TMC #11! Real yields were stubbornly low in the 1940s, and I expect the same in the 2020s. That's about it with the similarities though: watch out for the material differences.
Thanks for other fine article. Three more differences between the 1940’s and today: 1) YCC was paired with austerity. Everything valuable to the war effort was rationed. 2) In the US, Medicare and Medicaid did not exist. Social Security was new, small, fully funded and not considered an entitlement. 3) The war effort took Americans to their highest peak of social cohesion. It’s at the second lowest point today. Only the American Civil War was lower. Try austerity today and you’ll see social unrest that makes 2020 look like a Girl Scout picnic.
Hi Alfonso, Thanks as always for helping me understand and tie the pieces together. It's been a couple of months since this update--are we still in Quadrant 1 and/or where do you see us now? Would Fed tapering push us down to Quadrant 4?
If: we attempt to achieve "[poor] structural growth" by "expanding credit" but the "private sector does not want to borrow more, and banks don’t lend";
Then: I understand the short leg of the trade.
But: how does it make one confident on the long leg of the trade? Is it because of the short maturity of it (1 to 2 months), relying on the lagging effect from the previous quadrant we were sitting on?
I am very grateful for your work, please keep up on the high value content, I feel it getting from good to better with each article.
Good article. The public sector debt can be sustained indefinitely and eroded by keeping rates below inflation. Don't think you mentioned the extent of the private debt but agree private section will pay off or save public deficits.
The ageing workforce should be offset by technology / AI / machine learning ... etc plus medical service job growth.
Given this - is it not business as usual expect perhaps now we move into greater public deficit spending / MMT with a monitory issue down the line.
Euro banks are in a downtrend on daily but not on weekly timeframe (would need to close below low of week April 19 2021. Source : SPDR® MSCI Europe Financials UCITS ETF
The NQ is up on NQ100 cash immediate target is 16051.
So I think reasonable trades - yes if one has access to market to short EFT/CFD
Hi Alfonso, thanks for sharing your analysis. A question about the trade. Does the monetary quantity on both nasdaq and bank futures have to be equal? So about 66 bank futures? Correct? Thanks
I agree that demographics are totally different in the 1940s vs the 2020s: it was inflationary back then whereas it is deflationary today.
However, there is a new inflationary factor today we didnt have back then: easing Fiscal policies funded mostly by the central banks, and a little bit by tax hikes. UBI, student debt condoning, helicopter money, minimum wage increase, etc. It seems like the West is taking a political turn towards these type of practices. I dont know whether to label them as inflationist or currency devaluationist, but the end result seems similar: lower purchasing power.
Wouldnt those type of policies favor hard assets for the following years?
Hello Sir! New subscriber and I’m really glad I did. Ton of great information (especially for a retail investor). I have read a lot about the whole secular inflation vs deflation debate and each time my mind gets even more confused. What are your thoughts on the permanent portfolio as a means to cover all bases?
25% Stocks
25% Gold
25% Cash
25% Long US treasuries (TLT)
Or how would you adjust it for the “buy and hold” investor. Thank you so much in advance.
Hi Alfonso, ok, so regarding your thoughts on the 2020's v the 1940's.
I can agree that the Fed will do everything in its power to maintain negative REAL rates certainly over the medium term, say 3-5 years.
I think your idea that this will come from negative NOMINAL rates is way off base. It just is not in the American DNA to even contemplate negative NOMINAL rates - heck they'd rather give up their guns! These Americans are not Europeans or Japanese.
I think inflation, and not runaway inflation but around target, sometimes up to 5% like now, sometimes back toward 1%, will do most of the work of creating the negative REAL interest rates. An inflation target of 2% and very low Fed Funds nicely achieves your negative REAL rates.
Now whether you want to own 30 year debt in that environment... I will leave that up to you to decide. Certainly it will move around. I would be long rate vol especially given it's current level.
No argument with your thoughts on LSG and TFP. Medium term US growth will certainly be
considerably lower than the 40's. I like your line of thought that the Feds medium term dot is roughly R* plus the inflation target. So potential REAL growth is around a half to one percent., policy is about the same and inflation at target -> negative REAL rates.
Good luck with your trade but I have to say it's the antithesis of what I'm thinking.
Great article! Thanks.
Thanks for other fine article. Three more differences between the 1940’s and today: 1) YCC was paired with austerity. Everything valuable to the war effort was rationed. 2) In the US, Medicare and Medicaid did not exist. Social Security was new, small, fully funded and not considered an entitlement. 3) The war effort took Americans to their highest peak of social cohesion. It’s at the second lowest point today. Only the American Civil War was lower. Try austerity today and you’ll see social unrest that makes 2020 look like a Girl Scout picnic.
