Great article, once again. Concerning your first point, I understand the point you're making about Fed adjusting capital availability and the effect that has on rates. However, can't we say there's more to the story? In my latest article I expanded upon a point that Michael Howell and Jeff Snider have made,
Namely that the perceived return you can get from investing in the real economy has a heavy bearing on interest rates. As in, not just next quarter but if you look at trends over years or decades, if investors don't see growth opportunities in the real economy they'll favor bonds thus driving down yields. Irrespective of Fed adjusting capital. We could say it has more to do with demographics, pace of innovation, societal trends/regulatory environment, etc.
Although, I'm also not positive I've fully understood the implications of what you've written. I'm about to reread it again.
Absolutely - this of course is a gross oversimplification of a complex system, and clearly more goes into it than just central bank policy. It was more of a new framework that I've found helpful this year to conceptualize drivers of rates in practice over the past year.
And who knows, maybe its the wrong way to think about it!
There is absolutely a relationship between real economic returns and debt yields, in part because debt is only "accretive" to the extent that it is financing an asset that has a higher return than the cost of debt. The way that I interpret this in practice is that in order to hit growth targets, central banks have reduced the cost of debt in order to "unlock" lower and lower returning projects that can be accretively debt-financed.
However, I do remain somewhat skeptical of the idea that low rates must be permanent due to demographics or technology. The best counterfactual is that rates were comparably low from the 1930s-1960s, and yet rates rose for 20 years straight through the early 80s. It does seem that there could be some sort of "supercycle" for debt.
But who knows! I will seek out any and all information that I can get my hands on and continue to adjust my view accordingly.
"in practice is that in order to hit growth targets, central banks have reduced the cost of debt in order to "unlock" lower and lower returning projects that can be accretively debt-financed."
I found that bit to be fascinating. I'd never considered it quite from that angle before, but it does make perfect sense. I suppose it's a different way to frame the idea of pulling demand forward, but I like the way you put it better.
We're in the same boat, always seeking the best information and adjusting our views accordingly.
TINA...paying 4.3% while inflation is twice that. Works for me. With the government ramping up even more debt and businesses and consumers still drunk holding cheap debt, continued rising rates will encourage the rubber meeting the road. Expect skidding and blowouts.
O/N real rates are still negative if you compare to LTM inflation - but stock and bonds have had negative *nominal* returns over the past year, and even worse real returns.
TLBS, at least you can still use the acronym when you change to bull mode haha ;)
Anyway, can’t thank you enough for the knowledge that you brought to me this year and looking forward to learn more. All the best for you in 2023 and merry Xmas!!
Haha it sounds premature but I’ve already thought through out a couple ideas. Though I think I have to stick with TLBS as it is my internet name, and origin. I appreciate your kind comments every week, and wish a happy holiday and new year to you and yours.
As someone who thinks about interest rates quite a bit, you may also enjoy this analysis on its relation to energy, efficiency and velocity. I found it very interesting when I first read it!
Thank you so much for posting these, they are a pleasure to read. Your insights and writing style are absolute class. I've been going through Strunk and White's Elements of Style with a student of mine and shared your writing as an embodiment of Strunk's principles:
“Vigorous writing is concise. A sentence should contain no unnecessary words, a paragraph no unnecessary sentences, for the same reason that a drawing should have no unnecessary lines and a machine no unnecessary parts. This requires not that the writer make all his sentences short, or that he avoid all detail and treat his subjects only in outline, but that every word tell.”
Thanks Lauraine! This is a wonderful compliment. I had not really written prose since high school when I first started on twitter last year. My improvement in writing style has been enormous since then (and I have learned basic grammar from my editor/wife). It total I’ve written about 60,000 words here since April which is about the length of a novel - my writing has improved dramatically with practice.
Sometimes I worry the style is too direct, but maybe that’s impossible.
In any case, thanks for the gracious compliment and look forward to making it even better next year.
Thanks for this end-of-the year article. Congrats on the following you've built since 2021! I've thoroughly enjoyed all of your writings this year. You gave me so many satisfactory ''aha moments''. You and Lyn Alden are my favorite active econ/ finance writers. It's always a treat to read your thoughts! I'm also starting to feel excited about the opportunities and good deals that 2023 will bring.
