Great question, Pat. I think supply is a big part of the inflation problem. I do think that monetary and fiscal stimulus got us here, but ultimately if you look across a great number of good etc, supply was at or near 2019 levels but demand exceeded that. The normal function of increased supply to meet that demand could not catch up, because the Suez Canal was blocked, China had zero Covid policies, and we had issues at our ports. If we look at port traffic, rail traffic, truck indexes, all seem normal to above normal. Even with bloated inventories, companies seem to bring in more goods. Why? There are concerns of a trucker and/or a stevedore strike in California in Q4. As for commodities and food, supply issues have not, and will not be resolved. For a decade there was no money invested into the old economy. Maybe for ESG reasons, maybe because high growth tech was too sexy. However, even now, we don't have increased supply in oil, nat gas, copper, food etc. I think the food and energy inflation is a relatively long-run fixed supply (maybe shrinking with Russia but I think that gets laundered thru China) and fluctuating demand.
You definitely are in the minority on that view as consensus is bearish. However, I still think until the economy turns that is the high end of the range
Students are going back to school, vacations are ending, graduates are starting work, the weather is getting colder -- all signs are pointing to the fun of the summer being over, which I think would only be complete with another equity downdraft. Speaking of no fun, my question is about gold. It's hit a three week low as the 10 year got back above 3%, which makes sense because real yields are bouncing back higher as inflation expectations come down while the 10 year keeps climbing. The miners have all gotten smoked too.
But why is the 10 yr going higher? Isn't it because inflation is sticking around longer than a glance at lower commodity prices, and now, too, lower housing prices (per Zillow) would suggest? Or is it going higher because the market got too dovish and these expectations are retracing a little as the JPow hammer gets priced back in thanks in part to strong economic data and inflation in the EU?
So if yields are reacting to inflation after a couple months of pricing hikes out of the picture, why did gold barely react to the interim expectations of dovishness? Because I interpret flat gold meaning flat real yields as inflation would be flat around the 2-3% yield on the 10 year.
So heading into Jackson Hole, if we simplify what the Fed says to be of a binary result - dovish or hawkish - wouldn't hawkish suggest inflation remains too high - thus real yields are lower than current conditions suggest as inflation remains sticky - and wouldn't dovish suggest inflation is "under control" and it gives the green light for more of the same MMT looseness of the past several years which surely means prolonged low real yields and risk-on? Or would hawkish just mean gold will keep trending down as yields keep going up and would dovish mean risk assets are back and gold once again experiences outflows as bitcoin becomes more attractive again?
I'm trying to understand how gold spiked in 2020, in advance of all of the inflation news -- as if it knew it was all coming -- but now in the face of positive real yields, why hasn't it retraced those gains? It's just been so boring to watch, and now we even have dumb money on the gold wagon like Colin Cowherd peddling gold coins on TV. Still smarter money than Brady, Damon and the bitcoin salesmen.
But plenty of smart money remains on the gold train, including David Einhorn of Greenlight who spoke at a conference in June. He talked about much of the gospel that you have been preaching way before anyone else and he gave a compelling argument for gold (check it out at the below link). Even if it's boring, could it be a helpful barometer for understanding the tone at Jackson Hole?
Mr. Numisma - all great points. I will definitely check out the Einhorn piece, thank you. He has been hot and cold like everyone of late. The 10yr moved back higher for a range of reasons I think: 1. Market had gotten too bullish in its positioning 2. real yields continue higher 3. market was pricing in cuts in 2023 that have come out 4. inflation expectations were falling rapidly in 10yr and that has normalized. I think this is clearly the mkt to watch now as it will be indicative of the sentiment around policy error coming out of JH. Gold is in a tough spot. Higher real yields hurt it. Slower fiscal spending - even if still positive, it is slower than last year - hurt it. Finally, I think the monetary debasement crowd has moved on to crypto and away from gold at the margin, meaning there is no incremental flow in and out, leaving only the gold bugs who are already long 10% of their portfolio. I need to do more work on it and I will start with the Greenlight piece.
The balance of risks, post 50% retrace to near 200dma and in line with the "parenting" from the Fed points to downside, obviously reninfornced by seasonals. Although nothing is certain, it seems as if bears might press the issue over the next couple of weeks, which is reinforced by poor seasonals. One area, which is the source of a key question, is what is the Fed going to do about the MBS side of QT? They hold a lot of low coupon stuff, with low pre-pays. Thus, the MBS is not going to run off in line with their targets. This problem is made murkier by the way the MBS is accounted for but that is a more complicated subject, but in general, it seems as if one decision the Fed could take at the next Sept meeting and possibly signaled in either speeches or in media interviews is some indication that they are prepared for outright sales of MBS. If this occurs, MOVE ought to spike and that also may be one of the reasons for the re-steepening of 2-10y or increased convexity in the curve.
Great points as always. I was talking to a mate today about how TLT implied is the same as SPY implied, not a typical situation, and wondered aloud how that might get resolved. The re-steepening of the yield curve leads to more of a spike in VIX than the flattening does.
QT is super interesting to me. I always felt if there was going to be a pivot it would be in changing QT because they logistically couldn't do what they wanted, so why not leave it alone and hike rates more?
To what extent are current “supply chain issues” impacting the markets and how do you track this issues progress?
