No, I will not apologize for the clickbait title, or as Arnold always says, “To Hell With You!”
We’ve all seen the chart, that old diagonal line drawn across thirty years of financial chaos. If it all it takes to call the end of the bond bull market is a writing utensil and a straight edge then holy shit what are we paying people 2/20 for?
I tend to believe the US bond bull market is nearing its end. I think owning USTs here for anything more than a trade is a mistake. With that said, I think we have reached a point in time where the risk reward is enormously favorable for entering into a long UST position.
The mechanics I previously described way back in January 2017, seem to be playing out right before our eyes. In that blog post, I posited that a slowing China would catch record speculative positions in a variety of “reflation trades” from short USTs to long commodities like oil and copper offsides.
Since then, these positions have only become more extended, with oil longs out numbering shorts by almost 15 to 1.
Now investors are more terrified of the implication that ever rising bond yields might have on our recently cracked low vol environment. And on a more personal level, I’ve recently noted that even established equity bears do not like USTs here for fear of a replay of a 1987 style risk off event across all financial assets.
Yet if we look at the macro environment, we’ll see fears of rip roaring inflation might be misplaced. Perhaps investors are extrapolating too much at a pivotal turn in the global economy?
Global PMIs led by China have started to roll over.
Since the ascendance of Xi Jinping in the fall, the government has cracked down relatively hard on the shadow banking sector.
The size of Wealth Management Products (WMPs) which are essentially ponzi finance vehicles used to fund speculation in assets ranging from commodities to real estate have not grown in over a year.
Rather unsurprisingly this has had a negative effect on real estate prices in some of China’s most bubblicious cities.
Falling / stagnant real estate prices comes at an awkward time for developers.
70% of household wealth in China is invested in real estate. Without the wealth effect from rising home prices, spending could slow. And if somehow I still have not managed to convince you yet…
DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!