Are bonds an obvious investment now, if you believe that we will return to the 2010-1019 interest rate regime?

[needlesofgold]

@daniellea To me there is no financial magic other than Inflation that will combat out deficit issues under the weight of current spending & entitlements. I expect real Inflation to run rampant for the next decade+ and bonds to return negative real yields.

 

[daniellea]

@needlesofgold My understanding is that long term rates, except during QE, are at the mercy of bond auctions, not Fed decisions. The government can't just set long term rates to be below inflation because nobody will buy their bonds except at a discount to par that guarantees a real yield.

How will long term bonds get to negative real yields, in a free market? Or can QE be pushed forever? Does this means the Fed keeps buying up the long term securities the government needs to sell?

 

[needlesofgold]

@daniellea Bonds are a negative yield right now under real returns- yeah inflation is published at 3-3.5 percent over the last few months but that excludes a lot of variables that are obviously significantly embedded in the real economy. Real inflation has to be in the 9-15% range, and if you believe that then a 5% yield is at minimum a 4% loss of purchasing power YoY.

Personally, I think energy supply/prices will stack with our deficit issues and continue to pave a inflationary run we haven’t seen since the 80s. That’s just my thought process when I look at macro conditions and listen to the opinions of economists I respect. Lots of people who agree, lots who disagree. Nobody can foresee every variable but this seems to be most plausible from my POV.

 

[daniellea]

@needlesofgold

Real inflation has to be in the 9-15% range

How would one show this?

Here is Oil price divided by CPI - oil is cheaper than in 2009-2014 in official inflation adjusted dollars.

Here is Corn price divided by CPI. This is also near a 20 year low, but above the 1986-2000 era.

Here is Case Shiller House Price Index divided by CPI - here we see actual price growth from 0.6 in 2000 to 1.0 in 2023, which is 2% per year house price growth above official CPI inflation. This is before the roller coaster of 2007, when we had an intermediate house price peak.

All of these suggest that the official CPI measure is sort of OK for the past 20 years.

 

[needlesofgold]

@daniellea If you are using CPI in any capacity you have no idea what you are doing. It’s a metric that is used for political grandstanding and not much else. It’s horribly inaccurate over every period of time.

 

[daniellea]

@needlesofgold Well, my point here was to test its inaccuracy by seeing if the real price of oil, corn, or housing deviated a lot from what CPI based inflation suggests.

In fact, it looks like the price of these things using CPI as a real-value measure is roughly constant, suggesting that inflation based on CPI isn't horrifically wrong, and arguing against present-day 9-15% inflation.

If CPI were wrong, then CPI adjusted oil would have gone up by a lot, but it didn't.

 

[needlesofgold]

@daniellea CPI doesn’t factor in the massive rise in consumer debt or huge drawdowns in the SPR reserves to stabilize the price of oil. Economic factors that are instrumental in controlling prices are to me much more important, tell a more accurate depiction of the conditions

 

[daniellea]

@needlesofgold SPR reserves stopped being drawn down in 2022, and it was only 15 days of US consumption. The price of oil is global. And how does consumer debt relate to CPI, which is a measure of prices paid for stuff?

 

[needlesofgold]

@daniellea https://ycharts.com/indicators/us_ending_stocks_of_crude_oil_in_the_strategic_petroleum_reserve#:~:text=Basic%20Info,25.01%25%20from%20one%20year%20ago.

 

[daniellea]

@needlesofgold I agree. I referred to this site when writing the post to which you are replying.

1. the amount of oil in SPR has been basically flat since start of 2023, indicating drawdowns ended (for practical purposes) in 2022, as I stated. One needs to click on the 5 year scale to get a full view. There's been just one day's consumption of total drawdown in all of 2023, but 14x more in 2022.
2. the total amount drawn down is below 300M barrels, which is 15 days of consumption at 20M barrels a day.

 

[parkersburg614]

@daniellea How much of the current wave of inflation do you think is driven by climate change policies?

I would guess quite a bit, particularly across resource intensive industries

 

[daniellea]

@parkersburg614 Which policies?

I'd say "none" because inflation started in many countries at once, during covid.

 

[nicolalalala]

@daniellea Long duration bonds are likely undervalued if you are willing to hold for at least a year. Fed SEP shows long term real GDP of 1.6-2.5% and inflation at 2%. According to Taylor Rule, long yields are at the upper end of the range (4.4%) and aren't priced for any sort of economic slowdown happening, which is fair because there is no recession in the data. However, 4.4% long yields already assumes investors are demanding 2% real yields. Keep in mind that in 2019, when FFR was 2.5%, investors only demanded 1% real yields as long yields hardly ever went past 3%. For long yields to increase from here then you would need long run GDP growth to be 3%, inflation 3% and investors demanding 2% real yields, which I think is unlikely. The post-pandemic boom is creating a temporary spike in growth and inflation and long yields are not only at pre-pandemic but already at pre-2008 levels. Ignoring short term pressures like gov't treasury offerings and global events adding forced treasury selling, this suggests investors have already priced a Fed keeping rates higher for longer and any signal of mean reversion to post-2008 or slowdown in real GDP to less than 2% would mean lower long duration yields.

 

[daniellea]

@nicolalalala

However, 4.4% long yields already assumes investors are demanding 2% real yields.

I agree; I think TIPS yielding 2.2% proves this.

 

[blair14]

@daniellea 2% isn’t “normal”

 

[justwantin2fellowship]

@daniellea If I were going to gamble with my future, this would be my bet. But Im not. Good luck anyway.

 

[daniellea]

@justwantin2fellowship Well, everyone here is currently gambling, especially if they're in stocks at the current high PEs.