Hi Alfonso, Thanks as always for helping me understand and tie the pieces together. It's been a couple of months since this update--are we still in Quadrant 1 and/or where do you see us now? Would Fed tapering push us down to Quadrant 4?
Thank you!
Good day Alfonso,
If: we attempt to achieve "[poor] structural growth" by "expanding credit" but the "private sector does not want to borrow more, and banks don’t lend";
Then: I understand the short leg of the trade.
But: how does it make one confident on the long leg of the trade? Is it because of the short maturity of it (1 to 2 months), relying on the lagging effect from the previous quadrant we were sitting on?
I am very grateful for your work, please keep up on the high value content, I feel it getting from good to better with each article.
Good article. The public sector debt can be sustained indefinitely and eroded by keeping rates below inflation. Don't think you mentioned the extent of the private debt but agree private section will pay off or save public deficits.
The ageing workforce should be offset by technology / AI / machine learning ... etc plus medical service job growth.
Given this - is it not business as usual expect perhaps now we move into greater public deficit spending / MMT with a monitory issue down the line.
Euro banks are in a downtrend on daily but not on weekly timeframe (would need to close below low of week April 19 2021. Source : SPDR® MSCI Europe Financials UCITS ETF
The NQ is up on NQ100 cash immediate target is 16051.
So I think reasonable trades - yes if one has access to market to short EFT/CFD
I'm new to your work and am loving it. Many thanks.
Hi Alfonso, thanks for sharing your analysis. A question about the trade. Does the monetary quantity on both nasdaq and bank futures have to be equal? So about 66 bank futures? Correct? Thanks
Alfonso have you back tested your model and what do you think your blind spot is?
Hi Alfonso. What constitutes the "Observed Real Rates" when looking at whether or not rates are constrictive or not? Thank you.
Hello Alfonso, very interesting read. Thank you!
I agree that demographics are totally different in the 1940s vs the 2020s: it was inflationary back then whereas it is deflationary today.
However, there is a new inflationary factor today we didnt have back then: easing Fiscal policies funded mostly by the central banks, and a little bit by tax hikes. UBI, student debt condoning, helicopter money, minimum wage increase, etc. It seems like the West is taking a political turn towards these type of practices. I dont know whether to label them as inflationist or currency devaluationist, but the end result seems similar: lower purchasing power.
Wouldnt those type of policies favor hard assets for the following years?
Do you think the war on carbon will change someting?
Hello Sir! New subscriber and I’m really glad I did. Ton of great information (especially for a retail investor). I have read a lot about the whole secular inflation vs deflation debate and each time my mind gets even more confused. What are your thoughts on the permanent portfolio as a means to cover all bases?
25% Stocks
25% Gold
25% Cash
25% Long US treasuries (TLT)
Or how would you adjust it for the “buy and hold” investor. Thank you so much in advance.
Hi Alfonso, ok, so regarding your thoughts on the 2020's v the 1940's.
I can agree that the Fed will do everything in its power to maintain negative REAL rates certainly over the medium term, say 3-5 years.
I think your idea that this will come from negative NOMINAL rates is way off base. It just is not in the American DNA to even contemplate negative NOMINAL rates - heck they'd rather give up their guns! These Americans are not Europeans or Japanese.
I think inflation, and not runaway inflation but around target, sometimes up to 5% like now, sometimes back toward 1%, will do most of the work of creating the negative REAL interest rates. An inflation target of 2% and very low Fed Funds nicely achieves your negative REAL rates.
Now whether you want to own 30 year debt in that environment... I will leave that up to you to decide. Certainly it will move around. I would be long rate vol especially given it's current level.
No argument with your thoughts on LSG and TFP. Medium term US growth will certainly be
considerably lower than the 40's. I like your line of thought that the Feds medium term dot is roughly R* plus the inflation target. So potential REAL growth is around a half to one percent., policy is about the same and inflation at target -> negative REAL rates.
Good luck with your trade but I have to say it's the antithesis of what I'm thinking.
cheers, Karl.
Great post! Thank you so much for sending this out.
What about the positive effects of Capex which hasn't really picked up yet?
Also, given the high (2000ish) valuations in the components of the Nasdaq 100, do you think Quadrant one could be a sell everything event?
I get the low nominal (neg real yield) is a positive for long-duration assets such as tech but in Quad one, I would assume everything sells off, no?
Thanks again!