Mish Mailbag: Inflation-Deflation Debate - Bond Bears Still Wrong

Mish

Bill Gross says the bond bull is over. It's a premature proclamation he's made before. Let's investigate other opinions.

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.

Best,

Rick

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

1/9/18 –Bill Gross Says Bond Bear Market Confirmed

1/10/18 –Have We Entered The Bond Bear Market

1/11/18 –Has The Bond Bear Market Finally Started

1/11/18 –The Bond Bear Is Here

1/10/18 –The 3-Decade Bond Bull Market Is In Danger

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.

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.

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

Comments (14)
No. 1-14
Tony_CA
Tony_CA

Great write up.

KidHorn
KidHorn

The 2nd half of this year is going to be interesting. Our deficits starting in 2019 are going to explode and the FED is expected to continue shrinking their balance sheet. If nothing changes, then I agree there's nothing outside of a disaster that will change interest rates or inflation much.

Bam_Man
Bam_Man

With the astronomical amount of debt that now exists at every level (individual, corporate & government), even modestly higher interest rates (4-5%) would implode the entire financialized economy. I said many years ago that I would not be at all surprised to see the 10-year Treasury yield stuck at 2.50% (or less), while inflation is running at 6.00% (or more). And that is exactly where we are today and where we are likely to stay for the foreseeable future.

lol
lol

only hope for trump administration to survive past the November election is with even moar massiver deficit spending including NIRP and yes the mother of all QE programs.Could inflation (real number)reach levels not seen since disco?

JonSellers
JonSellers

The Federal Reserve has shown decisively that it determines what Treasury prices are going to be if it wants to do so. I expect prices to go where the Fed says they are going to go. Which is a little higher over the next couple of years.

Ambrose_Bierce
Ambrose_Bierce

I give RA a perfect 10, but you know, we'll just have to see. The hard part is what happens to FED cred, when they have to curtail the Rate Hike program and start buying bonds (or stocks) although Congress has to green light that.. My guess is they do both for a time, or allow their surrogate to buy US corporates in exchange for the FED taking some of their bad debt. There is nothing these people WON'T DO.

truthseeker
truthseeker

Well I guess the big dog speculators are shorting the twos and buying the thirties n the futures market embracing the flattening ideas of Mish and Lacy Hunt as Bill Gross once again announces to the world a bear market has begun in the bond market. I’m still trying to figure out as the Fed keeps pushing interest rates up while allowing treasury securities to expire from their 4 trillion holdings of treasuries and mortgage backed securities, how does the dollar keep moving down?

truthseeker
truthseeker

As liquidity is being drained by the Fed n the bond market, the dollar should shooting up and taking down commodities and equities if this flattening of the yield curve continues imo.

Stuki
Stuki

I’d be surprised if it is even possible to model an economy where truly unproductive incompetents own everything current and future, are spared from taking losses that could hurt their fragile self esteem, depend on a strong state to ensure noone else starts entertaining the idea that they too should be able to own something, while at the same time that state’s cost of funds increase in any meaningful way.

El_Tedo
El_Tedo

It's happened before and it will happen again. There are people still living in decent, middle-class homes who annually collect more in Social Security benefits than they paid for houses in the early 1970s. Of course they didn't pull a $28,000 bill out of their wallets, but their mortgage companies would have loved if they had after the inflation of the '70s led to the massive interest rates of the early '80s.

klausmkl
klausmkl

So much noise, go enjoy your day.

TheLege
TheLege

With the greatest respect the inflation-deflation debate is poorly understood on both sides. Yes, the debt-berg is hugely deflationary and yes vast debt-service costs will hold back economic growth, however, net money supply growth adds to inflation somewhere (mostly financial assets and collectibles thus far).

TheLege
TheLege

In the longer-run the bursting of a credit bubble on the scale we're experiencing now threatens the solvency of the entire financial system because the huge leverage has been secured on over-inflated assets. In order therefore to prevent a wholesale implosion of asset prices Central Banks will end up monetizing gazzilions of $s in financial assets (for real this time). Right now investors still believe that the Fed's monster balance sheet is just a temporary situation which is why the general lack of concern around inflation. The next QE+ will likely change that mindset. A huge swathe of the fake money in circulation will have to be made permanent ...

Flip312
Flip312

I don't see how the Federal government can continue to run up huge debts without it impacting the value of the dollar. It would be like a perpetual motion machine if it could. I spent a little time in Brazil and Argentina during the hyperinflationary late 1980s and that is what I ultimately expect in the US.


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