What’s Bugging Bond Markets? With Jared Dillian

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0:35what's bugging bond markets hi everyone welcome to the real vision daily briefing with me today is jared dillian editor of the daily dirt nap newsletter and author of street freak and his latest those bastards hey jared hey how you doing i'm doing well i know you got another one cooking too. So author of many is what I'll have to say next time. Wow, we got a lot to talk about. I mean, it was an ugly session for US stocks, but I better check. Wait, I always put something in and then sometimes when I look, it's actually doing a lot better. But I think it looks like it's going to be a pretty nasty close.

1:10But it looks like really that it's bonds that seem to be leading the action, although you can tell me what you're thinking. But we have losses, certainly 1 % across the board. But if you look at the bond market, yield on the 10-year treasury at a 15-year high price of TLT, the ETF, at a decade low. What's your sense of what's happening here? You know, this is tough for me. I don't know if you ever saw the movie Training Day where, what was it, Ethan Hawke? Denzel Washington. Sits down at the table and they asked him if he's ever had his ship pushed in, right? Like, that's what it's like for me right now.

1:52It's been pretty miserable. Like you said, though, give us the context. Why is it miserable? Because you've been thinking something else was going to happen? So I started getting bullish on bonds like 50 basis points ago, like around 4%. Well, tenure notes anyway. We have some structural issues which are not going to get better anytime soon. We have deficits, which are not going to get better anytime soon. And we have, you know, ostensibly we have China selling and other foreign government selling, which is adding to the pressure. You know, as a trader, when I watch a chart intraday, I look at the price action.

2:33I look how it behaves. And when I was watching 10s yesterday, not today, but yesterday, it was one of the most miserable days in terms of price action I have ever seen. You know, so I think that not I think I know that the data is getting worse every single day. The data today was terrible. Richmond Fed was bad. Consumer confidence was bad. Expectations was bad. New home sales was bad. And none of it matters. None. Absolutely none of it matters. And it reminds me a lot of when I was at Lehman in like 06, 07. and the housing market was rolling over and we were heading into a recession and the markets just did not care and nothing mattered until it mattered.

3:22The first day that it mattered in 2007 was February 27th. And we walked in that morning and the ABX was gapping down 10 points. And the VIX went from 10 to 19 or something like that. Stocks were down 3 % in the day and the bonds were up 2%. And that was really the first day that it mattered. So what's interesting is, you know, we have a pretty low volatility environment. You know, the VIX is 18 or 19. We still do have that complacency. And I don't know what it's going to take to sort of shake us out of this, whether it's some shock payroll number that's terrible or a CPI number or one of these big headline economic numbers or something else.

4:08But, you know, until then, the only day that bonds don't go down is Columbus Day, which is because the bond market is closed. So, I mean, that that's a that's a an excellent summary, I think, of the frustration a lot of people feel. ABS asset backed security market index. Is that what you're talking about at the time? ABX was the subprime. ABX. OK, subprime. Right. We know all the asset backed and everything got sucked in later on. But so, I mean, you know, when someone like you says that, I think we have to take pause because, you know, you sort of traded through the hellish two years that were the great financial crisis.

4:54So and I know you're not trying to be alarmist, but there are things that seem to be dislocated or disconnected. I want to play you. So Jamie, J.P. Morgan Chase, CEO Jamie Dimon today warned that interest rates may need to go further to get inflation, to rise further to get inflation under control. And, you know, that sort of feeding in maybe to the sentiment today. And it is kind of the opposite of what you're talking about, again, with the economic data weakening. I want to play a clip. Julian Brigden and Rao, as you know, they meet up every month for Pro Macro Insiders Conversation sparring match, you might say.

5:34And they also were talking about this because Rao was in the bond trade. He got out of it, but he was also looking for something different. And so they're really sort of testing themselves and sort of saying what's different, what's going on underneath. And this is Julian's take on what he thinks is happening or what he's looking at in terms of bonds. Let's have a listen and we'll talk on the other side. We're moving to a point where we are going to test the ability of global markets to absorb the amount of issuance that's coming. this is kind of referred to as technically as the fiscal limit i think we are pushing our luck in terms of moving into a period that they refer to as fiscal dominance it's not necessarily a bad thing it's just very different from the monetary dominance uh that we've had up to now and basically which of the two levers controls um inflation and controls the economy both can't right one has to be dominant.

6:37The other one has to be subservient to that. But I do think fiscal dominance is dangerous because it relies on the competency of politicians and the willingness of politicians or the ability of politicians to do things. It frequently occurs when you are moving to a period which demands collective policy response, right? This was what dominated the economic cycle or the nature of economic control from like 1933 to 1951. So right away through the Second World War, it's how we funded ourselves, right? The Fed played second fiddle to what policymakers were doing in terms of fighting the war. I think we're fighting arguably three wars, climate change war, kinetic war with Russia, cold war with China.

