Monday 25, April 2022

Lacy calls the crash

Lacy Hunt, the doyen of commentators on the bond market, and chief economist at Hoisington Investment Management
has spoken. His bulletin is titled “Disaster.”

Hunt has been a bond bull longer than most people on the planet have been alive, but now he thinks that the Fed is perilously close to losing control of inflation. It may now be too late to get the toothpaste back in the tube. He looks at various historical parallels, including the 1972/73 period, and concludes that the monetary easing to get us through the pandemic, just like the one needed to finance the Vietnam War, is going to kindle inflation expectations.

He also points out that the inflation which is already being experienced is causing economic harm to a very large part of the US population. He doesn’t say it, but I will. These people will not be kind to the Democrats in the mid term elections, nor are they likely to be kind in the 2024 presidential election. We are going back to Trump, presumably, who will definitely lean on Powell to keep rate low.

Hunt is always worth reading. He points out that the “dual mandate” (which is actually three goals: full employment, stable prices and stable bond prices) is undeliverable in practice. I am not sure that I’d describe Hunt as a bond bear, but he’s certainly not very bullish at the moment. There have been many false dawns for bond bears, and this may be another. Even if we are not at the end of the great bond bull market, the end must be within our lifetimes now.

What is unsaid in Hunt’s bulletin who exactly faces ‘disaster’ as a result of the Fed’s faulty monetary policy. The text sympathizes those on fixed incomes, who are in their old age, dependent on pensions which have no indexing. Unsaid, the other group which faces disaster are people who manage long-only bond funds. I suspect that Hunt is also a pensioner. Disaster indeed, but an opportunity for some.

Macron

The Economist, the FT and the Sunday Times all reacted with a huge sigh of relief to the prospect of Macron winning (or being likely to win) the presidential election in France. I’m pretty sure these papers never failed to use the epithet “far right” to Marine le Pen. I am not French, and I know about Le Pen’s policies only from discussions (usually cursory) in the UK and US media. I am sure that some her policies are fairly unsavoury, but my understanding is that recently, at least, she seems to have focussed on transfer payments to those who suffer most from inflation and who have fewest resources, i.e. fairly brisk redistribution from rich to poor. As far as I am concerned, this is not a policy closely associated with the ‘far right’. I appreciate that a politician like Le Pen does not even have to mention immigration to secure the votes of those who are opposed to it (certainly in the runoff election, Zemmour having been eliminated). But it seems rather unfair to caricature the woman. Most modern political parties change policies. The Conservative Party was strongly in favour of selective education in the UK, until they decided there were not enough votes in it. Nobody expects them to re-introduce grammar schools now. I am sure that the mainstream media in France hate Le Pen as much as les bien pensants of the UK mainstream media. This makes her vote share of 42% pretty impressive, and will put huge pressure on Macron’s new administration to pursue populist and (arguably) inflationary policies anyway.

The fact is that if we head for a recession, the best way out of it is to redistribute income from those with a relatively low propensity to save, i.e. the very rich, and funnel it to the poor, especially the working poor. I, like Hunt, am not a believer in the Phillips Curve, and I think this would be far better than trying to find infrastructure projects, or build windmills over the country.

The Yen

The yen has been the currency that defied covered interest rate parity for so long, maybe that’s coming to an end. Pinecone Research thinks so.

Wrap

It was pretty severely risk-off day today. The dollar strengthened more, commodities were hammered; the dollar rose more (DXY at 101.7), The 10Y yield dropped 8bp. Somehow, NDX managed to rally 1.3%, but this only recovers half its losses from Friday. The trend for all US equities is still firmly downwards. WTI crude is now $16 below where it was a month ago. It’s not clear to me that demand has been crushed, or that the supply situation has materially improved. However, on a short-term basis, it looks as though oil is going lower. As someone who has just bought a car with dismal fuel economy, there is at least a silver lining.

Image of the day

Genevieve Phillips by Everett, 1933 pic.twitter.com/vmZXTF0fTa

— Daniel Brami (@Daniel_Red_Eire) April 25, 2022