When the price isn’t the price

[7 min read]

Whoa! Whoa! Whoa! Settle down bond market. What you think is happening is not what’s happening.

Welcome back to The Rum Rebellion. In today’s letter, we’re taking up the question of when a price is not a price. The subject is prompted by last week’s move in 10-year US bond yields. The yield on said 10-year US Treasuries went to 1.75% at one point, its highest level since January of 2020. So what?

This key price is supposed to contain a lot of information for financial markets. For example, if the bond yields are rising (and thus bond prices falling) because everyone expects it to be a rip-roaring American summer, then it ‘feels’ like good news. Vaccines are rolling out. Stimulus cheques have mailed. The smell of inflation is in the air.

And speaking of which, US Federal Reserve Chairman Jerome Powell told markets he doesn’t much care about inflation. That’s not EXACTLY what he said. But Powell, meeting the press after last week’s two-day meeting of the Federal Open Market Committee (FOMC), told reporters the Fed would let inflation run over 2% for a while, until he and his colleagues were confident the pandemic recovery was firmly in place and unemployment had declined.

That seems like good news, right? If the Fed is fair dinkum about not raising its target interest rates this year or next year, or even the year after, that OUGHT to be good news for stock markets. The entire growth and momentum trade of the last few years — especially since March of last year — has been based on cheap money.

When the ‘risk-free’ rate of return, as defined by the yield on government bonds, is low, it makes rational sense to find bigger returns, even if it means taking more risk. That’s exactly what you’ve seen — massive risk taking on future expected returns from tech stocks, SPACs, IPOs and NFTs, some of which may never generate a dollar’s worth of profits.

Yet the bond market wasn’t buying it. Yields move up. And as they did, tech stocks in the US took a beating. What gives? Take a look at the chart below.

The REAL yield on the 10-year US Treasury is still negative. The REAL yield is the nominal yield minus inflation. In REAL terms, yields have been negative since the pandemic took hold. The rise in nominal yields isn’t a REAL price.

Central bankers all over the planet have been suppressing prices. It started with quantitative easing, in which central bank money printing brought bond yields down and bond prices up. And in certain places (like Australia) it’s continued with yield curve control. The result?

The price of credit isn’t a real price. Highly leveraged economies — with lots of debt — need price fixing. If the price of credit went higher, you’d have less GDP growth and lower asset prices. Yields are kept from rising by central bank policies in order to keep financial asset prices high.

US Treasury yields would have to rise to something like 4% in nominal terms to have REAL yields go back near 2%. 4% nominal Treasury yields would wreak havoc on financial markets. ‘Havoc’ is not a precise term, mind you.

But the logic is sound: a higher cost of government borrowing and all borrowing keyed off the ‘risk-free’ rate is a giant brick to the windscreen of an economy that depends on credit expansion for growth. If the rise in longer-term bond yields is a sign that investors see more inflation coming and are thus selling bonds and demanding higher interest rates to lend money for a longer term, that’s a sea change in sentiment.

Let’s not get ahead ourselves though. If there’s one thing we’ve learned since the GFC, it’s not to underestimate the willingness of a financial establishment willing to do absolutely anything to perpetuate its position of power and privilege. If the bond market ‘rebels’ by pushing long-term yields higher, what’s to stop central banks from practicing yield curve control further ‘out on the curve’?

Well, nothing really. Only the theoretical limits of the size of a central bank’s balance sheet. And in theory, as far as we know, there is NO limit to how many fake dollars you can create with a computer. Maybe if the electricity goes out, you’d be in trouble. But otherwise, money is no object!

Except in the real world, money DOES appear to still be an object. Down at the local antique and coin store, you’ll pay a 30% premium over the spot price of silver to buy a single ounce of silver. The premium goes down as the volume of your order goes up. But that’s assuming large volume orders can be filled!

We’re hearing more anecdotes of online bullion dealers cancelling or delaying the fulfillment of larger orders of physical silver. That’s one of the subjects for next month’s issue of The Bonner-Denning Letter. Is there an actual silver squeeze going on? And if so, so what?

Here’s a hint: the price of gold and silver are also signals. Traditionally, they tell you something about inflation perceptions and/or the risk of sovereign debt. In the paper market and on commodity exchanges, the prices aren’t sounding any alarms. But are the paper prices the real prices?

In the physical market, if you plan to take delivery of physical silver, even in small quantities, you’re going to pay a sizeable premium over the paper price. Conclusion: the price isn’t the price. And when the price isn’t the price, something else is going on. But what? Stay tuned.

Regards,

Dan Denning,
Editor, The Rum Rebellion

What Kind of Show Is This?
Bill Bonner

Yesterday, Senator Rand Paul and Dr Fauci went head-to-head, again.

Paul wanted to know why people who have had the virus…or the vaccination…should wear masks, when there is almost zero chance of them either getting the virus or spreading it.

Fauci replied that there were variants that we needed to watch out for, implying that we will have to wear masks forever.

It is ‘just theatre,’ Paul shot back.

Today, we wonder — and not for the first time — what kind of show we’re talking about.

Inflate or die

But first, an update on the markets.

In a nutshell, Federal Reserve Chief Jerome Powell spoke on Wednesday. Bond prices (which move inversely to yields) fell. And Bloomberg has the story:

‘Treasury Yields Top 1.75% After Powell Spurs Bets on Inflation

‘Treasury yields breached more key levels as bond traders boosted bets that the Federal Reserve will allow inflation to overshoot as the U.S. economy recovers.