Thanks Calibear. It’s been an unexpected ride since starting a twitter account for the LOLs. I’m glad you have enjoyed my writing and have a ton of respect for Lyn so that is great compliment. I’m also looking forward to the opportunities on the horizon. I’ll be sure to share them here.
"Today, Bulls are an endangered species." I think you have a bit of confirmation bias here regarding this sentiment. Maybe it's from the people that you're following and reading?
There's a difference between "doom and gloom" sentiment because stocks are dropping vs what people are actually doing with their money. Are people actually putting money where their mouth is? If more people see a recession coming and further drops in equity markets, we should see a lot more capitulation selling and a spike in put/call ratio. But that's not what we see. Margin loans are still near all time highs and the P/C ratios on some key stocks are actually quite bullish.
META 0.49
TSLA 0.66
AAPL 0.91
NVDA 0.97
Those ratios have been trending down, meaning that there are more bullish bets. I like to make data driven decisions. I highly recommend this rather than using something unquantifiable such as "I see a lot of recession talk".
Since this comment is fairly condescending, perhaps you should look up data on margin debt and broad P/C ratios. Margin debt is down nearly 30% from the peak, and CBOE P/C index for equities and equities+indices have been trending up for a year.
Merry Christmas and have a great, relaxing break from all this madness - thanks for all the fish ... erm ... blog entries! I did not drink (too much) yet, I want to be sober during all this market madness.
Great article, once again. Concerning your first point, I understand the point you're making about Fed adjusting capital availability and the effect that has on rates. However, can't we say there's more to the story? In my latest article I expanded upon a point that Michael Howell and Jeff Snider have made,
https://theunhedgedcapitalist.substack.com/p/not-just-the-fed-why-weve-had-0-rates
Namely that the perceived return you can get from investing in the real economy has a heavy bearing on interest rates. As in, not just next quarter but if you look at trends over years or decades, if investors don't see growth opportunities in the real economy they'll favor bonds thus driving down yields. Irrespective of Fed adjusting capital. We could say it has more to do with demographics, pace of innovation, societal trends/regulatory environment, etc.
Although, I'm also not positive I've fully understood the implications of what you've written. I'm about to reread it again.
Thanks again.
Absolutely - this of course is a gross oversimplification of a complex system, and clearly more goes into it than just central bank policy. It was more of a new framework that I've found helpful this year to conceptualize drivers of rates in practice over the past year.
And who knows, maybe its the wrong way to think about it!
There is absolutely a relationship between real economic returns and debt yields, in part because debt is only "accretive" to the extent that it is financing an asset that has a higher return than the cost of debt. The way that I interpret this in practice is that in order to hit growth targets, central banks have reduced the cost of debt in order to "unlock" lower and lower returning projects that can be accretively debt-financed.
However, I do remain somewhat skeptical of the idea that low rates must be permanent due to demographics or technology. The best counterfactual is that rates were comparably low from the 1930s-1960s, and yet rates rose for 20 years straight through the early 80s. It does seem that there could be some sort of "supercycle" for debt.
But who knows! I will seek out any and all information that I can get my hands on and continue to adjust my view accordingly.
Thanks as always for the feedback!
"in practice is that in order to hit growth targets, central banks have reduced the cost of debt in order to "unlock" lower and lower returning projects that can be accretively debt-financed."
I found that bit to be fascinating. I'd never considered it quite from that angle before, but it does make perfect sense. I suppose it's a different way to frame the idea of pulling demand forward, but I like the way you put it better.
We're in the same boat, always seeking the best information and adjusting our views accordingly.
Cheers
Hey Bear, great article. Always excited to read your content - thanks for everything. Merry Xmas 🎄
Thanks Max! I'm glad you've enjoyed. Merry Christmas and a happy new year to you as well.
TINA...paying 4.3% while inflation is twice that. Works for me. With the government ramping up even more debt and businesses and consumers still drunk holding cheap debt, continued rising rates will encourage the rubber meeting the road. Expect skidding and blowouts.
O/N real rates are still negative if you compare to LTM inflation - but stock and bonds have had negative *nominal* returns over the past year, and even worse real returns.
TLBS, at least you can still use the acronym when you change to bull mode haha ;)
Anyway, can’t thank you enough for the knowledge that you brought to me this year and looking forward to learn more. All the best for you in 2023 and merry Xmas!!
Haha it sounds premature but I’ve already thought through out a couple ideas. Though I think I have to stick with TLBS as it is my internet name, and origin. I appreciate your kind comments every week, and wish a happy holiday and new year to you and yours.
