Here's another way of looking at it. When Jim Grant and the others wrote the letter in November of 2010, one could have bought a 30Y Treasury bond yielding 4.35%. Today that bond would be worth about 35% more, and you would have collected interest payments of around 4% a year, not a bad total return. But anyone who believed Grant's inflation scare talk would have avoided such an investment like the plague, and missed a golden opportunity.
Alternative measures of inflation are debatable. Take a look at a chart of the CRB Commodity Index (made up of 19 base commodities), which is down an average of over 11% annually for the past 5 years. How does that happen if we have all this "shadow inflation"? At the end of the day, as it relates to long-term bond yields and prices, the only inflation measure I really care about is the official CPI. Long term Treasuries have a 70% correlation with the CPI over periods of at least 12 months, and the correlation goes up to around 80% for longer periods. The correlation is not with the "Shadow Stats" or your apartment rent or your next door neighbor's college tuition costs. It's with the official CPI number.
Keep in mind that I’m bullish on Treasuries because I’m bearish on the US (and global) economy. My main investment thesis is that a severely over-indebted world is doomed to slow growth and disinflationary pressures (not to mention more frequent financial crises). I used to say here that the US was the new Japan, but now I think the entire world has become Japan.
Another round of QE in the US would be a tactical sell signal, but I would buy back when it ended. If I started to see more than just transitory inflation, I suppose that would be another sell signal, but it’s hard for me to imagine that happening in an over-indebted world. In the few historical instances where we’ve seen the combination of a major financial crisis and a severely over-indebted economy (like ours), long-term interest rates didn’t reach their nadir until about 14 years after the financial crisis (although the experience of Japan is extending that average even further). I think we still have a long slog ahead of us.
Lol, how quickly things can change. By the way, Jim Grant is an excellent writer and a fine journalist, but he’s not a trained economist. Remember that infamous 2010 open letter to Ben Bernanke, signed by Jim Grant and others, warning that quantitative easing would cause inflation and debase the dollar? Still waiting for that massive wave of inflation!
The yield on the 10Y is up a stunning...10 basis points since you made the original post, lol
BEA first estimate of real Q1 GDP growth = 0.5%, within one tenth of a percentage point of the GDPNow forecast of 0.6%. Atlanta Fed FTMFW!
Based on this morning's international trade report, the final GDPNow forecast for this quarter was raised from 0.4% to 0.6%. This brings the GDPNow more in line with the NY Fed's Nowcast estimate of 0.8% (which, as pigorhog pointed out below, has not been updated since April 15th due to its self-imposed blackout period). We'll find out tomorrow which forecast was more accurate, when the official BEA numbers are released.
Take a look at my posts here for the past 3 years and decide for yourself. I think I've been absolutely more correct than either Gross or Grant. I was pounding the table for the long bond all through the fall of 2013, when most here were convinced rates would be going up in 2014 (due to the Fed taper). 2014 ended up being one of the biggest bond rallies in history.
He’s no Lacy Hunt, but I've always liked Gundlach, the new "bond king". And in recent years he's been right more often than wrong, or as Zero Hedge put it in a post earlier today:
“Gundlach's track record has so far been mostly impeccable: last year, Gundlach correctly predicted that oil prices would plunge, junk bonds would live up to their name and China's slowing economy would pressure emerging markets. In 2014, Gundlach correctly forecast U.S. Treasury yields would fall, not rise as many others had expected.”
And today in a Reuters story he basically said the recent selloff in Treasuries – if you can call a move in the long bond to 2.75% a sell-off – is done. I’ve learned not to make short-term calls on interest rates (although I think the long-term trend of lower rates is still intact), so we shall see if he’s right.
After this morning’s disappointing durable goods release, the GDPNow forecast for Q1 was actually increased a notch (not sure why), from 0.3% to 0.4%. The NY Fed’s competing Nowcast estimate of 0.8% for Q1 was released on April 15th, but I haven't seen any further updates from them.
In February, foreign ownership of US Treasuries rose to $6.236 trillion, a new record. Major buyers included France ($20 billion); Mainland China ($14 billion); the United Kingdom ($13 billion); and Japan ($10 billion). But didn’t the WSJ’s Min Zeng tell us that US Treasuries, like, caused cancer now, and that investors couldn’t wait to get rid of them?
As of the end of January (the most recent data available), foreign holdings of US Treasuries were at a 12-month high of $6.18 trillion. And the vast majority of indirect bidders in US Treasury auctions, like today’s, are foreign central banks.
Indirect Bidders (i.e., foreign central banks) took down 65.1% of the paper in today’s 30Y Treasury auction, the second highest on record, and just short of the 66.0% in September of last year. But how can this be? The stock market is telling us that it’s “risk-on!” and I thought foreign buyers were supposed to be skittish about US Treasuries, lol…
Haha, both Gross and Grant have been wrong about interest rates for years. How come you don't mention your buddy, Brian Kelly, anymore? Maybe because he's been bullish on TLT since the beginning of the year...
As of April 13th, the GDPNow forecast for Q1 real GDP growth was revised higher, from 0.1% to 0.3%, based on this morning’s disappointing retail numbers. Wait, what? Is the Atlanta Fed feeling a little intimidated by the NY Fed’s competing Nowcast, which reportedly will project 1.1% real GDP growth for Q1? The NY Fed’s first official Nowcast is scheduled for release this Friday (and will be updated every Friday thereafter). It will be interesting to see which one ends up being more accurate…
If Gross is still the “bond king”, why did Morningstar rank his Janus Bond Fund in the bottom quarter (as compared to its peers) at the end of 2015? The fund only had $1.32 billion in AUM as of December 2015, and half of that money is believed to have come from Gross himself, lol…
Remember when the former “bond king” told everyone that with the end of QE2 in 2011, the bull run in bonds was over? And then said the same thing about the end of QE3, haha. You can lose a lot of money by listening to Bill Gross. Paul McCulley, who was Bill's right hand man at Pimco for years, was always the brains behind that operation.
As of April 8th, the GDPNow forecast for Q1 real GDP was lowered to just 0.1% (annualized rate), with only 4 scheduled updates remaining. We’re going the wrong direction, Janet!