7:35I mean, you could call it a demographic war as well, a fourth. All of them demand shitloads of fiscal spending. And I think it's going to be very, very hard for policymakers to step back from that. And I think it's going to drive changes to markets, which we haven't seen yet. So I'm actually really structurally bearish fixed income, I think, for the next 20 years. The trend is up in rates. That was rather a long clip, but I really wanted to play it in its entirety because I think it really touches on this debate and divide that we're seeing. By the way, if you want to see that entire conversation, because they really pull out the threads, go over to our website, www.realvision.com.

8:24And if you are not a member, put a forward slash and the word birthday. after realvision.com, and it's going to take you to a very special offer so you can join and fully participate. Jared, I think that Julian did a great job of kind of explaining this debate, I think. Does it feel to you that bonds are disconnected from the economy right now and more focused on issues? Is it supply? I mean, Julian, that was a huge comment that he's bearish for the next 20 years on treasury? I mean, that's... People do that. They say, okay, this is what's happened in the last three months, so therefore that's what's going to happen for the next 20 years.

9:07I don't necessarily believe that. He's right about all that stuff. I don't dispute any of his facts. I will give you one reason why bond yields won't go up as much as we think, because if they go up another 100 or 200 basis points, we are not technically insolvent, but actually insolvent. So there will be actual discussions about yield curve control. And even pretend tens are at four and a half, let's say tens go to five, those discussions will start to surface. And then look, this is all theoretical and hypothetical and sort of pie in the sky. But, you know, if 10s got to 6 percent and the whole yield curve was trading around 6 percent, there's probably a better than 50 percent chance we're going to peg the yield curve because we can't afford it.

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11:11Yes, and that is another really huge statement. I want to ask you, I'm going to ask Brian to do something in a minute. I'm going to switch stuff up because one of the things I love about the new platform, and if you're not on it yet, don't worry. We are pulling everyone in if you are a member and you're not on it yet. We're rolling it out in beta and you're coming up really, really quick. I mean, we're moving through the groups, so you will get access to it. But one of the things I love is that there's a new AI tool on it and you can punch in things that you hear. So I just asked you before, because I thought you said ABS about ABX.

11:48Brian, if you can punch in yield curve control and see what comes up, and then maybe you can put it on the screen and let me know. And I'll try to do it in a minute. But in the meantime, I want to ask, because this is really important, and I think it's fair, Jared. I mean, I know you talk to a lot of people. You talk to your subscribers run the gamut as well, some very sophisticated and some looking after their savings. A lot of the focus was on equities for a really long time. And I feel like it's such an important time to understand bonds now and foreign exchange. It can be a little complicated.

12:25But things like this yield curve control is coming up in conversations among people who have the experience and the expertise to know what's going on. But it's really important. I think we all understand it. So I think that, yep, it's coming up. Okay. So I'm going to ask you a question and then I'm going to see if I can see it. I don't know if we can all read that, but I'm going to read what it said in a second. So in the meantime, though, before we talk a little bit more about yield control, we have a question. Would you consider sentiment with regard to Treasury already at extreme levels? And what's your view on the current positioning of institutional investors in this area?

13:06So everyone knows you really look at sentiment. You know, I asked Andreas yesterday if it felt like capitulation. Like, how do you feel like people are positioned? What do you think the sentiment is around this? I don't think we're getting the capitulation, but I think we're in the neighborhood. I'm starting to see some tweets from people. There's a species of tweet that I like to talk about, which is called the coincident tweet. So bond market has gotten destroyed. So somebody posts a chart. They tweet a chart of the bond market getting destroyed. and they say, look, the bond market is getting destroyed.

13:47And that tweet gets a lot of engagement. Like, oh my God, the bond market is a mess and blah, blah, blah. But when you see a lot of those coincide, and really what a coinciding tweet is, it's a little bit like a victory lap. And when you start seeing that stuff pop up, you know you're getting close to the end of the trend. But I don't think we're at capitulation yet. I really don't think so, unfortunately. As far as how institutions are positioned, Eric Valchunas from Bloomberg, he's the ETF analyst, he posted basically a table recently of inflows into ETFs. And TLT has had the second highest inflow of all ETFs this year.

14:30It's had$16 or$18 billion flow into TLT. So you might look at this and say, gosh, you have a lot of people trying to pick a bottom in bonds, and undoubtedly that's going on. But a lot of people forget what happens in ETFs is that ETFs attract assets when people buy them, but they also attract assets when people short them. Right. Basically, the mechanics of how that works is if a hedge fund wants to short 500 ,000 shares of TLT, they have to borrow 500 ,000 shares of TLT. So a stock loan desk at a bank will create 500 ,000 shares of TLT and go short the bonds and lend them to the hedge fund, which will then short the TLT.

