Energy vs. Sovereign Bond Markets
lynalden.com
lynalden.com
https://fred.stlouisfed.org/series/T10Y2Y
The current inversion hasn't been since the early 2000s and ensuing recession, which was characterized by the bursting of the dotcom bubble and the attacks of September 11th.
The dotcom bubble is attributed to venture capital funding, and the crash took out a lot of companies and hit others like Amazon pretty hard. Economic crisis is inevitable, it's built into the business cycle.
Following this logic, the next companies on the chopping block would be tech once again. This time, likely the "unicorns" that are the darlings of VC investors. Additionally, it's kind of an open secret that FAANG stock valuations are a bit disconnected from reality.
When you are on the edge of consumer tech, a lot of stock investors don't even understand how your business model functions and what gives it such a high valuation, and they don't really care as long as the price goes up. It's a darker side of the culture, as the trend is to splurge with VC millions and cash out at the zenith then move on to the next thing. History shows it's not sustainable.
Within the startup ecosystem there are embryonic products that if nurtured can develop into existential threats to most of the current Fortune 500 companies. Incumbents eventually have to pay up to survive, eg. Adobe acquiring Figma. This dynamic supports startup valuations broadly. Startups represent the future and the future is usually priced at a premium.
While this is true for the largest of ad companies like Google and FB, the same isn't true for the vast majority of recent tech IPOs like Robinhood, Duolingo, Couchbase, Monday not to mention literally all of the ridesharing and food delivery companies to name just a few.
In a way, excessive acquisition valuations are likely also a side-effect of too much money floating around that might change radically with increasing interest rates.
So then the question becomes what's the profit margins? Can they absorb, say, a halving of revenue short term?
If they can't then they're going to start layoffs, and the first to go will be the ones that don't generate revenue, so the experience gets worse for users, and the pipeline of new products dwindles, and you've released a bunch of potential competitors that know your business into the labour pool.
This also removes the price support for those existing startups.
In a time of genuine hardship, particularly of the energy/food constraint kind, there are a million consumer priorities before a new iphone (Apple), consumer electronics (Amazon), fast fashion, vacation travel, and the enormous adtech ecosystem (Google, Facebook) that is supported by such business, as well as the toolmakers (Adobe) for them.
Were they predicted by the yield curve inversion? Amazing. Those bond traders really know what they're doing.
https://www.jstor.org/stable/10.1086/503645#metadata_info_ta...
Agree to disagree I guess.
The months you selected are pretty much peak lockdown vs peak recovery, and are a reflection of demand for gas, not an oracle of some deep economic truth. Franky, I'm surprised the gas price difference is so small, considering the US economy shut down in March of 2020.
Demand (and prices) went down in March 2020, but had significantly risen in line with increased economic activity by February 2022.
Consequently, it shouldn't be surprising that there was a large price increase over the period bookended by those months.
If I buy a house with a mortgage, that's a risk. If interest rates shoot up to 10%, 20%, or I get made redundant, I lose my house and the risk hasn't paid off.
Yes you could point to the fact that I bought the house as the reason why I am now bankrupt and homeless, but I don't think that tells the whole story.
There's always risks that could turn into something worse, quite often they don't though. I think it's reasonable to point to 9/11 as a cause of the following recession because if that hadn't have happened we wouldn't have had the recession (if you accept that assumption).
And 9/11 itself couldn't possibly have caused a recession. 2 buildings just isn't enough damage to be measured in a system as large and complex as the US economy. If you want to argue that the Afghanistan invasion contributed to the recession I am sympathetic to that idea, but the general consensus seems to be that war is helpful for the economy (which I don't hesitate to argue is a stupid consensus - but it is what it is).
But are you really saying 9/11 is just 2 buildings collapsing?
There's a lot of psychology in the markets.
If it's obvious to me that this is exactly what will happen, it should be obvious to Fed board members, no? Therefore, those holding out for a for a pivot could be waiting for a long time.
There seem to be three models:
1. Paul Volker. Smack the economy with a 2x4 to kill inflation. Get back-to-back recessions that were the worst since the Great Depression.
