Macro Extremes Alert – U.S. 10’s

U.S. 10 year bond yield are at ‘overbought extremes’.

At 2.41%, it’s kinda done or at the least, at the upper end of being so.

I’ll give a move to 2.6% (that downward sloping resistance line in the chart below) but I’ll say that you don’t want to be shorting bonds at these levels.

Beyond the subjective notion that short bonds is a crowded trade and the chart below showing a unison registration of a 70 RSI reading (it’s 12th visit in 30 years) with a 2.5 weekly standard deviation above the mean, my other work tells me that the 10’s are the most stretched since October 2018.

In fact, other than 2018 and now, we haven’t seen the 10’s this ‘stretched’ at any other time in 40 years of data.

Additionally, the U.S. 10 year bond yields have doubled in 8 months and quadrupled in 18 months.

If you think 2.4% is low compared to where we once came from, the quantum of this ‘recent’ move should count for something.

p.s. once again, tune in to the noise amongst the market pundits, chat rooms and the media again. ‘Today’s’ hyper-ventilation is now about falling bond market yields.

Similar to recent moments seen in Nickel, Oil, Crypto, Wheat, Chinese equities etc etc, consider the opposite side of what the crowd is crowing about.

It’s funny, I just can’t seem to remember ‘them’ saying anything when interest rates were 1%……

March 23, 2022

by Rob Zdravevski

rob@karriasset.com.au

#pendulum

The Fed won’t hike 5, 6 or 7 times

Here is something to put in your diary and check at the end of 2022.

https://www.bloomberg.com/news/articles/2022-01-29/goldman-sachs-predicts-fed-will-raise-rates-five-times-this-year?sref=qLOW1ygh

Goldman Sachs joins the others below, where they think the Fed will raise rates 5 times this year.

“Bank of America Corp. now predicts seven rate hikes in 2022 and BNP Paribas SA forecasts six, while JPMorgan Chase & Co. and Deutsche Bank AG see five.”

Personally, I think their views are ridiculous and far-fetched.

My view is quite different.

I think the Fed raises rates twice this year and then corrects their actions with a rate cut.

My playbook suggests the Fed will hike and react to what the U.S. 2 year treasury note has done, which paints them as being behind the curve. They may be trying to temper inflation, which is mainly being driven by high commodity prices, disrupted supply chains and oddly, a tight labour market.

Politically, they will will feel pressure to do so, if at least to put a lid on U.S. gasoline prices.

But they won’t put rates up too much, for finally, inflation has reached the target rate that they have been wishing it would reach for many years.

As the government’s teat is removed from many and workforce participation increases (possibly because they lose money in their crypto portfolios), supply chains are rectified and commodity prices seriously mean revert, we should see inflation peaking (about now) and a lower GDP print for the March quarter, all without any meaningful rate hikes.

Excessive hikes will hurt GDP growth.

hint: mid term elections are coming in November 2022.

This may not sink in until after the May 4th Fed meeting.

More on the positioning of the investment playbook later.

January 31, 2022

by Rob Zdravevski

rob@karriasset.com.au

Rising GDP means higher inflation and interest rates

Below is an extract from this week’s IMF economic forecast report showing World GDP is set to rise 21% over the next 5 years.

This is an average of 4.2%, which is a good 35% higher than the post GFC GDP growth average from 2013-17.

So, how can the world’s economy grow by one-fifth in short period of time, without any material inflationary pressures when companies are telling us they see rising costs, constraint in capacity and the need to increase selling prices?

We will see a huge amount demand for production output constrained by production supply.

3 into 1, just won’t fit.

I think central banks in the ‘developed world’ are behind the curve.

Russia, Mexico, Brazil are commodity producing and commodity sensitive economies. Their central banks have been raising rates citing reasons to curb the rising cost of living.

Inflation is a tax that the ‘poor’ can’t afford to pay.

Their citizens are amongst the least indebted in terms of personal debt to GDP, so rising interest rates doesn’t threaten the value of their real estate and financial asset values unlike the sky-high indebted citizens of Australia, Canada, the U.S. and the U.K.

(see the other image below)

Interestingly, South Korea, Norway and New Zealand are the first of the developed world economies to raise interest rates. Their central bank reasons were to curb their respective country’s soaring household debt and home prices. Not the cost of living……

October 13, 2021

by Rob Zdravevski

rob@karriasset.com.au

#economy #interestrates #growth #realestate

Watching interest rates closely

Watching some macro signals today.

In the chart below, I’m watching the U.S. Year government bond yield.

Notice how over the past 6 weeks, the 10’s are making ‘higher highs’ and ‘higher lows’.

Now, they need to hold 1.265%. If they do, then they should test 1.385%.

If they break 1.385%, then 1.47% and 1.57% are next important levels to test.

Recently, rising interest rates have favoured cyclical and industrial equities, while falling yields have given the ‘technology’ stocks a boost.

September 10, 2021
by Rob Zdravevski
rob@karriasset.com.au.

The Case for Higher Equities, a Stronger USD and Weaker Commodities


The US 10’s are yielding 1.33% and the Aussie 10’s are 1.20%.

That spread (difference) between the US 10 Government Bond Yield and the Australian 10 Year equivalent is currently 0.13%.

But the figure doesn’t really matter, it’s the direction of the trend which is of greater importance.

As we see today………a rising trend (and when coupled with a break above a trend line) portends greener pastures for equity prices.

Below you will find a ‘close-up’ of a Weekly chart, highlighting the current ‘break-out’, while the 40 year chart (on a Monthly basis) illustrates a rising trend (of the spread) equating to an advancing S&P 500 (SPX), while a decline trend results in a lower or sideways travel.