15:19So it actually you can get just as much assets from people shorting it than people buying it. I highly doubt that$18 billion has flowed into TLT from retail bottom pickers. I don't think that's happened. I think a lot of that is short activity from the fast money community. Okay, that's really, really important because when you first started talking, that's, of course, what I thought as well. TrillionX saying yield curve control is not the solution. I don't think Jared was saying it was the solution. I just said he was just saying that that might be what happens. So, by the way, Brian, if you could put the screen back up.

15:54So for those who are not as familiar, and I know some of you are, in yield curve control, there's a whole big definition that came up, which is awesome. But I'm just going to read you part of it. In yield curve control, the central bank commits to buying or selling government bonds to ensure that the yields on those bonds remain close to the target level. They basically pin it, right? The market's no longer in control of what's happening. They said it. They've got to defend against the market. But they are saying this is where I want that to yield. And the modern day example of that is Japan. But you've got to spend a lot of resources defending that in open markets if that's the case.

16:33And the Treasury market is certainly a very large one to do that in. And I think that folks like Jared are just talking about the fact that they think rather than do that, I think, and correct me if I'm wrong, Jared, rather than do that, the Fed is going to find some way to have to cut rates. They'd rather cut rates than yield curve control, or we're not sure. Yeah, we aren't privy to those discussions, but those discussions are happening. And it's worth pointing out, in our economic history, we have pegged the yield curve in the past. I want to say we did it from like 1939 to 1946. So throughout the end of the depression into, I think we might've started earlier actually.

17:16But the Fed was pegging the 30 year bond at 2%. So basically what that means is the Fed stands ready to buy bonds, to keep yields, an unlimited amount of bonds. So you can just sit there and sell bonds to the Fed at 2 % all day long and they'll just keep buying them. And what happened after World War II, after they stopped yield curve control, is that yield shot up and inflation went to about 14%. A lot of people don't talk about the inflation we had after World War II, but it was significant. It came down pretty quickly. But that was as a result of this yield curve control, which is debt monetization.

17:55It's debt monetization. Yeah. And that is super important to know. So a lot of people are going back and looking at that time for some historical reference. But of course, we're living now, right? We've got all these other things happening, including technology. And that's the other side of the coin. So for all of the concerns we're talking about, there is this massive wave of technological change, AI. And so people are trying to fit that into the puzzle as well. How are you thinking about that? I'm really not. I mean, you know, obviously that technology is super deflationary, but it's super primitive right now.

18:39I mean, if you think about what the Internet was like in 1998, you know, I was buying CDs off of Amazon in 1998, but it was super clunky, you know. It wasn't easy. but uh yeah it's gonna it's there was actually i didn't send you this newsletter but um there was a newsletter from two weeks ago where i let chat gpt write one page of it and it was hilariously awful i mean it was just god awful and everybody was like that's the funniest thing i've ever seen so it'll get better but it is still pretty primitive right now yeah but we don't know what that there's definitely a gap. I think Raoul talks about it as this gap, right?

19:21In the meantime, but you know that especially with the access, I think for a long time, you know, the internet was really inaccessible, but this thing's kind of being layered on some stuff that already exists. I think Raoul talks about it as like on existing rails, which is so interesting. And by the way, if you're, if you want to deep dive into this, Beth Kindig and Raoul sort of went, did a lot on AI in their conversation. And we've got some more stuff coming up as well, I think, even this week. So check the site. We've got, Brian, maybe you can remind me, I think it's David Mattin is catching up with someone, I think, really talking about AI.

20:01So absolute must see on those two. So one issue that came up, well, let me back up one second. So Jared, are you out of bonds? Are you in the bond trade? How are you? It's frustrating, but what are you doing? Actually, my position hasn't changed since, you know, I think I was last on like three and a half weeks ago. And I'm in two-year notes, so I'm doing fine. Like, I am long two-note futures. I've been adding to the position. One of the reasons I chose that part of the yield curve is because the Fed has more or less communicated that they're done. They might have one more rate hike, but even if they do, that's priced in.

20:44So I'm pretty comfortable with the idea that my losses are limited in the front end of the curve, and they have been. Most of the selling has been in the back end. And what you've had is this vicious bear steepener, which makes no fundamental sense whatsoever. But you have to respect it because it is the pain trade. This is the trade that is hurting everybody. But like I said, it makes no fundamental sense. It shouldn't be happening. And earlier, you talked about the disconnect between the bond market and the stock market. Like with the S &P down 1.5%, bonds should not be down on the day. Like it's just - Yeah, they're moving in.

