Dear Mr. Blonde, thank you for the excellent economic analysis. Currently, the yield of the U.S. 10 Year Treasury 3.97% p.a. In your opinion, is the peak in sight? I expected the strong USD to be anti-inflationary and yields would not rise as much. Thank you!
well...considering i thought we'd see more support for back end yields around 3.25% i'm probably not the right person to ask. yes, i do think a peak is in sight primarily b/c i see significant risk to growth from the tightening of financial conditions and inflation demand destruction (energy) already in the pipeline. historically...even during 70s...bond yields fell when inflation momentum fell and growth contracted. perhaps UK event in the last week represents a bit of a blow off top for this phase of the cycle.
Could you please elaborate on this sentence: The sharp repricing in real yields while breakevens decline historically is a pressure point for risk asset valuations. I would like to grasp the logic behind... Thank you!
the interaction between real yields and breakevens is important to determine the health of the move. if breakevens are rising AND real yields are rising then it suggests good growth environment and therefore no reason for meaningful multiple contraction. if breakevens falling AND real yields rising it is policy tightening..."growth factor" falling while discount rate rising. the sharper the move the sharper the tightening (or easing if moving in other direction).
do you have any ideas on why it works only from 2015? I downloaded data by myself and checked correlations of time series... then, I did the first differences to account for instability. the results are that it works this way since 2015, but before that, the relationship is negative: like high inflation and low real growth - "stagflationary" nominal growth - lead to lower multiples
i believe it reflects the an environment when asset valuations have become much more sensitive to central bank actions/policies. its not really different that the relationship wi/ real yields and p/e multiples. my only twist on that single factor relationship is to include breakevens to control for periods (even if brief) when real yields and breakevens are rising together…in which case we should be less concerned about valuation implications from rising real yields. hope this opinion is clear
Thank you Mr Blonde for sharing an excellent piece, as usual. Appreciate the framework and can´t agree more with you. About "contagion" you mentioned, I´m honestly concerned about the "dollar wrecking ball" and all the cracks we´re seeing in EM, but mostly in DM (cause I´d expected a little bit more of resilience from some DMs). Any thoughts on how does the wrecking ball play out when central banks are gonna be selling USTs to defend their currency, hence giving the dollar an extra push forward? Thank you once again!
i don't have a strong opinion on this doom scenario of CBs selling UST (and $) to defend their FX. think better defense is more likely the right mix of fiscal/monetary policy...accepting some growth pain in the process. sorry i don't have a better answer. i think $ has more upside largely b/c i don't see any relevant alternatives...keep in mind a big part of $ strength is a function of corporate health/profitability...US far exceeds the rest of the world in that category.
Thank you Mr Blonde for accompanying all of those who in need of clarification. You do such clear, readable & value added work.
Wasn’t it Druckenmiller that said something along the lines of he’d never seen the spread between monetary policy & inflation that we have today. And, that goes for us here in Europe as well. The most complex of environments he had seen in his lifetime leaving him both humble & cautious.
What I’ve found fascinating in your work as I’ve mentioned in your capitulation indexed. Where it is today vs where it’s been since ‘87. Am surprised it hasn’t moved much &, found my eyes as they do look backwards into history to determine potential probabilities. Although ‘87 capitulation index numbers come from a substantially different variety of events, today Druckenmiller’s basic points keep ringing in my ears.
Skate to where the puck is going some say. Not where it is today. Your capitulation index has a pretty important message for those willing to listen considering our complex environment today.
Thank you for the thorough update. Memories of fall 2000 and 2008 also make me think any bounce will be short lived. That said, I took profits on hedges on Friday and will consider adding them back after a rally.
Thanks for the great insight, Mr Blonde. Why do you prefer using real Treasury yield when comparing against earnings yield? Will nominal Treasury yield be a better comparison because earnings yield is nominal?
funny...most suggest earnings yield is a real measure as they assume earnings grow with inflation. we know that isn't necessarily the case as it assumes 100% inflation pass thru (i.e. most companies can't pass thru all the cost increases, especially when rapid). either way, it would not change the message much at all. personally i prefer using BBB corporate yield as a more appropriate measure of cost of capital...that's the rate companies actually borrow at. see here: https://stuckinthemiddle.substack.com/i/73629694/burning-at-both-ends
Dear Mr. Blonde, thank you for the excellent economic analysis. Currently, the yield of the U.S. 10 Year Treasury 3.97% p.a. In your opinion, is the peak in sight? I expected the strong USD to be anti-inflationary and yields would not rise as much. Thank you!
well...considering i thought we'd see more support for back end yields around 3.25% i'm probably not the right person to ask. yes, i do think a peak is in sight primarily b/c i see significant risk to growth from the tightening of financial conditions and inflation demand destruction (energy) already in the pipeline. historically...even during 70s...bond yields fell when inflation momentum fell and growth contracted. perhaps UK event in the last week represents a bit of a blow off top for this phase of the cycle.