A rising trend in this interest rate differential tend to also equate to a stronger US Dollar, which in turn means a weaker AUD.

Which…..also correlates to weaker commodity prices.

This is an indicator worth watching for your macro and longer term positioning.

Who would think we’d see a stronger US Dollar?

Rising yields on U.S. Treasuries will prolong the advance in the Dollar.

And rising interest rates add to debt servicing stress which can lead to Sovereign Debt pressure (there is no use calling it a crisis, until it becomes one) at which point the U.S. Dollar remains the currency of ‘last resort’.

This can lead to more buying of the U.S. Dollar.

See how this scenario can develop?

August 11, 2021

by Rob Zdravevski

rob@karriasset.com.au

The Delicate Game of Interest Rates & Inflation

Brazil lifts interest rates by 1% to 5.25%. It’s seen as its most aggressive move since 2016.

2 weeks ago, Russia, (another commodity reliant economy) hiked rates too.

It looks like both central banks are trying to curb inflationary pressures. Rising commodity prices are a notable contributor.

Invariably, rising inflation will send government bond yields higher.

Why are the central banks in other commodity sensitive economies such as Australia and Canada still holding interest rates around the 0.50% mark?

Are the Bank of Canada and the Reserve Bank of Australia foolishly towing the same line as other Western economies?

The British, German and French economies are vastly different.

This may turn out to be a perilous policy error.

Are the BOC and RBA not entirely politically independent?

Can it be that the Russian Central Bank is acting for the good of the economy and citizens or is it because Putin doesn’t need to worry about being re-elected and Scott Morrison does?

Or perhaps it’s because the Household Debt to GDP for Russian’s and Brazilians is 22% and 37% respectively,

while in Canada it’s 113% and Australia’s is a world topping 123% ????

August 6, 2021

by Rob Zdravevski

rob@karriasset.com.au

Russia aggressively hikes interest rates

I found this news interesting.

https://www.reuters.com/business/finance/russia-raises-key-rate-65-sharpest-move-since-2014-2021-07-23/


Is the world’s 11th largest economy ahead of the curve and crowd when it comes to managing inflation or does its strengthening currency hinder growth and exports?

Incidentally, South Korea and Australia are ranked 12th and 13th

What the 10’s-2’s spread may tell us

My story about watching interest rates spreads and how the S&P 500 equity index may act.

June 22, 2021
by Rob Zdravevski
rob@karriasset.com.au

Health Check – the Copper/Gold Ratio

The watching the direction (not necessarily its value) of the Copper/Gold Ratio helps me reading the health of the economy.

And it has been healthy….

It’s particularly correlated with the direction of the U.S. Government 10 Year Bond Yield. More on that in the next post.

The chart below shows us the 6 moments when the Copper/Gold Ratio has registered an Overbought reading over the past 20 years.

Such occurrences correlate to and increase the probability of lower prices in the S&P 500 Index or at the very least see it trade sideways for the coming months. This also coincides with my thesis in my recent newsletter.

https://mailchi.mp/karriasset/quadrupling-yields-increases-equities-risk-2

What this chart tells you is that probability does not suggest ‘going long’ or making any meaningful capital deployment into equities at this juncture.

May 2, 2021

by Rob Zdravevski

rob@karriasset.com.au

The rising cost of capital

I wanted to expand on a previous post from Jan 18, 2012 titled “What if interest rates double”. https://robzdravevski.com/2012/01/18/what-if-interest-rates-double/

What if the cost of capital doubles or triples within 10 years?

I don’t think this outcome is far-fetched and I do think it is worth considering or at least being prepared for.

In the U.S., the Prime rate is currently 3.25%, a 15 year fixed mortgage costs 3.4% per annum and the government 10 year bond is yielding 2.2%. Australians pay 6.5% for a 3 year fixed home loan while the Reserve Bank of Australia’s Cash Rate is presently 4.25%.

Whether it’s the mortgage, government or capital markets, rising rates in the coming decade shouldn’t be a surprise. After all, they are at the extreme low of their historical ranges.

Continued cheap credit isn’t something we should wish for. Take a look at Japan. Deflation is the larger evil.

Presently, central banks are trying to reflate economies and the result of the increasing monetary base should be inflation. How high it will rise will depend on the policy employed to curb it from becoming hyper-inflationary. One strategy that will be used will involve raising rates in order to slow a recovering and expanding economy.

We should remember that rate cuts are used to stimulate activity. Keeping rates low for a prolonged period tell us either how sick an economy is or how much of a “jump-start” the economy ultimately needs.

I think that rising rates should be (quietly) celebrated as they signal an expanding economy. The rising cost of credit is designed to temper the growth or least keep it at a measured pace.

Rates will rise noticeably in the next 10 years from the combined results involving policy, creditworthiness, lending criteria and the flow of money.

Although economies should improve, the inflationary effects of central bank “money printing” and the legacy of company and government bond defaults will be the greater influence towards the cost of credit rising.

Scarcity of capital will be the second wave of upward pressure on interest rates. Banks will be required to hold greater liquidity and their lending criteria will remain tough but more importantly I believe money will flow increasingly from the developed world towards emerging markets, where the return on the capital invested will be a more attractive proposition to lenders.

This exodus of capital will cause interest rates in the developed world to move higher. It’s quite possible that the rise will be amplified by erroneous central bank policy because they deem higher rates are justified in order to stifle the inflationary result from their actions earlier in the decade.

These higher rates will also be used (and justified) in order to court capital back to safer investing jurisdictions.

The ramifications of this scenario would have far-reaching effects on their portfolios and I feel it is an important theme in which investors will need to prepare and position for.

In an upcoming post, I will apply this theme to how I think it will affect commodity prices and mining companies.

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