Mish Mailbag: Inflation-Deflation Debate - Bond Bears Still Wrong
In "You Bet Your Heinie" Bill Gross Needs a Fatter Crayon, I received a couple of emails. One email was from a reader who mentioned a viewpoint from Lance Roberts, the other was from blog writer Rick Akerman. You can find Rick at Rick's Picks.
Rick Ackerman Email
Hi, Mish. I was glad to see that your excellent and well-argued analysis of the Inflation v Deflation conundrum settled, as I might have expected, on the side of deflation. Like you, I cannot see more than a remote possibility that a quadrillion dollar debt bubble will be resolved through the mechanism of hyperinflation.
To those who seem to expect it nonetheless, I usually pose this question: “Do you honestly believe you are going to get to pay off the balance on your mortgage with a few $100,000 bills peeled from your wallet?”
Another common-sense question I like to ask -- of those who cannot see the inevitability of a collapse in social services and benefits -- is this: “Do you honestly believe that Millennials who are living with their parents into their thirties, and who are $50,000 or more in hock for college degrees they will never use, will be able to foot the bill for Baby Boomers’ Medicare and Social Security?”
The simple fact is, the private/public-pension/SS disaster that is baked into the cake cannot be monetized, since these programs require a monthly infusion of actual cash dollars that go out to recipients each month to pay for real goods and services.
The foregoing aside, and based on my own technical forecasts for crude oil and the dollar, two things could conceivably unsettle your thesis. For one, the Dollar Index (DXY) broke down on Friday and is headed – almost for certain, in my estimation – to at least 88.29. And crude, which I have forecast will eventually trade below $30, broke out to the upside, exceeding my $63.08 target by a whopping $1.77. I had used this target to stay firmly on the right side of an intermediate-term uptrend that went against my long-term forecast. But the way it broke through $63.08 strongly suggests there’s enough buying power to push prices above $70, or even $75.
You’ve stated that there is no direct correlation between a falling dollar and higher prices for goods and commodities. While this may be true up to a point, it may not hold if the dollar is crashing.
I nevertheless agree with you that significant inflation, let alone an inflationary spiral, seems most unlikely, especially given the structural constraints on wages and the downward global pressure on the prices of goods. Another inflation inhibitor, as you have pointed out, is the weight of debt service; it grows exponentially with each turn of the interest-rate screw, regardless of whether by market forces or central bank tightening. Even so, and for the time being, it looks like two key telltales – crude and the dollar – are synched in trends that augur inflation. And let’s add copper to the list. Treasury prices have correspondingly broken down, by the way. According to my technical runes, last week’s push above 2.57% on the Ten-Year Note implies it will hit at least 3.11% before the trend encounters serious resistance.
Still Wrong After All These Years
Lance Roberts at Real Investment Advice says Bond Bears Still Wrong After All These Years.
Bond Bears Still Wrong
1/10/18 –Have We Entered The Bond Bear Market
1/11/18 –The Bond Bear Is Here
These are just a few of the latest, but a quick Google search will produce a litany more.
Of course, those headlines are not the first time we have seen such calls made. One of the biggest issues with predictions of rising 10-year bond yields since “bond bears” came out in earnest in 2013, is they have been consistently wrong. For a bit of history, you can read some of my previous posts on why rates can’t rise in the current environment.
- Bond Bears & Why Rates Won’t Rise
- Why Bonds Aren’t Overvalued
- People Buy Payments
- Rates Continue To Defy Logic
- Rates, GDP & Challenges
As we head into 2018, and beyond, there are many reasons why rates will remain subdued all of which are economic and fundamental in nature. As for Bill’s call for the end of the “bond bull,” this isn’t the first time he has made that call.
- 5/10/13 –Bill Gross:Bull Market In Bonds Is Over
- 1/10/17 –Bill Gross: Secular Bear Bond Market Begins Is Rates Top 2.6%
Given the current demographic, debt, pension and valuation headwinds, the future rates of growth are going to be low over the next couple of decades – approaching ZERO.
While there is little left for interest rates to fall in the current environment, there is also not a tremendous amount of room for increases. Therefore, bond investors are going to have to adopt a “trading” strategy in portfolios as rates start to go flat-line over the next decade.
Of course, you don’t have to look much further than Japan for a clear example of what I mean.
But, for now, Wall Street continues to ignore the giant “secular stagnation” sign staring them in the face.
There you have it. Two opinions similar to mine. As Roberts says, if you want to hear the bond bull is over, and inflation is about to take off, you can find hundreds of articles.
Mike "Mish" Shedlock