Should we buy bonds now? C Thomas answers.
Good morning, I’m Austerity Jones. Get a cup of coffee or take a nap because C Thomas is about to bore the shit out of you…
C Thomas: Good morning Austerity. I’d like to ask you a question, if you had to choose one of the following, which would you choose: buying a 10 year bond at 4% with 8% inflation or one year ago buying a 2% bond with 6% inflation? Noone wanted to buy 2 year bonds a year ago because they were two percent! Now lots of talking heads are saying, I’m very happy getting 4% on my money. I am glad you aren’t managing my money. The loss of purchasing power is 4% in both situations. Now some people will say you can’t price the inflation at 8% or 6% for the term of the bond, that’s correct. They will tell you to look at the forward looking bond expectations for where interest rates will be over the life of the bond, like the 5 year 5 year forwards for example. That is a product that lets you know where the market is pricing inflation for 5 years out 5 years in the future.
I smile to myself and I say, ok I will play along. You are telling me that I can see where inflation expectations will be for years 6-10 of my bond 5 years out or more specifically where the interest rates will be when my bonds end since it is actually forecasted 5 years out, five years from now. This is some very sophisticated analysis and not for you at home. Marty Mcfly and his Delorian probably founded this analysis back in the 80s with old Doc Brown. I went back to the chart and I have attached the link at cthomasprinter.com if you want to explore this deeply insightful analysis. Austerity, I must have looked for 5 minutes trying to find where the 5 year 5 year forwards had 8% inflation or 6% inflation or even 4% inflation. Going back to 2003, the highest I could find was 3.05% right before the GFC in the fall of 2008. I went back 10 years from today and in Oct 2012, they had the rate at 2.87%. Boom, they nailed it! These guys are so far off that they couldn’t hit a bull elephant in the ass with a bale of hay.
That is a technical term, by the way. These forward looking rates are the reason that you hear that we have real yields right now. A real yield being the price of the bond less the inflation expectation for that bond’s expiration. These people use the same models that brought you transitory last year. They are garbage people, utter garbage. I understand you still don’t believe me, so let’s use one more example. During the covid sickness the US government shut down the economy, yes we seem to have forgotten that we did the exact same thing everyone is mocking China for right now, but bear with me, we did. That meant the velocity of money went down, production, and GDP cratered. This would all lead to lower expectations for lower inflation in the future and the forwards figured that correctly as the 5 year 5 year dropped almost a whole percentage point. But we weren’t closed for very long and when we did start reopening the geniuses in DC (Congress and the Fed) printed 2 out of every 5 dollars in existence today. That right, 40% of our money today has been printed since 2020. Milton Friedman said “money is always and everywhere a monetary phenomenon” and yes we understand that so how was it reflected in the forwards, this massive inflation of the money supply? We have not broken 2.6% yet in the 5 year 5 year yet.
You might be saying, great C Thomas. Super neat book report, gold star for you, but what the hell are you talking about and how does it affect me? That’s the right question and question. These are the real yields that have not gone over 3% for 20 years and why should they, inflation has been low for 40 years right? Toto, we aren’t in Kansas anymore. Using these instruments and accepting them as a given is a huge mistake. They aren’t accurate, no one knows where inflation is gonna be next month much less in 10 years. When you start hearing the media trumpet how 4% looks pretty good and that real yields are positive just go look for yourself. Today’s 10 year bond yield minus the core CPI, because I am a generous guy, and the yield is -3.1%. If we used the CPI it would be even worse and that doesn’t even take into account how fraudulent the CPI is- go to shadowstats.com if you want an eye-opening look at how the CPI has changed in measurements over the years. They do great work, but let’s say we are at -3% today. Why is that a good idea? Why does that sound good Mr. or Mrs Talking head on CNBC?