2. Arthur Burns. Bow to political pressure and ignore inflation - maybe it will go away. Get roaring inflation leading into the 1980s.
3. Roy Young. Fight wild speculation by raising interest rates and get the Great Depression.
Who cares about the broader economy. First-most they are smashing USG Treasury with a 2x8. Tax revenue down across the board (income, capital, corporate, you name it), social programs spending up, deficit through the roof. K.O.
They can raise the rates all the want, but as long as they are monetizing the deficit, it will be multi-trillions of money being pumped into broader economy anyway.
There is no other way then to print and incinerate the debt in a inflationary inferno.
What good is paying off a debt in a currency that's no longer valuable? We're fucked no matter what.
Good thing they aren’t monetizing the deficit.
You also have to discount the possibility that Fed might be incompetent, given how their recent track record has been in predicting transitory inflation and delays in calling off QE.
What? Take a look at the dot plots of FRB expected rate surveys and compare them to actual rates. These people have substantially less predictive capacity than a monkey throwing darts.
No, it should not be "obvious" that people who are consistently wrong will miraculously start being right. They really do believe their own bullshit.
Doing the right thing is for chumps.
Too bad the crypto hasn't worked out nearly as well as other forecasts. Also, the dollar has surged despite weakness in the bond market.
So maybe now is the time to buy treasuries given that these type of victory lap posts tend to mark either bottoms or tops. The bond market is pricing in huge inflation right now. Even inflation that is high but not absurdly high may still be bullish given all the negativity priced in the market. Also you don't need to hedge all of the inflation, just enough to live off of. If you got $2 million in the bank, then $80k/income plus social security will be enough even if your real return is -5%.
https://thestackreport.xyz/dashboards/tezos?search_term=plen...
And an inflation rate of ... oh sorry that didn't fit the narrative, I'll just skip that bit.
"The market basically goes “no bid”."
except for the Gilt-Edged Market Makers (GEMMs) because "GEMMs are committed to make, on demand and in all conditions, continuous and effective two-way prices to their clients, in all gilts for which they are recognised as a market maker." (GEMM Guidebook, Sept 2021, UK Debt Management Office)[0]
I'll leave the rest of the article to the Gell-Mann Amnesia hypothesis.
[0]: https://www.dmo.gov.uk/media/22bbjndz/guidebook200921.pdf
They are not going to complain now that their wish has been granted. 3% is massive, in a good way. Japan's problem is the Americans have absurd inflation causing rate increases and encouraging the carry trade.
But obviously that doesn't mean that they are obligated to absorb billions of pounds in selling pressure (due to large pension funds needing to meet margin calls) without significantly moving prices, which is the question at hand, and that's what the author means by "no bid".
- Since the UK treasury has already issued the bonds at a fixed rate, why do they care what the secondary aftermarket price of their bonds is?
- How does propping up the bond market reduce the risk of the impending recession or help the UK treasury pay off its debt obligations?
- Doesn't keeping yields low just help the treasury sell more cheap bonds (ie take out more debt)?
I may have answered my own question. The problem with the greater than 100% Debt to GDP ratio means that, should they decide to stop printing money, they'd immediately go into default on existing debt, regardless of the interest rate.
What if the UK Gov't passed a law to prevent the treasury from issuing any new bonds, and the Bank of England stopped QE. The UK would go into austerity, while it reduces the Debt to GDP. What if interest rates were then dropped to zero to stimulate the economy. There would be inflation until the economy finds equilibrium with all the extra money that has already been printed. Reducing interest rates will devalue the British Pound - and Britain is a net importer. So, yeah.. thats no good.
Check mate indeed.
As I think you figured out for yourself, it affects the interest rate that they have to pay on new issues. Even when the budget is balanced (HA!), they are still constantly issuing new bonds to pay off maturing ones.
How does propping up the bond market reduce the risk of the impending recession or help the UK treasury pay off its debt obligations?
Buying bonds puts more cash into circulation which can (at least in theory) act as an economic stimulus. Of course, it also increases the risk of price inflation.
Most government are constantly issuing new bonds (to roll over existing debt if nothing else), so the secondary market of their own bonds is a direct competition to the new bonds they want to issue.