Great article Bear. Making it easy to read unlike other writers that spam jargon which makes things unreadable to the newbie haha
That is my intention, and I’m glad you’ve found it accessible. Jargon is often used as as an in-group signal, at the cost of clarity and precision.
Good point on turning from being the last bear and turning into the first bull.
Subscribing to doom and gloom is something I really try to avoid even thought it has helped me MASSIVELY for almost the entirety of 2022.
There is a time for everything under the sun.
As someone who thinks about interest rates quite a bit, you may also enjoy this analysis on its relation to energy, efficiency and velocity. I found it very interesting when I first read it!
http://theoildrum.com/node/7147
Thanks Alex! I’ll check it out. And you’re right I do think about rates a lot… maybe too much.
OMG. “THE FIRST BULL RUNNING” that made my day. Thank you for your insight
Thanks JSUAVE!
Thank you so much for posting these, they are a pleasure to read. Your insights and writing style are absolute class. I've been going through Strunk and White's Elements of Style with a student of mine and shared your writing as an embodiment of Strunk's principles:
“Vigorous writing is concise. A sentence should contain no unnecessary words, a paragraph no unnecessary sentences, for the same reason that a drawing should have no unnecessary lines and a machine no unnecessary parts. This requires not that the writer make all his sentences short, or that he avoid all detail and treat his subjects only in outline, but that every word tell.”
Thanks Lauraine! This is a wonderful compliment. I had not really written prose since high school when I first started on twitter last year. My improvement in writing style has been enormous since then (and I have learned basic grammar from my editor/wife). It total I’ve written about 60,000 words here since April which is about the length of a novel - my writing has improved dramatically with practice.
Sometimes I worry the style is too direct, but maybe that’s impossible.
In any case, thanks for the gracious compliment and look forward to making it even better next year.
Great article. Looking forward to lots more in 2023. Merry xmas.
Thank you and Merry Christmas to you! Looking forward to writing lots more next year
Thanks for this end-of-the year article. Congrats on the following you've built since 2021! I've thoroughly enjoyed all of your writings this year. You gave me so many satisfactory ''aha moments''. You and Lyn Alden are my favorite active econ/ finance writers. It's always a treat to read your thoughts! I'm also starting to feel excited about the opportunities and good deals that 2023 will bring.
Thanks Calibear. It’s been an unexpected ride since starting a twitter account for the LOLs. I’m glad you have enjoyed my writing and have a ton of respect for Lyn so that is great compliment. I’m also looking forward to the opportunities on the horizon. I’ll be sure to share them here.
"Today, Bulls are an endangered species." I think you have a bit of confirmation bias here regarding this sentiment. Maybe it's from the people that you're following and reading?
There's a difference between "doom and gloom" sentiment because stocks are dropping vs what people are actually doing with their money. Are people actually putting money where their mouth is? If more people see a recession coming and further drops in equity markets, we should see a lot more capitulation selling and a spike in put/call ratio. But that's not what we see. Margin loans are still near all time highs and the P/C ratios on some key stocks are actually quite bullish.
META 0.49
TSLA 0.66
AAPL 0.91
NVDA 0.97
Those ratios have been trending down, meaning that there are more bullish bets. I like to make data driven decisions. I highly recommend this rather than using something unquantifiable such as "I see a lot of recession talk".
Since this comment is fairly condescending, perhaps you should look up data on margin debt and broad P/C ratios. Margin debt is down nearly 30% from the peak, and CBOE P/C index for equities and equities+indices have been trending up for a year.
Thanks for consistently putting out thoughtful analysis!
Thanks Cole! Thanks for reading!
Great article and excellent ongoing coverage all year. My goal for 2023 is to be The Second Bull Running.
Thanks David. I’ll ring the bell (and hopefully won’t be too far off!)
I am already seeing the narrative shifting from inflation into recession. Nature is healing. There is a lot of money to be made in 2023.
excellent coverage, thank you
Thank you Ibad. I hope next year will be even better.
Merry Christmas and have a great, relaxing break from all this madness - thanks for all the fish ... erm ... blog entries! I did not drink (too much) yet, I want to be sober during all this market madness.
Hey it’s 5 o’clock somewhere. I think that’s what they call the ‘spirit’ or the holiday. Thanks Monty!