Another week; another iconic rocker turned tits up. And this one hits bone. Ginger Baker, Cream’s iconic drummer, has now ascended to the double bass/double high hat heavens. The wonder is that he lived so long. Back in his band’s brief but magnificent salad days, he was such a stone cold junkie that the audience would routinely yell up at the stage “are you gonna die tonight, Ginger?”. But he didn’t. He went on to celebrate his 80th birthday this past August. But it’s now October, and he’s gone. Here’s hoping that in the afterworld, he operates on better terms with Jack Bruce, with whom his on-stage fights were the stuff of legend – so much so that Clapton had to break the ensemble up in disgust.
For me, Ginger’s passing was the culmination of a fairly wild week. In addition to several highly memorable experiences that I am not at liberty to share, I had occasion, for the first time in a couple of decades, to have a go at the New York Times’ crossword puzzle. As devotees of the forum are well-aware, the puzzles become more perplexing as a week unfolds. You can feel a boss on a Monday, or even Tuesday. But by Saturday, spit ballers like me will often look like fools.
This particular puzzle was in Thursday’s edition, typically a hard slog for proles like me, but perhaps manageable. Not this time. Maybe it’s because I’m out of practice, but the hard fact is that I couldn’t populate a single clue.
I did have some help, and my partner crushed it. The key to unlocking the quagmire was to recognize that the verbal matrix contained numerous responses where the correct answer featured three letters in a single sub-frame. I protest. It’s unholy. And yes, THE DUDE MINDS. This aggression shall, not stand, man. Over recent years, I’ve formed a pretty consistent hostility to the NYT, which has now turned into abject hatred. They’ve lost me now, forever. On the other hand, it’s been years since they had me.
I had been laboring under what to me was a justifiable assumption that the whole premise involved one letter per box, And I had held on to this rule of engagement for dear life. But when you shove three consonants into a space designed for no more than one, you’re bound to shatter the equilibrium of a sensitive soul such as myself. And I got to thinking about what a dangerous precedent this establishes. What if they tried this stunt in, say, tic-tac-toe? I’ll tell you what: the game would be over before it began. And I don’t even want to think about how disruptive such a move would be on Wheel of Fortune.
But then I said to myself: “self, this is just the kind of world we live in right now”. And, in dubious transition to investment affairs, I offer, as Exhibit A, the surreal condition of negative interest rates that somehow persist across this (cue up the Moody Blues) cold-hearted orb.
And now I’m going to make a bold prediction, one at which I’ve hinted, but have not had the stones to proclaim outright.
The U.S. 10-year note will soon be in extended, negative rate configuration, offering buyers of these instruments the opportunity to collect an amount less than their original investment, when they come to claim their principal, 10 years down the road. It’s coming, and we should be prepared.
I reckon I am obliged to defend this outrageous proclamation, which, if rendered at any point prior to this recent interval of financial madness, would have certainly caused one or more well-meaning souls to send the guys with the butterfly nets to take me a way. And they would’ve been entirely justified in removing me. And I would have been compelled to thank them for so doing.
But that was then. As of now, the butterfly net guys might be keeping a close eye on me for making such a dubious claim, but they’d probably hold their fire. The first corroborating signs that I might not be completely bat-sh!t about this came precisely ½ hour into the official trading sequence of Q4, when the ISM Manufacturing numbers dropped:
And when I say they dropped, it is indeed a double-entendre. Not only were they released, but, as depicted to my immediate left, they fell victim to a beyond-Newtonian gravitational force.
This here move garnered a lot of ink. And rightfully so. Just back from our Rosh Hashanah festivities, us Sabbatarian market participants reacted in Pavlovian fashion. We circumcised the Gallant 500 — to the tune of 50 handles that Tuesday, the carnage continued into Wednesday. And it wasn’t until I was just getting over my three-letter box shame — on Thursday morning — that our favorite index began to regain some of its mojo.
And as for 10-year note yields? Well, they continued to decline across the remainder of the week. Given Friday’s closing 1.52% print, they currently reside five skinny basis points above the lows that clocked in immediately after the post Labor Day action commenced, and 0.15% above the all-time bottom, registered in the middle of 2016.