Could you please elaborate on this sentence: The sharp repricing in real yields while breakevens decline historically is a pressure point for risk asset valuations. I would like to grasp the logic behind... Thank you!
the interaction between real yields and breakevens is important to determine the health of the move. if breakevens are rising AND real yields are rising then it suggests good growth environment and therefore no reason for meaningful multiple contraction. if breakevens falling AND real yields rising it is policy tightening..."growth factor" falling while discount rate rising. the sharper the move the sharper the tightening (or easing if moving in other direction).
do you have any ideas on why it works only from 2015? I downloaded data by myself and checked correlations of time series... then, I did the first differences to account for instability. the results are that it works this way since 2015, but before that, the relationship is negative: like high inflation and low real growth - "stagflationary" nominal growth - lead to lower multiples
i believe it reflects the an environment when asset valuations have become much more sensitive to central bank actions/policies. its not really different that the relationship wi/ real yields and p/e multiples. my only twist on that single factor relationship is to include breakevens to control for periods (even if brief) when real yields and breakevens are rising together…in which case we should be less concerned about valuation implications from rising real yields. hope this opinion is clear
Great comments - very helpful - thank you.
Cheers Mr B, always a pleasure to read your thoughts.
Thank you Mr Blonde for sharing an excellent piece, as usual. Appreciate the framework and can´t agree more with you. About "contagion" you mentioned, I´m honestly concerned about the "dollar wrecking ball" and all the cracks we´re seeing in EM, but mostly in DM (cause I´d expected a little bit more of resilience from some DMs). Any thoughts on how does the wrecking ball play out when central banks are gonna be selling USTs to defend their currency, hence giving the dollar an extra push forward? Thank you once again!
i don't have a strong opinion on this doom scenario of CBs selling UST (and $) to defend their FX. think better defense is more likely the right mix of fiscal/monetary policy...accepting some growth pain in the process. sorry i don't have a better answer. i think $ has more upside largely b/c i don't see any relevant alternatives...keep in mind a big part of $ strength is a function of corporate health/profitability...US far exceeds the rest of the world in that category.
thank you for the answer, Mr Blonde!
"Recession risk very much remains and history suggests THE low doesn’t come until after the recession begins."
What types of indicators do you need to see to declare that we are in a recession?
my man @EPBResearch is the expert in this area...here's a recent post of his:
https://twitter.com/EPBResearch/status/1552758490464231424?s=20&t=4acKkioZpv7g5WHszznFxQ
Why thank you for the share!
Excellent little write up of current conditions around the globe led by CB policies. Thoroughly enjoyed reading, thank you
New subscriber. Thank you for the clear concise write-up on current markets.
great, welcome jrobe and thank you for the clear feedback
New subscriber here. Clear, cogent and concise - exactly what’s needed heading into this week.
great, welcome bob and thank you for the clear feedback
Great stuff. Thank you.
Great take as always, thank you! Have a great week!
Thank you Mr Blonde for accompanying all of those who in need of clarification. You do such clear, readable & value added work.
Wasn’t it Druckenmiller that said something along the lines of he’d never seen the spread between monetary policy & inflation that we have today. And, that goes for us here in Europe as well. The most complex of environments he had seen in his lifetime leaving him both humble & cautious.
What I’ve found fascinating in your work as I’ve mentioned in your capitulation indexed. Where it is today vs where it’s been since ‘87. Am surprised it hasn’t moved much &, found my eyes as they do look backwards into history to determine potential probabilities. Although ‘87 capitulation index numbers come from a substantially different variety of events, today Druckenmiller’s basic points keep ringing in my ears.
Skate to where the puck is going some say. Not where it is today. Your capitulation index has a pretty important message for those willing to listen considering our complex environment today.
Thank you Sir.
Thank you for the thorough update. Memories of fall 2000 and 2008 also make me think any bounce will be short lived. That said, I took profits on hedges on Friday and will consider adding them back after a rally.
Thanks Blonde.
Very good charts and analysis.
Always great material to read. Thank you for the time you put in to create content like this.
thank you for taking the time to give feedback
Thanks for the great insight, Mr Blonde. Why do you prefer using real Treasury yield when comparing against earnings yield? Will nominal Treasury yield be a better comparison because earnings yield is nominal?
thank you for the feedback, much appreciated.
funny...most suggest earnings yield is a real measure as they assume earnings grow with inflation. we know that isn't necessarily the case as it assumes 100% inflation pass thru (i.e. most companies can't pass thru all the cost increases, especially when rapid). either way, it would not change the message much at all. personally i prefer using BBB corporate yield as a more appropriate measure of cost of capital...that's the rate companies actually borrow at. see here: https://stuckinthemiddle.substack.com/i/73629694/burning-at-both-ends
Thanks for your explanation. Agree that the message wouldn't change even if we use nominal Treasury yield. : )