What’s Behind this Messed-Up Bond Market?

The Fed. And then the Fed steps away.

By Wolf Richter. This is the transcript of my podcast of last Sunday, THE WOLF STREET REPORT.

So now, inflation has jumped by 6.0% according to the Consumer Price Index for Urban Wage Earners and Clerical Workers, or by 5.4% according to the Consumer Price Index for All Urban Consumers. According to private sector measures, and my own estimates, inflation, when properly calculated, has jumped by a lot more.

And Americans are figuring this out because they’re seeing how the income from their labor buys less and less.

But the bond market, which is supposed to be the smart money, hasn’t figured this out yet. It too will eventually figure it out, as it did last time – that was in the late 1970s. And that’s going to be a little rough.

A year ago, the bond market put the yield on 10-year Treasury securities at around 0.6%. At the time, the narrative in the bond market was that interest rates would go negative, as they had already done in many countries in Europe.

But then, this narrative started sounding increasingly silly, as inflation began rising amid red-hot spending on goods by consumers. There was talk that the Fed would eventually taper its asset purchases, as the economy was growing in leaps and bounds. And by the end of March this year, the 10-year yield had nearly tripled, from 0.6% to 1.7%.

By definition, when bond yields rise, bond prices fall, and in bonds with long maturities, this six-month surge in yields caused some bloodletting. This was particularly felt by holders of mutual funds that specialize in government bonds with long maturities.

Since April, even as inflation became red-hot, the yield on 10-year Treasury securities dropped. By early August, it was at 1.15%, down nearly 60 basis points from the March high.

This drop in yield amid spiking inflation crushed the “real” yield, meaning the yield earned by investors minus the rate of CPI inflation.

The real yield at that point dropped to minus 4.2%. This was the worst negative real yield since June 1980, and the worst negative real yield of any of the developed economies.

The 10-year Treasury yield has since then moved up a little and on Friday closed at 1.3%, which is still ludicrously low, given that overall CPI inflation is 5.4% and CPI inflation for Urban Wage Earners and Clerical Workers is 6.0%.

So what happened in the 1970s through June 1980 that cause the real yield to blow into the negative, like it is today?

What happened was that inflation zigzagged higher and the Fed refused to deal with it. There were hopes that inflation was temporary due to the 1973 Oil Shock and would go away on its own. And after hitting 12%, inflation did back off in the mid-1970s, dropping to about 5%, and everyone thought inflation would go away entirely on its own.

But it didn’t. It turned around and spiked again, and went to 15% by 1980.

All along, the 10-year yield had zigzagged higher but had lagged years behind inflation. During that period, between 1973 and late-1980, bond investors got totally crushed, by rising yields and therefore dropping prices, and by very high inflation which for most of that time was higher, and for years, a lot higher, than the bond yield.

This was the period that became foundational for the so-called bond vigilantes that emerged in the 1980s. They were big bond-fund managers that had gotten burned during those prior years, and that then refused to buy government bonds unless the yields were high enough. And for the next 20 years, as inflation dropped and dropped, bond yields remained much much higher than inflation.

The 10-year yield and CPI inflation didn’t meet again until 2005.

But in the years when it became clear even to the bond market that inflation was going out of control, the 10-year yield spiked from 7% to 15%. Eventually the bond market figured out inflation, and then the reaction was brutal.

Before Paul Volcker became Fed Chairman in 1979 under President Carter, the Fed had already pushed up its short-term interest rate to 10%. Inflation continued to zigzag higher under Volcker who jacked up the Fed’s policy rate to 20%.

And that did the job. But the Fed had waited far too long to act, and had dilly-dallied around for years hoping inflation would go away on its own, that it was just temporary due to the one-off 1973 Oil Shock, and then the 1979 Oil Shock, and inflation kept soaring in an inflation spiral that became ingrained in the economy.

By the time the Fed finally took this seriously, and got political backing from President Reagan, it took a series of massive rate hikes to tame the inflation monster. And in the process, the nasty double-dip recession ensued, as borrowing new debt and refinancing maturing debt had become prohibitively expensive for companies.

That’s what the Fed accomplished by thinking this inflation spiral was temporary and would go away on its own. But then when it was difficult to break the back of inflation, it had to stomp on it with both feet.

So now we’ve got another supply shock, but much broader than the Oil Shock. This includes the semiconductor shortage which will soon complete its first year, and which is hitting all kinds of products, from consumer electronics and appliances to new vehicles. And there’s a container shortage, shipping bottlenecks, container port congestion, rail terminal congestion, a new vehicle shortage due to the semiconductor shortage, and all kinds of other shortages and constraints, including another major container port being closed in China due to a Covid infection.

In addition, and far more importantly, we’ve got a demand shock due to an overstimulated economy – overstimulated by trillions of dollars in government deficit spending in every direction, and by a myriad of other stimulative distortions, such as allowing tenants to not pay their rents even though many received state and federal unemployment benefits that exceeded their previous incomes; and by allowing millions of homeowners to skip making mortgage payments though many also received unemployment benefits that exceeded their previous incomes.

And much of this money that was handed out via these benefits, plus much of the money they didn’t have to spend on mortgage payments and rent, was spent on goods, thereby creating enormous and historic demand for goods. And no one was ready for this artificially stimulated demand spike. And this demand spike is now bouncing around and hitting services.

And we’ve still got the loosest monetary policies and the biggest monetary stimulus since World War 2.

This monetary policy by the Fed includes interest rate suppression to near zero for short-term interest rates, and asset purchases to the tune of $120 billion a month to repress long-term interest rates.

But the Fed is buying a lot more than $120 billion a month. It is adding $120 billion a month to its pile of securities. But it is also buying a lot of securities to replace its maturing securities.

So for example, in terms of mortgage-backed securities, the Fed is adding about $40 billion a month to its pile. But it is also buying mortgage-backed securities to replace the pass-through principal payments that it receives when underlying mortgages are paid off, which happens when houses are sold or when mortgages are refinanced.

And there has been a flood of these mortgage payoffs and refinancings. To deal with this, the Fed buys over $100 billion in mortgage-backed securities a month. Since March 2020, the Fed added $1 trillion in mortgage-backed securities. And to do this, it ended up buying over $2 trillion in MBS. The MBS market isn’t that big. And the Fed already owns a large portion of it. This is a huge interference in this market.

The Fed has also bought more Treasury Inflation Protected Securities, or TIPS, since March 2020 than the government has issued during that time. And any signals this market might send isn’t a reflection of inflation but of the Fed’s purchases of TIPS.

And the Fed has bought $3 trillion in Treasury securities on net overall since March 2020.

This massive interference is still going on despite the overstimulated economy and despite the highest negative real yields for 10-year Treasury securities in 40 years. It’s just mind-boggling.