And on Friday, even after a September Jobs print that featured few items for complaint (record low unemployment, upward revisions to the last two months, etc.) the 10 year rallied – albeit by just a titch.
We’re going higher in price here, kids, and lower on yields. The domestic and global economies are slowing. Central Banks are in about as expansionary a mood as they have evidenced since, well, since the election of 2012, which was presaged by the astonishingly aggressive monetary stunt known as QE3.
The main trend I am noticing is that every time either equities or any component of the global capital markets evidence any form of agita, the subsequent bond bid takes on quantum proportions. And in case anyone was in doubt about the prospects, there’s plenty out there on the horizon to catalyze such agita. Next week marks the beginning of the Q3 earnings dance, and current projections are for a negative growth rate in excess of 4%. If they come in anywhere near these estimates, then, after three consecutive quarters of decline, the hypothesis of an earnings recession becomes a proven theory.
I’m told we are (yawn) again on the verge of papering some sort of deal with China, and if this happens, I am fully prepared for yields to back up a bit. But know this: it will be a note-buying opportunity that readers would be ill-advised to miss. Plus, if the deal falls apart (and let’s face it: there’s at least a miniscule chance that this could happen), we’re looking at another $250B package of tariffs to hit the trade markets on October 15th. At that point, the 10-year will become a moon rocket.
Meanwhile, the whole perplexing “Impeach 45” saga continues unabated, with neither of the opposing squads particularly showing themselves at their most elegant. It does seem, though, for better or for worse, that the House will move forward, as retreat after what has transpired over the last couple of weeks would be tantamount to ignominious defeat. So they’ll press ahead in formal fashion. The lawyers and the electronic news media will have cause for celebration, and as for the rest of us? We’ll just have to suffer through what promises to be a very sorry spectacle.
And what will happen when Congress brings charges? The 10-year will rally. And what will transpire if they look like they have a chance to force the Big Guy to send his belongings, prematurely, from the White House to Mar-a-Lago? They will rally even more.
All of which brings us to the expanding pig circus of the 2020 election. With Bernie’s dubious ticker and Biden clearly being sacrificed on the altar of this Ukrainian Hail Mary, all political roads are pointing towards Senator Warren being a lock for the nomination. What will happen if these trends are confirmed? Yields will plummet even further.
And what will happen if she is actually elected? More of the same. In spades.
And as for the rest of the world, as is often the case, it could only wish it had our problems. Europe is feeble, can only weaken from here, and will print money in response. The Chinese? Same deal.
If we start heading toward a bona fide recession, the 10-year note bid will blow away even any of the amazing such displays that we’ve witnessed during this remarkable interlude of monetary intervention.
So I say, come what may, you have my blessing to own the 10-year note here, in any size you can muster. I particularly believe that such an action offers a perfect hedge against long oriented equity portfolios, because under any paradigm involving their broad-based selloff, the 10-year note will rally and then rally again.
I do believe all of this puts a floor on equity valuations, because one consequence of an unending government bond bid (here and abroad) is the manifestation of cheaper financing costs, which will ease the path of financing the purchase of equities for the privileged class, while rendering their ownership all the more attractive by comparison.
And I do extrapolate to a condition where the U.S. joins its former Axis enemies of Germany and Japan, as well as always-neutral Switzerland, in a seemingly-permanent negative borrowing benchmark configuration. The dynamic will be difficult to impede, much less reverse, but that, my friends, is a problem for another day.
Because right now, the 10-year note bird is pining for higher heights. We may think we have her in a cage, but even if we do, we have left the door open. She is therefore free to fly. One strategy is to walk away, and let her do what she will. It’s entirely possible that she will flutter off, but then come back to us, perhaps in the dead of night. This is a rarity, but I’ve borne witness to it happening, and it has been breathtaking.
I’m not sure it’s the best strategy from a risk management perspective, however. The note bird is a mysterious creature, kind of like a crossword puzzle where they expect you to shove three letters into a single square. My best advice is to give her the freedom to spread her wings, and to do what you can to fly with her.
Because if you do, even the most improbable of your dreams might come true.
TIMSHEL