, somebody walks into an airport bookstore and sees it sitting there. That process is long!
Markets don’t wait for magazine art departments. By the time a trend becomes so obvious that it deserves the cover of a major magazine, there’s a pretty good chance that much of the move has already happened. The journalists aren’t necessarily wrong about what’s been happening. In fact, they’re often exactly right. They’re just late.
3.) MORE BONDS – Ok, let’s expand on the above topic a tad by looking at TLT, which owns long-term U.S. Treasury bonds.
Prices peaked back in 2020 and have spent years getting crushed. It’s made the typical 60/40 (stocks / bonds) portfolio a train wreck…and that has historically been a portfolio for investors looking for some safety and reduction of volatility.
Anyway, these bonds, after getting “blown up” since 2020 are breaking below an area that supported prices for more than two decades. And now the “smart people” are asking whether bonds will blow up? Where have you guys been?
This doesn’t mean bonds can’t go lower. But the damage isn’t something we’re waiting for. It’s already been happening. Clearly, being right about yesterday isn’t particularly useful.
Bottom line from the cover indicator is that when a major magazine puts a dramatic warning on its cover, I don’t look at it the same way the average reader does. I see it and think, “Wait a minute. Has everybody already sold?”
Can bond prices go lower from here? Of course! But the fact that right now, apparently, everybody is worried that bonds are going to blow up. To me, that’s useful information.