The Fed is such a big player in that market that the market is paying attention to the market’s interpretation of what the Fed might do, and of what the market wants the Fed to do, and it’s not a reflection of inflation or economic dynamics. So all the inflation signals that this manipulated bond market is sending are wrong.

The bond market is no longer telling us anything about inflation. It’s just telling us what it thinks the Fed might do, or what it wants the Fed to do. And the bond market wants the Fed to lower interest rates into the negative and buy even more securities because that’s how the speculators with highly leveraged positions will make big gains when they sell their positions to the next one in line.

But the Fed is getting serious about stepping away from the bond market. Fed governors have been speaking in near-unison that they will taper the asset purchases, and it’s now just a question of when it starts, likely in a few months, and how fast it will go, likely a lot faster than the last taper, which stretched out for a year.

Tapering asset purchases is the first step. It means the Fed brings its balance sheet expansion to a halt.

And after the taper, the Fed will raise interest rates. Among Fed governors, there is also broad consensus on that, and it’s just a question of when it will start and how fast it will go.

And somewhere along the line, the bond market has to grapple with the reality that this surge in inflation wasn’t a one-off thing, but that inflation continues, while sometimes backing off to provide fodder for a false sense of confidence, only to surge again, as inflation normally does. It’s not linear.

And at some point, even in the current out-of-whack bond market, these realities are going to sink in. And then the bond market gets to grapple with inflation for real, and as in the 1970s, it will find itself way behind the curve, and to catch up, with the Fed no longer buying bonds, yields are going to chase after inflation.

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  133 comments for “What’s Behind this Messed-Up Bond Market?

  1. Pl’n’l says:

    Bond market? Market? I don’t see any markets left in western finance. All I see is centrally planned manipulation of statistics on electronic tote boards.

    • Nick Kelly says:

      I’m not reading further yet, maybe the time stamp can prove it, to predict a lot of folks are going to tell WR he’s wrong and the Fed will do whatever to stop rates rising.

      Second point is to add to the list of inflationary factors: the psychological one which includes the expectation of inflation, therefore the supplier of anything ups his price on inventory, no matter what its cost to him. In the case of a contract for future delivery, the contractor will add to his expectation of inflation an extra amount ‘just to be on the safe side’
      This is now baked in, even if his costs don’t rise as much as expected.

      • Thomas Roberts says:

        Innovation needs to be added to the western finance markets. The FED clearly is against America, for not embracing new technologies. If the FED were controlled by AI; the markets could be entirely driven by AI, supported by an AI FED and reach new heights.


    • Old School says:

      Real interest rates at all time low. That’s definitely Fed PhD policy. Being limited by zero bound is an illusion, when you can QE.

      The thing to remember is there is no back tested evidence that Fed policy helps economic recovery. There is plenty of back tested evidence that bubbles are very destructive to economy when they burst.

      Fed is trapped. People will be looking for someone to blame when it all falls apart. Politician’s are good at stoking hatred of fellow citizens, but probably root cause is printed money is the drug no one can resist.

      Phds at the Fed thought they could manage it all with sophisticated models. Nope. Human nature doesn’t change. Producing is hard. Consuming is easy.

      • RightNYer says:

        That’s the problem with big government in general. Ultimately, it relies upon false assumptions about the world and about human nature.

        Human nature is that when a tax, or other roadblock is put in place, people change their behaviors to avoid it. That was true in England many hundreds of years ago with the window tax, it was true with the cigarette tax in many states, and it’s true now.

    • Roger Pedactor says:

      Bond “market” and stock “market” are both more of a meme than AMC or GME.

      There is no modeling this mess. Largely because you break it down and see that there is no real production, so there is no real “economy”. “Services economy” is a meme.

      It’s all a meme. Reality is setting in. The Dow is crumbling without any date for tapering even set yet. And bond yields are still in the toilet.

      This is stagflation. These are the indicators of stagflation. When the money has no value and there are no goods or services and there is a massive movement against the production of even reliable energy you get this.

      My guess is that the next few weeks will push back the Fed’s plans and ultimately they will be forced to keep the currency worthless and eventually the global markets will get fully wise and the DXY will tank to nothingness like it should, pulling the EUR, GBP, YEN, and Swiss Franc with it.

      The Remnibi will become the world reserve currency and the global economy will become centralized through Beijing.

    • RH says:

      It is not just the statistics that are being manipulated. I suspect that there is quid pro quo manipulation going on: e.g., the EU bankster families or their EU banks may be manipulating the US bond market for the banksters “Federal” Reserve after it bailed them out with trillions in the last years. If any honest people remain in the FBI or maybe(?) even in the Society for the Enabling of Corruption, which pretends to be a government law enforcement agency, wiretapping would reveal such communications.

      Think Mega-Libor scandal like in the past when Libor manipulation emails that should have remained secret didn’t. LOL.

      Unless taxes on the trillionaires are changed, so they actually pay taxes, the US government has limited funds and must spend them only where they will yield a benefit: e.g., Afghanistan was never one of those places after Al qaeda was defeated. A slight rise in the interest rate that it must pay on its treasury roll overs and the US government is technically insolvent: i.e., forced to cut some major expense, like the US army.

      which is why US corporations often avoid paying any dividends, so their trillionaire owners can live off of loans and pay no US taxes.

      Note that billionaire owned newspaper legalistically talks about “cheats” as opposed to those who use loopholes like the foreign income exclusion from taxation in the US tax code. That is called tax avoidance and is still perfectly legal.

      As an attorney, I can tell you that is also a gigantic under count of the real amount of avoidance of US taxes, for example, because most Americans do not realize that there are discreet, hidden families out there that own not billions of dollars but TRILLIONS of dollars in carefully hidden assets via trusts, foreign shell companies, etc. They are secretive because they fear kidnappings, paying their fair share of taxes, being found out for bribing or owning politicians, probably for funding fake “news” networks, etc.

      “Does the U.S. Tax Code Encourage ‘Tax Avoidance’?” The answer, of course, is YES it does, because the trillionaires bribed or own the souls of our politicians

      Who do you think always funds all the initial candidacies of politicians and, thereafter, keeps many in power through their money: trillionaires and billionaires. Many persons who are thought to be billionaires are actually the secretly-hired agents of trillionaires, who hold them by the short hairs: e.g., by demand promissory notes for much more than the factories and other assets of the “billionaires” are truly worth, BS aside.

      As the decreasing foreign purchases of US treasuries show, the US has been painted into a corner by the banksters’s massive thieving and control of the government through their “Federal” Reserve, which is privately owned but has the word “federal” in its name to deceive Americans. (The banksters are, or are agents of, the trillionaire families.)

      • RH says:

        I forgot to insert two connecting paragraphs that I wrote separately:

        The reason why the banksters’ “Federal” Reserve is desperately manipulating the markets, and I suspect, has gotten its cronies to join it, is to avoid fundamental reforms. They previously evaded any reform with the fake reforms in the Dodd-Frank Act, which really created poison pills to force the US government to bail the banksters out or let all other financial institutions go under and depositors’ funds get taken FIRST before the CORPORATE veils of the banks could get pierced.

