Who is in control? The FED? Or the bond market? C Thomas walks us through two opposite views of Jeffrey Gundlach and Zoltan Pozsar.
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Good morning I’m Austerity Jones, and I am here with C Thomas Printer.
C Thomas: Good morning Austerity, let me start by reading a tweet from January 6, 2023 from Jeffrey Gundlach, the bond king: “The highest yield on the US Treasury curve is the six month T-Bill, at 4.8%. There is no way the Fed is going to 5%. The Fed is not in control. The Bond Market is in control.”
Now let’s preface this all by saying, I read Jeffrey because I think he is one of the smartest guys out there and he also knows more about bonds that I ever will, but that doesn’t mean that he knows more about people or more specifically the behavior of people. Turn on Bloomberg any morning and every fixed income guy is excited about bonds getting a yield in the coming year, and then turn into a gold podcast, and this is year gold goes to new highs, and then turn to the bitcoin maxxies and they are still believing to the moon. Most people are talking their book, meaning where they have a vested interest. They are on a show because they are promoting their book. I don’t have a book, but I’m trying to decipher for our listeners the bullshit from the bull thesis. I also don’t run a multibillion dollar bond fund, but to be fair in Jeffrey’s defense I am not a bond made billionaire either.
Here is my contrasting thesis to Jeffrey, there is only one person that is going to decide where the Fed goes and that is our last hope, our CTPC adopted Jedi, Jay Powell. Not Jeffrey, that’s trying to get him to pivot by applying public pressure to make his bond fund make money, not Elon Musk whose stock would bounce like crazy if Powell would pivot and not Kathy Wood who Ark fund is down 67% last year and desperately needs a cheap money environment to make her investments pay off again. They are already rich so who cares about them, what about the little folks that tune in and watch and say that sounds pretty good to me. Listen up I say, Jay Powell has veto power over the Fed committee and what he wants, he will get. He has promised pain and the market ignores him, he has said higher for longer and the market ignores him and he has said layoffs are likely and the market ignores him.
Now do I trust him like Joseph of Arimathea with the holy grail no? Is Powell a brother of the cruciform sword, hell no, but even his lifelong dovish foot soldiers have been pounding the pavement saying we are going over 5%. But, and this is a Jennifer Lopez, a big but, we haven’t had real inflation in your entire career Jeffrey until this past year and how did the bond market do? JLO again and this is a big JLo, what if Powell is trying to break the system to save the system? He is already rich, he didn’t need to take a second term, so think about what his true reason for doing the job, read about how much he hates the leverage in the market, read about how much he respects Paul Volcker, and come to your own conclusions.
If you don’t believe me, then let’s go back to January eighteenth of 2022, and read another one of Jeffrey’s tweets: “The 2 year UST Yield has been pounding higher, now over 1%. But CPI is 7%. Is a little over 1% an appropriate 2 year UST Yield?”
Forgive me Jeffrey, but today’s interest rate on the 2 Year is 4.258%. The bond market which calls itself the smartest market in the world didn’t know shit, it just did the equivalent of an NFL coach going 0-16. They didn’t have a clue, they whiffed completely, they didn’t know their ass from a hole in the ground shall we say. Remember in June when Bloomberg pointed out the Deutsche bank research that the bond market had the worst 6 months since 1787, that is before Washington became president and the year before Nancy Pelosi joined Congress.
Now that doesn’t mean that they aren’t smarter than the equity market, but to assume that they are in control is laughable, they aren’t in control of shit. I’m not saying this about you, for all I know you made another billion dollars by identifying this move and trading correctly, but my point is that the bond market didn’t see this coming, not in the 2 year, not in the forwards, yet what did the bond market think was going to happen after all that money printing, and there were plenty of people that were screaming inflation then, but the bond market certainly wasn’t among them and damned sure wasn’t clairvoyant.
When we last wrote about bonds on October 30th, the 2 year closed October 28th at 4.41%, it was 4.45% on Thursday January 5th, when I started writing this, but it fell almost 20 basis points that Friday, and today it is (January 12th) 4.16%. The point of the piece was I don’t care whether you buy bonds or not, but there is a lot of hype out there selling pretty good yields, the best yields we have seen in years etc. I also pointed out how ridiculous it was to just assume 5 year forwards were an accurate mechanism we should use to make decisions. Real yields are my little pony yields if you are using made up future guesses about inflation rates.