Great question, Pat. I think supply is a big part of the inflation problem. I do think that monetary and fiscal stimulus got us here, but ultimately if you look across a great number of good etc, supply was at or near 2019 levels but demand exceeded that. The normal function of increased supply to meet that demand could not catch up, because the Suez Canal was blocked, China had zero Covid policies, and we had issues at our ports. If we look at port traffic, rail traffic, truck indexes, all seem normal to above normal. Even with bloated inventories, companies seem to bring in more goods. Why? There are concerns of a trucker and/or a stevedore strike in California in Q4. As for commodities and food, supply issues have not, and will not be resolved. For a decade there was no money invested into the old economy. Maybe for ESG reasons, maybe because high growth tech was too sexy. However, even now, we don't have increased supply in oil, nat gas, copper, food etc. I think the food and energy inflation is a relatively long-run fixed supply (maybe shrinking with Russia but I think that gets laundered thru China) and fluctuating demand.
good article. Some rate tantrum pullback followed by markets finding their footing. I see 4400 eoy (barring ofc Putin nuking/china invading etc)
You definitely are in the minority on that view as consensus is bearish. However, I still think until the economy turns that is the high end of the range
Students are going back to school, vacations are ending, graduates are starting work, the weather is getting colder -- all signs are pointing to the fun of the summer being over, which I think would only be complete with another equity downdraft. Speaking of no fun, my question is about gold. It's hit a three week low as the 10 year got back above 3%, which makes sense because real yields are bouncing back higher as inflation expectations come down while the 10 year keeps climbing. The miners have all gotten smoked too.
But why is the 10 yr going higher? Isn't it because inflation is sticking around longer than a glance at lower commodity prices, and now, too, lower housing prices (per Zillow) would suggest? Or is it going higher because the market got too dovish and these expectations are retracing a little as the JPow hammer gets priced back in thanks in part to strong economic data and inflation in the EU?
So if yields are reacting to inflation after a couple months of pricing hikes out of the picture, why did gold barely react to the interim expectations of dovishness? Because I interpret flat gold meaning flat real yields as inflation would be flat around the 2-3% yield on the 10 year.
So heading into Jackson Hole, if we simplify what the Fed says to be of a binary result - dovish or hawkish - wouldn't hawkish suggest inflation remains too high - thus real yields are lower than current conditions suggest as inflation remains sticky - and wouldn't dovish suggest inflation is "under control" and it gives the green light for more of the same MMT looseness of the past several years which surely means prolonged low real yields and risk-on? Or would hawkish just mean gold will keep trending down as yields keep going up and would dovish mean risk assets are back and gold once again experiences outflows as bitcoin becomes more attractive again?
I'm trying to understand how gold spiked in 2020, in advance of all of the inflation news -- as if it knew it was all coming -- but now in the face of positive real yields, why hasn't it retraced those gains? It's just been so boring to watch, and now we even have dumb money on the gold wagon like Colin Cowherd peddling gold coins on TV. Still smarter money than Brady, Damon and the bitcoin salesmen.
But plenty of smart money remains on the gold train, including David Einhorn of Greenlight who spoke at a conference in June. He talked about much of the gospel that you have been preaching way before anyone else and he gave a compelling argument for gold (check it out at the below link). Even if it's boring, could it be a helpful barometer for understanding the tone at Jackson Hole?
https://www.greenlightcapital.com/login
Mr. Numisma - all great points. I will definitely check out the Einhorn piece, thank you. He has been hot and cold like everyone of late. The 10yr moved back higher for a range of reasons I think: 1. Market had gotten too bullish in its positioning 2. real yields continue higher 3. market was pricing in cuts in 2023 that have come out 4. inflation expectations were falling rapidly in 10yr and that has normalized. I think this is clearly the mkt to watch now as it will be indicative of the sentiment around policy error coming out of JH. Gold is in a tough spot. Higher real yields hurt it. Slower fiscal spending - even if still positive, it is slower than last year - hurt it. Finally, I think the monetary debasement crowd has moved on to crypto and away from gold at the margin, meaning there is no incremental flow in and out, leaving only the gold bugs who are already long 10% of their portfolio. I need to do more work on it and I will start with the Greenlight piece.
The balance of risks, post 50% retrace to near 200dma and in line with the "parenting" from the Fed points to downside, obviously reninfornced by seasonals. Although nothing is certain, it seems as if bears might press the issue over the next couple of weeks, which is reinforced by poor seasonals. One area, which is the source of a key question, is what is the Fed going to do about the MBS side of QT? They hold a lot of low coupon stuff, with low pre-pays. Thus, the MBS is not going to run off in line with their targets. This problem is made murkier by the way the MBS is accounted for but that is a more complicated subject, but in general, it seems as if one decision the Fed could take at the next Sept meeting and possibly signaled in either speeches or in media interviews is some indication that they are prepared for outright sales of MBS. If this occurs, MOVE ought to spike and that also may be one of the reasons for the re-steepening of 2-10y or increased convexity in the curve.
Great points as always. I was talking to a mate today about how TLT implied is the same as SPY implied, not a typical situation, and wondered aloud how that might get resolved. The re-steepening of the yield curve leads to more of a spike in VIX than the flattening does.
QT is super interesting to me. I always felt if there was going to be a pivot it would be in changing QT because they logistically couldn't do what they wanted, so why not leave it alone and hike rates more?