        They are scared what the collapse that is coming, which may cause the US taxpayers to finally arise in outrage and force fundamental changes, such as a wealth tax on the fortunes of those who have more than 500 million dollars or a flat income tax based on imputed revenues, so they cannot just manipulate their accounts and pay their relatives gigantic salaries to evade taxation, etc.

  2. 2banana says:

    Imagine your investments when that happens…

    “But it didn’t. It turned around and spiked again, and went to 15% by 1980.”

    History is rhyming just about now…

    “But the Fed had waited far too long to act, and had dilly-dallied around for years hoping inflation would go away on its own, that it was just temporary due to the one-off 1973 Oil Shock, and then the 1979 Oil Shock, and inflation kept soaring in an inflation spiral that became ingrained in the economy.”

    • Wisdom Seeker says:

      There’s a huge discord in the rhyming, though, because in the 1970s the Federal Debt, and everyone else’s debt levels as well, were small compared to incomes, GDP etc. Rising interest rates were affordable then. Today, not so much.

      If interest rates were to rise now, without further inflation first, there would be a huge wave of defaults. But the Federal Government doesn’t default, it prints to cover what it owes. So inflation & devaluation will have to run a lot further before debts become small compared to incomes/GDP.

      The Big Question then is whether the Federal Government’s spending is wise enough to put the economy on a sound footing to make the debts affordable (via production) sooner rather than later.

      • MonkeyBusiness says:

        Not to mention the rest of the world will probably need to bail us out. Otherwise income will need to rise in order for people to consume at a higher rate.

      • cas127 says:

        “The Big Question then is whether the Federal Government’s spending is wise enough to put the economy on a sound footing to make the debts affordable (via production) sooner rather than later.”

        1) Afghanistan – 20 years.

        2) Iraq – 20 years

        3) Final severing of US dollar from any supply-limiting real asset – About 50 years.

        4) Number of years goods trade balance in (huge) deficit – About 50

        There is no wisdom, there is no question.

        Essentially every metric argues for the grotesque, hopeless incompetency of DC…already the authors of the current ruin.

        • Wisdom Seeker says:

          Yeah, I’m feeling pessimistic too.

          The only way out in that case is for a populist voters-revolt to take away the credit cards from the Prodigal Congress.

        • Thomas Roberts says:

          After the everything bubble pops. America’s bonds should probably go to a negative interest rate. That will save America about 400 billion a year, after all the debts are recycled (they mature and are resold into marketplace). Depending on how negative interest rates are handled, the debt would either shrink every year, the budget deficit was zero, or more likely, the more negative the interest rate, the more extra cash into the budget. If America’s Healthcare system was entirely changed structurally, and the military was made efficient, the budget deficit could be eliminated.

          The capabilities are there, but, the bubble has to pop, alot of people will lose most of their retirement money. And then, the Healthcare system will have to implode onto itself (as the booomers become eligible for Medicare and the costs skyrocket) and be redone.

          While, all this could be done more gracefully, that doesn’t seem likely. All these problems are numbers on paper problems and not material problems. Though, the booomers definitely won’t have as much retirement money, no matter what, exact amount could change.

          All this stuff, and the counterpart stuff in Europe and beyond, will impact whole world. So I don’t see any new countries, over taking anyone.

          At any point, all this nonsense could be ended almost immediately, if things are run better, which could happen right after the implosion, but right now, too many people are comfortable with the status quo.

          All the nonsense will come to an end eventually, the question is can we prevent the nonsense from happening? The answer, clearly not. But, if enough people know how to fix it, after implosion happens, could all nonsense end almost immediately? Yes, but we will see if that happens. The social problems are more concerning to me.

          As for the booomers retirement, well, they should be okay. The ones with less money, we are probably going to force to have roommates. 2 couples into 1500 sqft houses. 3 couples into 2500 sqft houses. Realistically, most retirees, after they adjust will probably be happier with roommates, but some won’t. We will have to plan that in, less roommate friendly goes 2 into 1 1500sqft house, possibly house divided. This will save enough money to make sure everything goes smoothly. Re-dividing walls of houses is not as difficult or as expensive as people think, we can have people, who are unemployed do this.

          I would definitely, rather be in the western world, during this period; than China, India, or any developing country, most of them will be hit much harder. Some won’t recover, for quite awhile.

          The trade deficit should shrink alot, during this period, especially as more automation and other changes take place.

      • Augustus Frost says:

        How about never?

        The government won’t and can’t spend this country to future increased prosperity. It will only waste resources making most in the US poorer, even as in the backward mirror of economic statistics it’s measured as “growth”.

        It’s not different this time and no, there is nothing which exempts the US population from declining living standards for living beyond its collective means.

        What you are describing is another attempt to transfer wealth to spenders and debtors from savers and creditors. It’s “working” now through monetary policy but that’s primarily or entirely due to the credit and asset mania which has inflated asset prices through the lowest aggregate lending standards ever.

        When the asset mania ends regardless of the “reason”, the tide will have gone out and most Americans will be discovered to have been swimming naked. The majority of Americans are destined to become poorer or a lot poorer.

      • Old School says:

        If you watch Lacy Hunt and see his long term interest rate charts, then maybe Fed policy makes sense. Maybe they are trying to keep real economy going, but it is so debt saturated that only crazy -5% real rates is all they got.

        If you believe Mr. Hunt rates are going lower, unless the monetary system is altered.

  3. John M Winterhalter says:

    Maybe the bond market is correct… what happened to lumber prices

    • Wolf Richter says:

      John M Winterhalter,

      Lumber prices are irrelevant. Lumber never made it into the CPI inflation figures, not on the way up and not on the way down (neither the cost of new houses nor plywood are in any CPI basket). If you want to look at commodities, look at the ones that filter into inflation, such as energy commodities, steel, aluminum, ag commodities, plastic, etc.

      The fact that the media keeps citing lumber as the example of how inflation is going turn around shows how brain-dead economic reporting in the media really is.

      • rich says:

        Wolf is correct. Just talked to my metal roofer, and he has been informed that metal roof prices are going up another 10% in the next few weeks. Building prices are still rising, with no end in sight. Even the key expert lumber trader, Stinson Dean, didn’t see lumber prices falling this fast. He may have been trying to read the futures market rather than reading inventory buildups and delayed housing starts. Housing starts aren’t subject the the whims of the HFT guys.

      • Spencer Bradley Hall says:

        Nothing has changed in over a century. Inflation is predetermined by monetary flows, volume times transactions’ velocity, or AD. The correlation has always been perfect.

        And Powell has disavowed monetarism. Powell: “Inflation is not a problem for this time as near as I can figure. Right now, M2 [money supply] does not really have important implications. It is something we have to unlearn.”