‘Yields on the benchmark 10-year note climbed as much as 11 basis points to 1.75% — the highest since January 2020, while the 30-year breached 2.5% for the first time since August 2019. Market measures of inflation expectations are now trading near multi-year highs, with traders paring back bets the Fed would start tightening as soon as late next year. The dollar rebounded against its major peers.

‘The moves came after Fed Chair Jerome Powell indicated he wasn’t concerned over the recent surge in long-term yields — with his focus still on whether financial conditions remained accommodative. Rates have surged this year on expectations that stimulus spending and vaccine rollouts will fuel a sharper economic recovery and a pick up in inflation.’

The bond bull market — which began 41 years ago — seems to have come to an end last August.

If this is so, watch out. It’s ‘inflate or die’ remember.

And what’s going to die first are investments that depend on bonds and all forms of fixed income streams — including mortgages, pensions, rents that can’t be raised, and so forth.

But let’s leave that for Monday…

Today…what to make of the last 12 months? What kind of spectacle was it?

Shutdowns and fearmongering

Not wishing to keep you in suspense, here’s our advice to policymakers: It’s time to bring down the curtain.

At the beginning of March a year ago, the State of Washington confirmed the second coronavirus death in the nation. A year later, some 539,000 have died reportedly from the disease in the US.

Most of those still living — and many of those who are already dead (depending on their last tax return) — are now getting thousands of dollars worth of stimmy cheques, unemployment comp, and tax credits to help them through these trying times.

Altogether, the cost of Dr Fauci’s masks, shutdowns, and fearmongering (with widespread support from the public and blue-state governors) has risen to about $800 billion (or a bit more than 3% of GDP)…

…plus five remedial boondoggles — the Families First Act, CARES Act, Payroll Protection Program, Response and Relief Act, and the last one, the American Rescue Plan — at a cost of $5 trillion, bringing the total to nearly $6 trillion.

Big mistake

Also in March of last year, it was obvious that this — like the War on Terror and the Wall Street Bailout — was another big mistake.

The first reports from Italy showed that the coronavirus was not an indiscriminate killer. Instead, it, like many other diseases, took down the old and the weak…and even as to them, it was not especially frightful.

Which leads us to our first insight: We’re all going to die. And since death cannot be put off forever, the question is ‘when’.

The Centers for Disease Control and Prevention (CDC) reported that in the first half of 2020, Americans’ life expectancies had dropped by a ‘full year’ to 77.8 years — blaming COVID-19.

This was reported with a straight face by both The New York Times and The Washington Post.

And yet, as near as we’ve been able to determine, the average age of a person dying from COVID-19 is…are you ready for this?…78.

In other words, the typical person is better off dying from the coronavirus than from other causes.

Homicidal instinct

Meanwhile, the only statistics we trust…and then only somewhat…are the death counts.

We want to see the bodies laid out…cold and stiff. Everything else is inferred…contrived…modelled…or subject to interpretation.

And what does the body count tell us?

Well, here’s our second insight: The COVID-19 was not so bad after all.

The plague that struck Athens in 430 BC killed Pericles (Athens’ leader) and a quarter of the population. The Great Plague of 1348 killed half the population of Paris.

By contrast, the plague of 2020 seemed to lack the homicidal instinct. In a year when the killer was on the loose all over the world, the global population actually grew — by 81 million people.

Vestigial responsibility

What else did we learn?

Public health measures are a vestigial responsibility of state and local governments, and some were more eager to join the panic than others.

This, of course, was the whole idea of ‘federalism’, wherein each state would compete with the others to create a more perfect democracy.

In the COVID year, the states put in place a rather haphazard and sloppy set of prophylactic measures.

Though by no means a perfect laboratory test, it still gives us a chance to compare the different strategies for fighting the coronavirus.

In short, some states fought the bug vigorously and aggressively. Others shirked…claimed heel spurs…or otherwise failed to join the fight.

And now, with declining caseloads…and a full year of statistical evidence…we are able to draw some tentative conclusions.

Tentative conclusions

As of 8 March, Hawaii had the fewest deaths — just 32 per 100,000. New Jersey had the most, 270. So, our third insight: If you want to avoid dying from an infectious disease, it is best to live on an island.

Between New Jersey and Hawaii is a whole continent with a whole range of death statistics. And here’s our next takeaway: In the end, it didn’t seem to matter what the states did.

In this regard, Florida is worth looking at more closely, which is just what The New York Times did last week. We’ll let the ‘Old Grey Lady’ provide the takeaway: The lockdowns didn’t work…

‘Florida reopened months before much of the rest of the nation, which only in recent days has begun to emerge from the better part of a year under lockdown…

‘The unemployment rate is 5.1%, compared to 9.3% in California, 8.7% in New York and 6.9% in Texas. That debate about opening schools? It came and went months ago. Children have been in classrooms since the fall…

‘Yet Florida’s death rate is no worse than the national average, and better than that of some other states that imposed more restrictions, despite its large numbers of retirees, young partyers and tourists. Caseloads and hospitalizations across most of the state are down.’

The Times cannot bring itself to admit that it was partly to blame for whipping up the hysteria. Instead, as if it had failed to understand its own insight, it adds:

‘The tens of thousands of people who died were in some ways the result of an unspoken grand bargain — the price paid for keeping as many people as possible employed, educated and, some Floridians would argue, sane.’

But that was just the point. The death rates — which are all over the place — show no such bargain.

Which is our final insight: The show turned out to be a surprising farce.

Whether you locked down tightly or not at all seemed to make no statistical difference...

And the heroes (such as New York Governor Andrew Cuomo) turned into villains…while the buffoon (Florida Governor Ron DeSantis) turned out to be not such an idiot after all.

Regards,

Bill Bonner,
For The Rum Rebellion