They don’t care about the bonds the Lu are buying, they care about the market price it sets.
The Bank of England are (and the distinction is very important to that market).
There's nothing that changes at a 100% debt-to-GDP ratio, and it doesn't have to mean a default. E.g. if the debt has an average yield of 3% and uniformly matures over the next 20 years, even at a 100% debt-to-GDP ratio the yearly cost to service the debt is at most 8% of GDP.
The UK parliament has identified that when large numbers of people go bankrupt all the parliamentarians get into trouble, so it requires that the Bank of England take an interest in the secondary market for bonds. A lot of people with debts will be sent bankrupt if there is an available mechanism to get a yield because at the moment lots of money is deployed to people who can't make a meaningful return on it (turns out this includes a lot of pension funds). It'll be redeployed if yields go up.
1. https://www.cell.com/joule/fulltext/S2542-4351(22)00410-X
There will always be costs for energy. Nothing lasts for ever and solar panels and batteries eventually need to be replaced.
>>people would say that at some point it’ll get so cheap that it won’t be worth running a meter to track customer usage
A similar case was made about automation. On the first half of the XX century people argued that by year 2000 we would only need to work 1 hour a day, because machines would do the rest. How that turned out? So i'm always very suspicious of arguments where the future holds some sort of cornucopia.
I do know that when energy is produced domestically, then your energy can't be held hostage by OPEC or the Russian Federation.
That is the promise of renewables: freedom from geopolitics.
He argues that we've built a giant bureaucracy, most jobs are bullshit jobs (he created that term), and most work is a scam.
We could have UBI and most people working just a few hours per week, but that much freedom is dangerous. Politicians might loose power.
More seriously, watch The Century of the Self (Adam Curtis), https://en.wikipedia.org/wiki/The_Century_of_the_Self https://www.youtube.com/watch?v=DnPmg0R1M04, which describes the creation and rise of marketing as a social force in the 1900s; how the consumer-based society was created.
A large driver of this was the need to "control the masses", because if they weren't controlled bad things happened. Like world wars or crystal nights.
Bullshit jobs and an all-encompassing bureaucracy, keeping people working all the time and unable to think, is our current social technique for controlling the masses.
Are you refering to something like Kristallnacht, or is it something else?
This strikes like reaching, when a simpler explanation will suffice: automation improves productivity, but the owners of capital have decided that it is better to pocket the profits than to reduce the working hours or provide UBI.
There is precedent for very expensive things becoming very cheap. Energy will always have a cost to produce, but we've seen in the case of the internet that "as long as you don't use this much, do what you like" models of pricing - it is effectively too cheap to transfer data to justify metering it.
Given how much energy I have a use for around my home, it is completely plausible that nuclear power could put me in a situation where I pay a grid connection cost, some nominal fee and then just use however much electricity I feel like to maintain a typical lifestyle. I don't think people appreciate how transformative the orders of magnitude cost improvements promised by nuclear power could be.
The people responsible for the insane over-spending on safety deserve to be publicly shamed for the damage they've done to human progress.
Absurd that people don't consider the industrial uses of oil and gas when they talk about green tech. Nearly a fourth of all oil and gas is used in industrial processes and as base materials for pretty much every modern product you can imagine. And that has no synthetic replacements yet.
Air captured carbon and electrolyzed hydrogen are not very far off comeptitive with fossil methane.
Reminds me of clandestine chemists who can use clove oil to synthesise MDMA because other precursors are closely watched. As long as you have the right atoms, the only issue to building a new molecule is energy and time.
Most plastic are made from oil because it's cheap and convenient (you only need a small amount of oil to make plastic, unlike when burning it for energy).
When it's no longer convenient to use oil for that you can be sure that there companies will find alternatives.
The current battery projects are tiny and I suspect there will be greater costs from scaling them than Wright's law suggests. Not to say they won't get cheap, but that they will get cheaper slower than a simple exponential decay relationship suggests.
Just the scale of materials required and the fact that battery tech has been around for a long time. I suspect we have got more of the low hanging fruit than with PV.
Again, I hope I'm wrong.