        Powell: “There was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time” Powell refers to M2.

        Don’t you find it curious that M1 now includes old M2? And that the old M1 has also been reconstructed?

        Inflation will fall off in Feb. 2022 (reported in March).

        • Wolf Richter says:

          Spencer Bradley Hall,

          “Inflation is predetermined by monetary flows…”

          If you talk about consumer price inflation, or asset price inflation, or wage inflation, the answer is no, it’s not predetermined at all. Lots of factors go into, including market psychology and a shift in how people are thinking about higher prices. Companies raise prices and get away with it and then raise prices again: that’s consumer price inflation. There are all kinds of factors that help sustain it, including higher wages, stimulus spending, stock market gains that are getting spent, cheap borrowing that is getting spent, etc.

          “Inflation will fall off in Feb. 2022 (reported in March).”

          Year-over-year inflation measures may back off next April-July due to the “base effect,” because the base for the year-over-year data a year from now is the index earlier this year, which was very high. This is the same “base effect,” but opposite direction, that we experienced in April through July this year, and that EVERYONE was citing to say that this big inflation is no big deal due to the base effect with these year-over-year comparisons being based on the low index a year ago.

        • Spencer Bradley Hall says:

          It’s mathematically impossible to miss an economic forecast period. You can believe in animal spirits if you want.

          FYI – yoy comparisons may reflect a base effect. But that’s not how money flows work.

          — Michel de Nostredame (the best market timer in history)

    • wkevinw says:

      Commodity prices (index) have doubled (from a VERY low base) in about a year, so that’s as fast as that percentage increase has happened for decades. This index has been a bit flat for a few months.

      The CPI has changed about +4% in about a year, which happened similarly in ~ 2010.

      Compared to earlier decades, this is pretty tame. Compared to recent history it’s much bigger.

      I don’t trust anybody’s predictions (never do), but the inflation gauges (and market trades) that I track have flashed “going up” since August-October of last year.

  4. Bev kennedy says:

    If interest rate rise how will government’s pay off debt needed to support the economy through covid?
    Also I note that the Bank of Canada has realized that retail investors pay a significantly higher cost when purchasing bonds than institutions (if memory serves me 37 to 46 per cent more than instItional buyers

    • Auldyin says:

      @BK to your first point.
      Clever Govts make clever investments in their countries to advance the prospects of ALL their people. (C…)
      They can pay for these investments in one of, or a combination of, three ways depending on how clever they are:-
      1) Tax, but you don’t get re-elected in democracies.
      2) Debt where you pass the cost to the next generation which is ok if you also give them good stuff to live on in the future.
      3) Printing money which causes inflation and makes most people poorer and causes much distress and distortion.
      I rest my case, you decide what kind of Govt you’ve got and where you are headed.

      • Augustus Frost says:

        Governments make little actual investment. Read the programs proposed in the second part of the “infrastructure” bill. It’s WELFARE, not investment, supplemented by mountains of pork programs as payoffs for campaign contributions.

  5. Smooth Operator says:

    I don’t trust official inflation numbers as they have been managed to keep low for years.
    I speak from UK experience.
    I read similar experiences from USA.
    I note the hedonic adjustments.
    But numbers are numbers – we are getting poorer.

    • jon says:

      The real inflation on the ground is ~14%. The official numbers are all manipulated,
      FED decided to taper but to what extent ? They are buying 120 b worth /month, they may taper it down to 118/month :-).
      The market is happy, the FED is proven truthful the common people suffer

      • Kenny Logouts says:

        Unless people are earning 14% more, they’re surely consuming less?

        So once this stimulus gives way, what is going to drive inflation from the demand side?

        And won’t lots of people lose jobs if consumption drops?
        Again how does that drive inflation?

        • jon says:

          In the last 1 year or so, 10s of millions of people have lost their income/jobs but they still could consume. We all know the answer why and how.

        • JeffD says:

          Or… they are taking out loans to fill the gap, becoming perpetual debtors.

  6. rich says:

    “According to private sector measures, and my own estimates, inflation, when properly calculated, has jumped by a lot more.

    And Americans are figuring this out because they’re seeing how the income from their labor buys less and less.

    But the bond market, which is supposed to be the smart money, hasn’t figured this out yet. ”

    And yet, Michael (The Big Short) Burry, who has been among the smartest of the smart money, just sold off his ProShares UltraShort 20+ Year Treasury, and also removed his bullish call options on Direxion Daily 20+ Year Treasury Bear 3X Shares and ProShares UltraPro Short 20+ Year Treasury. Go figure.

    • Wisdom Seeker says:

      Anything a guy like Burry is letting you know is for his benefit, not yours. Unless you know what all his other positions are, the ones disclosed are meaningless chaff.

      • rich says:

        I could have printed many more of his positions. Didn’t see them as relevant to this discussion. Does he have other positions I’m not aware of. Probably, but that said, he certainly didn’t keep his “big short” positions secret, did he?

        • Swamp Creature says:

          Michael Burry is recommending buying water rights in the West based on information from climatologists of a major drought lasting more than a few years. As a former meteorologist there is some validity to this forecast as there is a water temperature anamoly over the Pacific ocean, it is 3 degrees above normal water temperature, creating a high pressure dome over the eastern Pacific leading to the drought. This will also affect the food supply in the US. So you will need to budget much more for food than you are currently. I don’t know how you would invest in this but I hear some hedge funds are already doing it.

          Right now I’m having difficulty just getting clean bottled water at the local supermarkets because of a supply chain issue. This has been going on for months with no end in site.

        • Wisdom Seeker says:

          Famous hedgies disclose some of their positions so that greater fools can follow them, giving them space to close out with larger gains.

          Or, as Burry did with the Big Short, to try to explain to their frazzled investors the logic behind what appears to be a losing position (but might, in due time, prove immensely profitable).

          He was bleeding investors the whole time, until it turned around. As they say, you don’t always come out of a bear market with the investors you started with!

    • The risk is on the downside. Should the economy recover then yields will normalize. Bear treasury securities are a hedge for TIPs. Rates spike and CPI goes negative, (along the lines of 2019 REPO crisis) happens in a low liquidity environment, and currently with the Fed running QE there is too much liquidity, excess reserves. The door is still open to rising rates, treasury could shrink new issues and the Fed could taper their balance sheet, and USG could directly monetize to the Fed in longer maturities, and not sell those bonds in the open market. The Fed is never painted in a corner.

      • Tom S. says:

        As long as you have power you can turn the light switch on and off.

        The Fed officials have moved from talking about talking about tapering to talking about or even planning tapering. Not sure if the market will let them raise rates or address the 8 trillion dollar balance sheet in the room. All it would take is a pivot from growth to value.

    • Old School says:

      Best thing I read in a financial book a long time ago was that accuracy of interest rate predictions is extremely poor so don’t place interest rate bets.