21:24It's just not making sense. Exactly. And this is what's been killing everyone, right? This is what happened before, that they're not offsetting each other. You said something in one of your notes that nobody gets out alive. Does that mean that we're going to see pain in equities as well as bonds? How messy does this get? So here's how I see this playing out. We're going into a recession. It's happening. I have 98 % confidence on that. We will get one or two or more pieces of economic data that confirm that, whether it's a terrible payroll number or something like that. The Fed will change its posture.

22:14You'll see the front end of the yield curve come down significantly. You should see two-year yields come from five to four and a half to four as we start pricing in rate cuts. And the one thing I want to point out is after every rate hike cycle, and I think I said this the last time I was on, the longest that the Fed has ever maintained rates at the highest level was seven months. That's the longest. And that was in 2007. The longest they have ever maintained rates is seven months, and then they start cutting. So assuming that the last rate hike that we got, which was a couple of months ago, is the last one.

22:52I mean, the clock has started and we should start seeing rate cuts soon. So it's, you know, I continue, you know, I say that my email inbox is like a beige book. I continue to get anecdotes from people about the economy slowing down. Like there's a broad consensus that this is happening. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

23:23How do you feel about the idea? So Andreas yesterday, when we were doing the daily briefing, Jared brought up the idea that he thinks maybe energy stocks in a portfolio are the new bonds, that that's the way to diversify away from stocks, that the idea of the 60-40 with 40 % protecting you from swings in stocks, that that's broken down now, and that energy is the diversifier. um maybe i don't necessarily agree with that um you know if 2007 is the analog which maybe it is maybe it isn't but if it is um if you remember what happened to oil in 2008 as we went into a recession and went from 140 to 30 in a couple of months you know a lot of people this is true of bonds and it's also true of oil people supply is very easy to figure out in bonds we know what the government is issuing, we know what China is selling.

24:19In energy, we know what we're producing. But what we don't know is the demand side. We cannot predict demand. And demand can evaporate almost overnight. So if the economy really does meaningfully slow, the demand side and the oil equation will slow down significantly. And I kind of struggle to see how energy would be a good diversifier in that scenario. So yeah, so you don't think stocks would start to move higher in anticipation of those rate cuts? Well, I'm guessing that that's where the like if they get hammered, then that means stocks, tech stocks, other stocks would be looking forward to that.

25:02Yeah, on a short term basis, that happens. But, I mean, if you go back to 2000, 2001, you know, the market would rally 3%, 4%, 5 % on every rate cut, but ultimately it would continue to decline. So you do get these bounces on these rate cuts, but, you know, the trend would be lower. We answered that for Tom and TrillionX, we answered the TLT stuff. So we're ahead of you, which is fabulous. Another person asking, what do you think of gold? Does it go all the way down to support around the low 1800s? Oh, man, this is terrible. Like, you know, I looked at the gold chart last week, and it looked pretty good.

25:44And I looked at it today, and it looks terrible. Like, you know, it's, I don't know. I mean, just from a fundamental standpoint, if we go into a recession and the Fed cuts 300 basis points, gold should be trading at 2 ,500, you know. But gold often does things that nobody expects it to do. So, yeah, Michael Cow once said that he's like, I, you know, I get I get it. But like my problem is I just I can't see like I don't know if central banks are buying or selling. I don't know. Like there are all these unknowns that are hard to game out, which kind of puts him out of gold. And I always remember him saying that.

26:19I thought it was a very interesting comment. Doug asking. Jared, how much of the DXY at 106 is a function of external demand versus yield appreciation? I think it's mostly yield appreciation, honestly. I do. I saw a chart right before I came on that the DXY is up 13 weeks in a row. Okay. There are a lot of people looking for a lower dollar too. That's extreme, like not specific to the dollar, but any, whether it's a stock or a bond or a currency or a commodity, like it's very rare for something to go up 13 weeks in a row. Usually the streak will get to nine or 10 and then you'll have a correction.

27:0813 weeks is unheard of, you know? So it kind of speaks to something I just don't understand. Maybe Brent Johnson can answer the question, but you know, I, I look, I think the dollar should be lower for all the reasons that I described and maybe it will, but it's unstoppable. Yeah, I think we will tackle that one in some coming content we do because I think that's really important. Long ago, Peter Brandt said, if you can't get the dollar right, he doesn't feel he has as much conviction in his other trade. So it is an important one. It's another one of these things that's been really frustrating and baffling people.

27:48So we'll dig into that a little bit further and keep coming around to that. DD asking, are REITs cheap enough yet or no? Are what cheap enough? REITs. Oh, I haven't looked at REITs in a while. I can't answer that question. I don't know. I haven't. You know, I had the SLG trade on a few months ago, and I closed it out and haven't looked at it. Bo asking, interest rates, energy prices, housing prices. Jared, which one can cause the most harm to the economy?