I have gained an ally on that front- Zoltan Pozsar, we talked about him last spring when he wrote about his Bretton Wood III thesis and how commodities will be valued in the future. Zoltan, managing director at Credit Suisse, is one of the world’s leading macroeconomic thinkers and in tune with both economic and political tealeaves. Pozsar is particularly critical of inflation expectations in both the five year section and the 5 year forward section saying that they are not figuring in geopolitical risks, the possible introduction of a “BRICS Coin” aka alternative to the dollar commodity backed currency, and the implications of China’s investment in its Belt and Road initiatives that we have discussed here from the Middle East to Southern Asia to Argentina. He says “that will keep inflation above target, forcing central banks to hike interest rates above 5%.”
Now this is what I love about the markets, you have an opportunity to put your money (or in their case their clients’ money) where their mouth is. Opposing opinions are what causes a market and time will decide. Two of the smartest macro people in the world are at opposing ends of the spectrum. Let’s get some popcorn and watch shall we? Zoltan has now said the forward curves are wrong, and we know their future guesses were wrong last year and they remind me of how stock analysts, who are always trying to sell stock, have such rosy analyses for the coming year.
Stock Analysts love to use forward P/E ratios for predicting the future. We love and respect Charlie Munger here at CTPC and he holds these prognostications to be rubbish, holding them just higher than EBITDA which he calls bullshit earnings. He says those analysts don’t know the future. He is exactly right. If they knew the future why would they be asking you to buy a stock or use their 5 year forward interest rate product as a hedging mechanism. Just trade the markets and become fabulously wealthy if you know, and you don’t know, do you know how I know, because the last time a bond market had a year this bad the great state of Montana belonged to France and that little runt Napoleon.
When I start referring to great military minds of the 19th century as little runts, it is clear that this episode has jumped the emotional rails so I will attempt to close more rationally. I’m not saying that Jeffrey is wrong, he may turn out to be right, but to say it with the bond market having such a questionable track record in the recent inflation era is self-serving at best or downright misleading at worst. It is an opinion or an assumption looking forward and like we have seen forward assumptions have been pretty smelly in the past year.
Our first goal is to get our listeners to think, then remember, then smile. Think when you hear the US Treasury is a risk free instrument, think when you see our national debt is growing at $1-$2 trillion dollars a year, think how can that be a risk free instrument? Think when you see mortgage rates just below 7% and think is that high compared to the 30 year average of 7.8%? Think when you see these rates and think when was the last time the government’s debt to GDP was over 120%? Think for yourself and challenge every assumption because even though you might not be as successful as Jeffrey Gundlach you will be more successful in your life. You never know when your perspective allows you to spot a blind spot that someone like the great Jeffrey Gundlach might have missed.
Sincerely Yours,
C Thomas Printer
This week’s financial tip
Keep saving for your emergency fund, but I want you to start thinking about a piece of capital that you could buy and use for its utility. When we are done building the emergency fund, that is the next phase in our program. Let me give you an example…let’s say that you are a cowboy, maybe you buy a saddle and a bridle so that if you ever needed to work for someone that produced food you could cowboy for them, and it wouldn’t cost them anything and you could exchange labor for food. Let’s say you are good with lumber, then maybe think about buying a chainsaw so that if something would happen you could always be able to get wood for heating. Maybe it is a fishing rod or tools for carpentry or plumbing or pots and pan for cooking or baking or whatever your skill set might be, that’s the first place you want to have some true savings because that savings could turn into something useful that you could use to create more money in the future versus something that will be spent and gone.
On this date in history
14 years ago today to be exact, US Airways flight 1549 flew into a flock of Canadian geese and Captain Sully landed the plane safely in the Hudson River with no fatalities. An investigation agency showed that the Canadian Geese acted alone and were not supported by money laundering but stopped short of calling it terrorism narrowly avoided the Maple Syrup War.
Also born on this date
The original lead vocalist for the southern rock band Lynyrd Skynrd, Ronnie Van Zant.