      If you are going to be a rational investor you have to believe the Fed is going to do its job on keeping long term inflation at 2%. If they don’t do that, the whole rationale for being an investor is gone and you have to become a stacker.

  7. Artem says:

    Yes, it rhymes except there’s an endless demand for dollars globally unlike 1970s. All the modern inflation has been, and will continue to be in asset prices.

    For now.

    • Old School says:

      Fed also has a problem with long term real growth slowing to 1%. I think they would like nominal growth to be at least 4%, but preferably 5%. That means they need at least 3% inflation and preferably 5%.

      Even though it’s a sample size of two, Japan and Eurozone shows there is not much central banks can do to get higher nominal growth rates to stick.

      • Old School says:

        Oops. should have said preferably 4% inflation, not 5%. I will be surprised if in a year or two the inflation rate is not back at sub 2% as stimulus fades, but depends on politics.

  8. anton says:

    I would assume that a spiking yield in bond rates would result in a drop in stocks since the risk/rate of return would at that point favor bonds.

  9. David W Young says:

    So in the next 18 months, bonds will not be a Refuge from the Stock Market as is typically the case when the stock market starts to reprice the value of future corporate earnings and dividends. Can you imagine the carnage if the 10-year Treasury Note approaches the historical norm of 4.33%!!! Bond investors that are retired are going to be filling some of those fast food jobs that can’t be filled right now due to screwed up Pandemic Goodies to the Moon.

    Even at 5%, the 10-year will still be underwater on a Real, Inflation-adjusted basis by some 100 to 200 basis points. Bonds are going to be real dogs for many years, if not decades, to come. And since U.S. stocks have a composite real, running price to earnings ratio over 43 times, their day in the sun is well past its prime and the last 7 trading days have shown a market beginning to roll-over. Sunset there also.

    As the 10-year Note heads back to some semblance of reality vis a vis the deadly trio of Inflation, Credit/Default Risk, and Currency Risk, mortgage rates are going to soar putting the U.S. housing market in a world of hurt. Aren’t you glad now you did not spring for that condo on the beach this summer!!! With Global Warming all the craze, the beach won’t be there much longer anyway! A rickety house boat would have been a better buy.

    Go where few men or women have gone before. Buy real money that has weathered the destructions of hundreds of currencies over thousands of years. No printing press at the Fed for this asset and its little sister.

    • David in Texas says:

      Good advice: I just sold everything and put my life’s savings into Dogecoin. Now the bond and stock markets can blow up and I’ll be secure!

      • DawnsEarlyLight says:

        To be precise, ROFLMAO!

      • David W Young says:

        DiT, DodgeCoin has not been around for millennia. I think you are trying to be funny, but that would be like going from the frying pan into the fire.

    • David Hall says:

      They may not want to hire senior citizens in fast food establishments. They want younger workers to keep a fast pace. See if the slower ones get cut from the schedule.

      Food stamp benefits rising. Eventually the price of food inflation may overtake the benefits increase.

      Chip shortages confound planners. The information highway is limited by silicon wafer production.

      10 yr. bond yields rising in America. 10 yr. yields falling in Europe.

      • Anthony A. says:

        The old people I see in fast food around here (Whataburger) are working the dining floor doing food delivery, cleanup and customer requests. Behind the counter are the young people, typically Hispanic around here, that can’t count change or hit the right order button.

        There’s a neighbor guy over 65 years old working in our Costco. He is pushing a broom and setting up displays.

        Another neighbor over 80 works at Home Depot (14 years now) and another old retiree works for the Mercedes dealer driving the courtesy van.

        The rest of us in this 55+ community are still unemployed. LOL

    • Auldyin says:

      Nice post.
      Just one thing, the fear always goes too far, at some point bonds will overshoot to the downside and that is the point to pounce.
      Just remembering the 70’s and how 15% bonds had only one way to go for nigh on 50yrs.

    • Tony says:

      Not all waterfront property will be equal. Lakefront will be prime and will replace oceanfront. Especially in the Northern Great Lakes, which has both moderate temperatures and plenty of water.

    • Nick Kelly says:

      ‘ Even at 5%, the 10-year will still be underwater on a Real, Inflation-adjusted basis by some 100 to 200 basis points.’

      A 5% Fed rate not only cures inflation, it produces a 7% mortgage and deflation especially in housing. You can argue, as some here, that the Fed can’t do 5% but you can’t have 5% (or 3%) AND inflation in the most inflated markets in 100 years.

      It’s only a 1.5 % Fed rate and 3% mortgages that have produced 6-10 % inflation.

  10. matt says:

    So what happens to the housing market when mortgage rates go back to 13%?

    • Anthony A. says:

      Really? Remember 1980 – 1981 like I do? Prices will FALL as no one will be buying. Real estate agents will regroup at the tennis courts.

      • matt says:

        Not really but I remember mortgage rates rising to the breaking point in 2008. It was a rhetorical question.

        I’m not sure we’ll see the wave of foreclosures this time around as lending standards now are much better, but I could see some people on the margins getting into trouble, such as those who leveraged themselves to the hilt to get into the AirBnB business.

        • RightNYer says:

          Are the lending standards “much better?” They might be much better in the sense that they require proof of income now, but I haven’t seen any evidence that they’re much better in requiring 20% down, more cash on hand, an income that is not 6x the purchase price, etc.

        • jon says:

          Real estate prices are decided by the margins like the stock market.

        • JeffD says:

          Don’t forget — people holding an underwater mortgage can walk away at any time with jingle mail.

        • Augustus Frost says:

          Lending standards are weak. Even a 20% down payment requirement at bubble prices is hardly prudent.

          In an economic environment of much higher interest rates, employment will almost certainly decrease noticeably if not drastically and asset prices including housing with it.

          Artificially low interest rates are one of the two pillars keeping this mostly fake economy afloat. The other is government deficit spending. Artificially low interest rates make it possible to disguise lax lending standards because the fake economy and rising prices keep defaults low.

          That is, until people figure out they apparently never have to pay their debts back and politicians let them get away with it. Mortgage forbearance “worked” in the sense of controlling foreclosures.

          Don’t be surprised if it’s activated again in an “economic emergency” for another contrived reason.

    • Peanut Gallery says:

      I would imagine the probability of a 13% mortgage rate would be extremely low… like winning the lottery?

    • Wolf Richter says:


      Hahahaha, they’re not going to 13%. But they might go to 5%. And that’s going to be enough of a shocker.

      • Swamp Creature says:

        I’d like to see Paul Volcker rise from the grave and implement his 21% prime interest rate and 18% mortgage rate scenerio once again. Savers would finally get what they deserve. I remember those days in 1981 with fondness. All these Wall Street shills like Jim Cramer and RE shiesters like Lawrence Yum would be s$iting in their pants.