That’s a very good question and I only have two answers for you today. The first is the reason that the fund manager can ask you to put your money in a 4% instrument today is that it covers the fees or their commission. At 2%, the percentage of the interest earned was just too big, but now at 4% plus, hey you the client won’t notice. It’s in the future 10 years down the road when you notice, hey wait a minute I can’t buy didley dick with this bond. I’ve lost a bunch of purchasing power and inflation wasn’t 2.4% and I still had to pay a commission. They won’t blame the fund manager then, they will blame the Fed or the government maybe or Big Oil or Mr. Putin. They can’t recommend stocks when Amazon is down 20% or Facebook is down 25% and they haven’t had to work on picking good stocks their entire career because they have just been recommending passive investing since they passed their series 7. Now I’m not licensed anymore so I have a little more leeway but I still can’t give financial advice so I will simply say, do some research. When they give you a term like real yield go back and see how it is calculated. The answers might surprise you.
The second reason that they want you to buy bonds is that it is your duty. That’s right, good old stars and stripes and Francis Scott Key playing in the background, do your duty American and buy some of these bonds backed up by a $31 trillion dollar debt shitheep and growing by a trillion and a half a year. That’s right, Biden is pleased to announce that they cut the deficit in half this year! When the Covid craziness hit the market and market sold off in 2020, the Fed lowered rates to zero, and the market went down, and then they stepped in with QE and bought some bonds, and the market went down, and then they bought Mortgage backed securities and the market went down, and they finally stepped in and bought some corporate debt and with that- the FED saying that they would not let companies go broke, the market railed back. We got QE on steroids, a fiscal helicopter of money, and here is the sneaky little secret. Until June the largest buyer of US government bonds was the Federal Reserve, that’s right. That $8.9 trillion dollar Fed balance sheet was from buying MBA, US sovereign debt, and MBS mostly. Now, China is not buying our bonds, Japan and Europe can’t really buy our bonds because they are selling bonds to protect their own currency, and the Fed stopped buying bonds in June as they embarked on quantitative tightening. Since September they have been letting $95 billion roll off their balance sheet. So somebody needs to step up and buy some bonds! The American public just needs to be told to buy bonds because they are a good deal, they need to be told that a real yield sounds good, and they need to be told by their advisor who still wants to be in business and can’t sell crashing stocks any longer and must pivot to bonds to stay in business.
The Fed has two choices and we all know them too well. Let inflation in which case getting a 4% return over 10 years will be a terrible idea in a world of hopefully only stagflation or they raise rates really hard and cause us to go into a recession and the federal government to go broke with interest on the debt soaring into the trillions. Most of the time governments don’t go broke. They inflate their way out hoping for a better day down the road or at least the catastrophe happening on someone else’s watch. They will try to sell you on the risk free US treasury for yield, safety, or patriotism- be warned.
It reminds me of the death of the beautiful and talented Carole Lombard. She crashed into a mountain outside Las Vegas, Nv on Jan 16, 1942. She was returning to Hollywood after selling war bonds on tour during World War II. Most of you were too young to remember the selling of war bonds to support our boys over in combat, but there is one key difference from the efforts of Mrs. Lombard and what is coming today. She was selling bonds to raise money to fund the government supporting young men fighting to rid the world of evil and today you would be buying bonds to fund the government of reckless spending and stupidity. Choose wisely.
Sincerely Yours,
C Thomas Printer
This week’s financial tip
Do your research. What I just said doesn’t mean you shouldn’t buy bonds or not buy bonds. Every situation is different, but I am telling you not to buy bonds for reasons that you haven’t investigated, for reasons that you hear on tv. Google real yields, google the St Louis Fed and look at their charts or head to our blog for a good place to start. Think about what you are going to do with that savings account you set up. Btw – I got another email saying my savings account rate went up- hey this inflation isn’t so bad Austerity, and I saw a new company was coming out offering the highest savings account rates in the country. Happy googling!
On this date in history
18 years ago today to be exact, the Boston Red Sox beat the St Louis Cardinals to win their first World Series in 86 years.
Also born on this date
The second president of the United States John Adams, the Fonz Henry Winkler,
Ivanka Trump, Kevin Pollack, the never leaving bootlegger Harry R Truman – not to be confused with the ex-president who died when Mt. St Helens erupted – and the hand of god himself Diego Maradona.
Useful links mentioned on this episode
https://fred.stlouisfed.org/series/T5YIFR
https://data.nasdaq.com/data/FRED/T5YIFR-5year-5year-forward-inflation-expectation-rate