You're taking his quote from two years ago out of context. He was criticizing the Fed's QE program at the time, which actually resulted in higher long-term rates every time they did it (contrary to popular belief). Lacy was one of the first economists to point out that counter-intuitive fact. I've never heard him suggest that the Fed raise short-term rates, and assume he's probably ambivalent about it (his latest quarterly report points out the costs to the economy if the Fed decides to raise rates). You should read his most recent report (2Q 2015). It likely won't convince you to buy Treasurys at this level, but at least it might keep you from doing something foolish, like investing in an inverse bond fund. By the way, Lacy is on record forecasting that the yield on the 30Y will likely drop to around the 2% level sometime later this year, no matter what the Fed does...
As of July 27th, the final GDPNow forecast for Q2 remained at 2.4%. This is only the second quarter I've followed this indicator, so I'm curious to see how this number will compare to the BEA estimate that will be released Thursday. I think I'll ignore this forecast for Q3 until they have at least a month of data - it's just too volatile to be useful before then.
Do you invest real money based on these "thought experiments"? What does bond guru Brian Kelly say? Anyway, the vast majority of Chinese Treasury holdings are in the short end of the curve (maturities of less than two years). Foreigners collectively own only about 8% of Treasuries with maturities of greater than 10 years, and that's the only thing that matters for long-term bond holders.
On April 22, 2014, Marketwatch published an article with the infamous headline: “100% of economists think yields will rise within six months”. It reported that in a survey of 67 economists, every single one of them predicted higher rates (Lacy Hunt was notably not included in the survey). On the date of the article, the yield on the 10Y closed at 2.73%, and the yield on the 30Y closed at 3.50%. Exactly six months later, the yield on both had dropped by 50 basis points. The yield on the 30Y went on to drop another 75 basis points in the following four months. The lesson? The vast majority of economists, financial journalists and CNBC talking heads are clueless about bonds and interest rates. Read Lacy's reports, and you'll know more than 99% of them...
The accuracy (or inaccuracy) of the CPI is irrelevant. The yield spread between the official CPI and the rate on the 30Y is what's important and predictable, and I expect it to revert to the mean. There's been a 70% correlation between the yield on the 30Y and the rate of inflation over periods of at least twelve months. For periods of time longer than that, the correlation is more like 80%.
For the past 140 years, the yield on the 30Y has averaged 200 basis points over the rate of inflation. Right now you can buy the 30Y at 300 basis points over the rate of inflation, or 50% higher than the historical average. I've been in and out of the bond market three times over the past 5 years, and the current yield, though nominally low, represents one of the best values I've seen over that time.
If the yield on the 30Y drops 100 basis points (as I think it will over the next 10-12 months), an investor will receive about a 20% return, not counting the interest payments (the reverse is obviously true if rates increase that much). The return on a 30Y zero coupon bond would be 6-7% higher. I was buying all through the fall of 2013, while most of the posters on this board were telling me that rates had nowhere to go but up in 2014 once the Fed ended QE. Rates proceeded to drop 170 basis points from peak to trough, with 2014 experiencing one of the biggest bond rallies in history. I sold those bonds in February, and began buying again once the yield rose above 3%. I only buy 30Y bonds when I think I have a reasonable expectation of at least a 20% gain...
“No stock-market crash announced bad times. The depression rather made its presence felt with the serial crashes of dozens of commodity markets. To the affected producers and consumers, the declines were immediate and newsworthy, but they failed to seize the national attention. Certainly, they made no deep impression at the Federal Reserve.” Thus wrote author James Grant in his latest thoroughly researched and well-penned book, The Forgotten Depression (1921: The Crash That Cured Itself).
And thus did Lacy Hunt begin his 4Q 2014 quarterly report for Hoisington Management. I was reminded of those words as I read about the continuing commodities bloodbath in today's WSJ (CRB Index now down almost 11% in 2015), and the massive layoffs in the mining and O&G sectors. I don't think Lacy was necessarily warning of another depression in that report, but some of the parallels he raises to the 1930's are eerie, and it's hard not to be a little worried about the unknown implications of a cascading drop in commodity prices...
Good question. My guess is that consumers have been trained to pay more for beef the past few years, and continue to do so (and so grocers are enjoying higher margins). There could also just be a lag between spot prices and consumer prices, I really don't know. There seems to be a lot of pain on the ag side of the equation, though...
Yes, that was a good quote from a couple of years ago. Lacy has been a consistent critic of the Fed over the past few years, arguing that most of their efforts have been counter-productive at best, or even harmful to the real economy at worst. If I were king, I would make Lacy Hunt the head of the Federal Reserve...
You might give Lacy Hunt’s latest quarterly report for Hoisington Investment Management a read (2Q 2015, and it’s free on their website). He methodically works through four misperceptions responsible for the recent rise in Treasury yields (and explains why it’s unsustainable). Lacy probably knows more about the US Treasury market than anyone on the planet. Even if you don’t agree with his conclusions, it’s always worthwhile to challenge your investment thesis by reading what one of the smartest guy in the room thinks…
"They are China. They are mining. They are minerals...." and the rout is just beginning for all of these. You need to take a look at a 10 year chart and refresh you memory as to how CAT reacts to a bursting bubble (it bottomed around $25/share in March of '09), and we now have multiple bubbles bursting.
The CRB continues to collapse (now down 8.7% on the year). Here’s the year-to-date performance of most of the commodities included in that index:
High-grade copper: -12.3%
Live cattle: -11.2%
Lean hogs: -6.4%
WTI Crude: -4.6%
Natural Gas: -0.3%
I agree regarding the manipulation - long term rates should be much lower (at least 60-75 bps lower). But hedge funds are still massively short Treasurys, and we'll just have to wait it out. :)
If by "running its course", you mean WTI crude is still getting clubbed like a baby seal, then you are exactly right, as it is now down another 12% since you wrote this...
Surprise! This morning the Fed revised its industrial production and capacity utilization numbers downward (from already weak levels). Who could have seen that coming? Industrial output likely declined more in the second quarter than in the first. This will be the first back-to-back decrease in industrial production since the recession “ended” in 2009, lol…
I neglected to mention that the CRB Index (and the Bloomberg Commodity Index) are now at 13-year lows. And as hyperinflationhyenas so eloquently once put it in a post here, long-term bonds are a leveraged bet on deflation...
Can you name one reputable economist who is forecasting 4.5% inflation in the US? How about just one who is forecasting 3% inflation? It's not going to happen in an economy with sub-2% real GDP growth (as we've averaged in the US since the year 2000). You don't have to be a day-trader to profit from bonds. I've been in and out three times in the past 5 years, each time selling after gains of between 20-30%. I only buy when I have a reasonable expectation of a 20% gain, and I fully expect another 20% gain when the yield on the 30Y drops another 100 basis points in the next 12 months...
…and they’re rolling over again, just like they’ve done every year for the past 5 years. Recent performance of the CRB Commodity Index:
2015 to date: -7.83%
Central banks have flooded the world with cheap money, encouraging higher levels of nonproductive, growth-killing debt (resulting in malinvestment and oversupply in the commodities space). The net effect is disinflationary or even deflationary. But I thought everything was fixed? Lol…
No one knows for sure, but we are likely repeating the recent experience of Japan, in which inflation stays low for decades (the main culprit, of course, being severe over-indebtedness in the US and global economies). Commodities are crashing again (the CRB Commodity Index is down almost 8% year to date, and down a third from its 2014 peak). What does that tell you about inflation and global growth?