        • KGC says:

          And I remember those days too. Not fondly. Mortgage payment interest was 14%, saving account at the bank actually paid me 3.5%. Gas had quadrupled and nobody could afford a new car, which was a POS anyways.

          Slow Joe’s being compared to the peanut farmer, and I really don’t want to live thru that again, but the idea of having Kamala takeover wouldn’t be better.

          The Fed needs a new boss and serious oversight from Congress, neither of which is going to happen. We’re digging a real hole…

        • Spencer Bradley Hall says:

          Volcker solely created two back-to-back recessions.

        • Artem says:

          Swamp creatures,
          Do all savers, inlcuding savers from abroad deserve 20% interest? Is that really wise to encourage cash hoarding to this extent?

        • KGC says:


          First, money saved in a bank and earning interest is working capital, and encourages wise investment and growth as the bank must pay that sum to use those funds. It’s not hoarding.

          Second, when an individual cannot plan on a steady return from saving there’s no incentive to plan for when the money stops. You cannot plan a retirement if you have no savings. You cannot help your family if you die. You cannot live without either going into debt (which gets harder as you grow older) or without taking a subsistence from the government, which means your standard of living will decrease.

          It’s very difficult to adjust to a decreasing standard of living when your busting your ass 8-12 hours a day with plans to retire and/or care for your family.

      • Tronald Dumpf says:

        Agreed. Yet for some reason my Canadian bank wants to stress test me with a 5.5% interest rate ? I’m like mate it’s gonna be a long time if ever we hit that amount.

        • Wolf Richter says:

          You guys have what we down here call variable rate mortgages. So this is a big issue when rates go up. The 5.5% assumption is not unrealistic. The thing is if you have to refinance your mortgage at 5.5% when the current term ends, or if your rate adjusts to 5.5% in three years, and you cannot meet that payment, then you’re looking at trouble.

          We have 30-year fixed rate mortgages down here, which is a different ballgame. You just won’t be able to move when rates rise. But you can keep your house.

    • Vichy Chicago says:

      Reminds me of this from “The Golden Girls”, S1E25 – aired May 1986:
      Zelda : Mrs. Devereaux, you must leave this house at once. It is possessed by an evil spirit.

      Blanche Devereaux : Actually, it’s possessed by Miami Federal. And at 7%, you couldn’t blast me out of here.

  11. Armstrong says Dow 65K in a few years, because what is the alternative? Sub 2% bond yields become irrelevant while there are 10% YOY stock market gains, and a 3% mortgage is cheaper than margin debt? The downside to his argument is where is the new money coming from? (Bonds are content to roll over old money) The fiscal bubble is sweat money. If corporations are going to make money they have to sell stuff and hire workers, and there’s a problem. They can automate the assembly line but material handlers? Shipping costs? All those things require a consumer society with infrastructure and the corps don’t want to pay taxes. Just not sure why USG isn’t peddling infrastructure bonds? Something low yield tax free??

    • RightNYer says:

      I hear the point, but it’s circular reasoning. It’s saying, “Who cares about crappy bond yields because you can always buy stocks and get 10% gains per year?” But that assumes that you get those 10% gains. If the market takes a huge drop and people’s confidence is shattered, the calculus changes.

      In any case, the biggest concern would be hoarding cash. If people don’t want stocks OR bonds at current prices, they can just hold cash, causing a liquidity trap.

  12. Wildman says:

    Socialism for the 1%. Feudalism for everyone else. Your tribute payments are low…for now.

  13. WES says:

    Those 20 years when real interest rates were positive was when I was able to grow my meager savings from the 1970s and the rule of 72 actually worked. Anyone remember long term strip bonds?

    After this 20 year positive window ended, governments quickly re-introduced financial repression making the rule of 72 only useful for calculating your negative losses.

    So we went from the power of positive compounding back to negative compounding as soon as the government was as able to do so.

  14. Keepcalmeverythingisfine says:

    The only shock we are going to see is when inflation stays above 5%, and the bond market does almost nothing, and the S&P 500 goes up 15% per year, and housing prices in desirable areas keep climbing. I personally will be shocked by my wealth gain, again.

    • RightNYer says:

      The only shock you’re going to see if that happens is rioting. The bottom 95% of America isn’t going to tolerate being priced out of all assets, wealth, and housing so that a few people can become obscenely rich.

      • Trucker guy says:

        Yep that’s the only point when civilization falls. We saw what a pathetic joke the insurrection last January was. Those people that broke into the capitol had a life to lose. If everyone is starving and working a full time job just to end up below poverty level and living in their car you might see some pushback. I think most of the ones in control know this though. The gen z and their kids will likely be the ones burned and most everyone posting in this comment section will be dead or near it anyways so it won’t matter.

        Still a ways off though. Assuming of course we’ve created a paradigm shift where capitalism doesn’t go tits up every decade or two.

        • RightNYer says:

          I agree with your larger point, but if you think everyone older than Gen Z will be in the clear, you’re much more optimistic than I am!

      • Depth Charge says:

        I just drove by a massive tent city today that wasn’t even there a month ago. Things are really, REALLY bad out there.

        • RightNYer says:

          Yep. And the aloofness among the “elite,” including Wall Street, is really shocking.

        • Swamp Creature says:

          The entire DC Swamp is turning into one big tent city. I’ve never seen anything like this. All the parks near the Capitol are full of homeless squatters. Its getting worse every day. If you wait a week it looks like the number has doubled. What a disgrace.

    • Fat Chewer says:

      Uncertainty is an uncomfortable position. But certainty is an absurd one.


  15. TweedleDum says:

    Lending standards are irrelavant if the houses are under water. I could be a billionaire, and it would still make more sense to default on my mortgage. Also base lending rates matter, mortgage rates can easily double from here, doubling your outgo, which didnt happen untill well after the blowup in 08

    • Paulo says:

      All true, but an equally guilty party are those individuals stampeding into the housing market buying more than what they need simply because the monthly payment will be low, right now.

      If mortgage rates are low people should be able to double up and pay their houses off faster, provided they used common sense and didn’t buy the million dollar crap shack. There are always other options for everything.

      If a house is paid for, or the buyer has built up some real equity by planning for possible rate increases before buying, the home will never be underwater. In that situation all the homeowner has to do is hunker down and wait. Ebb and flow….like a sine wave.

      • gametv says:

        I hear people who think that they will be fine because they are buying a home on a fixed rate mortgage or with cash. But the big problem with that thinking is that the value of that home will be reset to the monthly payment that can be afforded by the future buyers. And when home prices start to fall over several years, instead of viewing it as an appreciating asset, people will begin once again to view it as an expense. And prices will overshoot to the downside instead of the upside.

        Our government has pushed finances to the brink and now, there will need to be some pain.

        Even if you can afford the monthly payment, when you are upside down 200K on a mortgage, you will walk away, rather than take the loss yourself. A hit to credit scores is recoverable, a large equity loss is much harder to recover from.

      • Trucker guy says:

        I don’t follow what you’re saying. Aren’t most mortgages fixed rate? Especially now after 08?

        Buying a house is a long game anyways you likely won’t ever have a good ROI due to taxes and expenses. Buying and selling within a couple years is a loss 9/10 times and ultimately, if you’re not needing a rural setting, renting small is a better bet than buying some free standing condo in suburban america where you can piss on your neighbors tv set from your window if theirs is open also.

        Also, nobody can buy anything right now that isn’t a million dollar crap shack. That is all that is on the market right now. Obscenely overpriced junk to middle class homes. The only place where prices are somewhat not inflated is the multi million dollar mansions on 200 acres.

        If I could find a small rural trailer or cabin for 100-150k on 5 acres 1-2 hours from town I’d not be renting right now and getting raked over the coals. Sadly a tear down 3 hours from town and off grid is 300k right now. You couldn’t get me to touch these jokes with a stick I poked a dead guy with. However those that are needing to buy and thus keeping and ear to the ground sees that real estate is starting to press against the ceiling and car prices seem to as well. I know a few other sectors related to my job are looking like they’re peaking.

  16. Swamp Creature says:

    Was in home Depot this morning to load up on some topsoil and mulch to repair my landscaping from the damage caused by the July heat wave. When I got to the area where the loading was to occur I found to my surprise that there was not a single Home Depot employee anywhere in site like there usually is to help load about 200 lbs of this stuff into my Subaru SUV. No one anywhere! So I wound of dragging my sorry a$s to the different areas in the lot and loading all this stuff myself in the 90+ heat with a sore back. This is what constitutes customer service at the big box stores in the year 2021. What a joke!

    • Paulo says:

      Home Depot is brutal for that, or if you do find someone they don’t know anything. I think employees break at the same time, too.

      But my biggest piss off is the push for customers to do self check out. I tell them right up front to start the scan or I book.

      • Anthony A. says:

        When I remodeled my ex-wife’s old house after she died and I got possession, I ordered so much stuff that I got a commercial credit card from HD. I still use it and check out through the Contractor’s area every time I go there, even if it’s for a box of nails. I get 5% off too!

        I have a commercial account at Lowes too, but they are usually out of most things when I go there.

        • Paulo says:

          I have a contractors account at a real lumber yard Windsor Mill Sales. The Home Depot stop is for the stuff they don’t carry. It is brutal to go to Home Depot, but marginally better than our local Home Hardware Building Center. Almost all decent/traditional building centers have been wiped out by Lowes and HD.

          I often buy flooring etc online.

    • ru82 says:

      Same thing happened to me at a Lowes. They called for assistance to load a big vanity into the back of my pickup truck. The cashier called on the intercom 3 times over a 10 minute time frame and nobody showed up. They were really not that busy. After 10 minutes I just said I would do it myself.

      I wheeled the cart out to the truck and hailed a Lowes customer heading into the store to give me a hand which he did.

    • Swamp Creature says:

      And you wonder why retail sales are declining. Shopping has become such a chore that you only buy when you absolutely have to. I bought a $500 gift card and order a lot of landscaping items on line that I must have delivered right to my front door.

    • I go to the blue place, they give me a 10% veteran discount and parking, and when they load my truck they say thank for your service and I say thank you, for your service.

    • RightNYer says:

      To be fair, Americans have shown, through their actions, that they want this. Independent hardware stores used to provide these services, but people decided they wanted lower prices, at all costs.

      As ye sow, so shall ye reap.

    • Ron says:

      Menard,s is a shit show bought 12 ft drywall loaded myself when 3 employees ran off seeing I needed help went to manager he told me it’s a self service lumber yard haven’t been back

  17. BatHelix says:

    Ok, but where does all this analysis go when we know the Fed will step in to stop this?

    I’ve been seeing disaster because of what “should” happen for over 10 years but the fact is the Fed is going to do everything they can to keep rates low and stimulus coming. So the only question is what will somehow force them to not do that?….and I don’t think it’s as simple as just saying “inflation” … because they will try and ignore it for longer than they should … and as soon as they would react they drop the market and prices etc and have to do more stimulus right? What would force that to change?

    • Old School says:

      Federal government is doing all they can to get economy to grow, but printing money, child tax credits, increasing food stamps ain’t going to get it done. Real long term economic growth requires entrepreneurship and private sector growth not printing and handing it out.

      They may get rates up, but real terms they are going to be negative unless government has the will to tell people the freebies are getting cut off.

      • RightNYer says:

        Exactly. It’s one thing to borrow money for productive investment, it’s another to borrow money and hand it out so people can buy new Chinese made electronics.

        Our politicians are either stupid or evil.

    • Alku says:

      I think it’s impossible to predict. But it can be that some disbalances in the markets will just reach a point where the consequences will be too big to fix the way that used to work. The numbers are getting bigger and bigger everywhere, like 1T+ daily RRP

    • gametv says:

      It is all different now because inflation is hitting. The Fed simply cannot increase purchases when inflation is soaring. So they pretend that they are intending to raise interest rates. We are less than 2 months from a major turning point. It is all centered on the time when the debt ceiling is lifted.

    • Augustus Frost says:

      What’s going to get the FRB to change course?

      Political blowback, that’s what. They aren’t robots and when this institution and their policies become unpopular enough, they will fold if comes to even that.

  18. Spencer Bradley Hall says:

    The Federal Reserve (BOG), under Chairman William McChesney Martin Jr., re-established WWII stair-step case functioning (and cascading), interest rate pegs thereby using a price mechanism (like President Gerald Ford’s: “Whip Inflation Now”), and abandoning the FOMC’s net free, or net borrowed, reserve targeting position approach (quasi-monetarism), in favor of the Federal Funds “bracket racket” in 1965 (presumably acting in accordance with the last directive of the FOMC, which set a range of rates as guides for open market policy actions).

    The effect of tying open market policy to a repurchase agreement/remuneration bracket (or some policy peg, e.g., today’s remuneration rate on IBDDs) was to supply additional (and excessive) complicit reserves to the banking system whenever loan/investment demand (i.e., bank deposits), are increased.

    The velocity of money accelerated during the same period. I.e., the “monetization” of time deposits. The process of monetizing time (savings) deposits within the payment’s system began in the early 1960’s with Citicorp’s Walter Wriston inventing the negotiable CD – which drew funds out from all over the world, indeed from the international, unregulated, E-$ banking market (with an ever-mounting and inflationary, self-reinforcing depreciating currency effect, as the volume of E-$s directly impacts U.S. prices).

  19. Lol says:

    It’s not the 1970s, and the whole goal is to manage expectations while achieving significant inflation to inflate much of this debt away. They want to control it – they’ll likely get stagflation.

    If you look at the WW2 period from 1945 onwards, you can see the beginning of an inflationary cycle much like 2020. 1945-1955 = ~90% devaluation in the dollar and that wasn’t even the real inflationary parts.

  20. BatHelix says:

    Yeah and I also think there is a much larger desire for inflation on their part than they talk about or admit. I think they want to have a lot of inflation … they just want it to look like it wasn’t their fault and there was nothing they could really do about it. That way they can keep getting the asset inflation along with the “real stuff” … which is really what they want.

    This is all why I think it’s very overdramatic to think the Fed will see inflation and panic and get scared …. that’s what they want. They shouldn’t and it’s devious … but it is and that’s why they’re not going to all of a sudden start panicking to do something about it. They will pretend a little while saying they think it will pass and maybe eventually do the bare minimum but that’s it.

    • jon says:

      Infact, FED would have many excuses not to taper and hike rates. Inflation is always transitory. For example, a home which was sold at $500K 12month back, is now sold at $650K. After 1 year, say it is sold at $700k. If you look at this, inflation has indeed slowed down dramatically.

    • backwardsevolution says:

      “I think they want to have a lot of inflation … they just want it to look like it wasn’t their fault and there was nothing they could really do about it.”

      Absolutely correct. The evidence all points in that direction. They are purposely and intentionally engineering and manufacturing inflation while at the same time denying they’re responsible.

      Devious and criminal.

  21. Gary Yary says:

    The Fed and their “staff, participants and counter parties” want to create an accommodative environment for their banker buddies. Not Gary, not you.

    The supply bottlenecks in the recent economy were caused by the accommodative nature. Free money creates more demand. More demand creates logistic traffic snarls.

    Maximum employment will return when “free” benefits end.

    The Fed is doing the best they can. It is easy to Monday morning QB this mess. But I do think that the Fed mentality if it ran the entire USA – would have been to Nuke the entire globe after 9/11 – to be accommodative for lending to banks and businesses.

    I’m not done…

    Replace the term “Delta variant” with “The boogeyman” in any news article. It is hilarious fun!

    Thanks for the transcripts of your talk Wolf.

    I love the discussion and observations of this moment in time.

    • Nick Kelly says:

      ‘Replace the term “Delta variant” with “The boogeyman” in any news article.’

      Wouldn’t people say the boogeyman is fictional?
      Since you surely can’t be saying all these scientists and these burnt out ICU docs and the electron microscope images are fictional, what are you saying?

      Florida: 70 THOUSAND new cases in 24 hours. It’s like dealing with an aboriginal pre- science tribe.

      • Gary Yary says:

        Hi Nick,

        I do not know any of these people who report about the virus. I also do not know of anyone who has been infected by Covid-19 or the A, B or D variant. Deaths in my personal life circle are in the range of what an actuary would rank them @ 100%.

        Like the ongoing influenza virus from the dawn of time. The virus mutates. Same with the boogeyman. CNN might have an interesting report on lightning deaths next week. Approach these reports with caution – and an open mind. Tread safe. Forget my opinion.

        I find humor in finance, life and death. Not taken for granted – enjoy this miracle!

        • Nick Kelly says:

          So since you don’t know anyone in Afghanistan, nothing of import is happening? It’s one thing to say the media isn’t always correct it’s another to say it’s irrelevant. You have issued a statement that you apparently think is artistic expression, just your opinion.

          Did you know that in English a ‘fact’ is distinct from an ‘opinion’
          CNN employs fact checkers. If they say there were 70K new cases in Florida in 24 hrs. it will be close. And since the chances of being struck by lightening are one in 14 million they won’t be doing a special on that.

          I’m all for art and imagination too, I just think being in-tubed in an ICU is serious. There are some frivolous comments on this site. I’ve made some, but 70K cases in 24 hrs BEFORE back to school is a fact and it’s not a joke or a vehicle for a work of art.

  22. gorbachev says:

    They have control and I don’t mind as long
    as they hold on tight. What worries me is slippage. That point where they let go of the rope and can’t get it back.

  23. Chauncey Gardiner says:

    The broad bond market keys off “risk-free” U.S. Treasury bill and bond yields, with a spread attached to bonds of similar maturities based on perceived risks to the payment streams of those bonds. Believe the Fed has to some extent been trapped into continuing its enormous QE purchases in order to keep interest rates low, as US Treasury bonds comprise much of the collateral pool for repo financing. Repo financing is in turn estimated to comprise around two-thirds of total funding of US Treasury debt issuance not being absorbed by the Fed’s QE purchases.

    If rates rise, Treasury bond prices will fall, with the magnitude of those drops being particularly large in the longer term bonds. Thus the value of the repo collateral pool would be impaired by rising rates, with potentially adverse liquidity effects emerging similar to those we saw in mid-Sept 2019 due to tightness in the global repo market and rising leveraged derivatives risks at the large global banks and shadow banks. Further, large Fed QE purchases of Treasuries under QE contribute to a shortage of Treasury collateral for repo financing, even though that does serve to raise prices of Treasuries and lower their yield as the Treasuries that are available are aggressively bid up by wholesale money market participants to meet their repo collateral needs.

    Just my view, which could be wrong. Really appreciate this forum.

  24. Doutdoor says:

    The FED isn’t serious about stepping away from the Bond market and likely in a few months is hogwash. No Way. The FED is only spoon feeding propaganda to make people think it might start tapering. The FED isn’t done being the buyer of everything and lender of last resort. They’ve been doing it over the course of the last decade but their plan is not yet close to finality. They’ve been working overtime to sterilize & control society. Also by providing free money to the masses before removing the punch bowl and turning what’s left of the middle class & lower class into peasants.

    What we’ll start to see in the near future I believe is disinflation (a leveling off and contraction) as the effects of stimulus and debt creation fade. Then a period of stifling deflation before one last burst of supersonic stimulus by the FED that creates a cataclysmic period of hyper inflation and subsequent collapse of the dollar and the U.S. economy.

    You will want to have your assets out of U.S. banks into different stores of wealth such as precious metals & cryptocurrencies, and out of reach of the U.S. Government. This will be paramount to survival in the Great Reset.

  25. CZ says:

    Inflation is too much money chasing too FEW goods. Computers, modern supply chains, fracking etc. have created robust efficient supply that has kept inflation low for 3 decades.

    Supply chains are all screwed up b/c of weird pandemic demand shifts, which are hopefully not permanent, and in any case solvable. I’m not convinced the FEW part of the equation is permanent.

    • RightNYer says:

      There’s more to life than goods. What good is it that you can buy cheap goods if all assets, including housing, services, energy, and food are through the roof?

      • CZ says:

        “Services, energy and food” are certainly goods, and my thesis is that efficient productivity will keep supply ample and inflation low.

        (Counter-thesis: domestic productivity is currently exceptionally slack due to “nobody working.”)

        “Housing” (leveraged assets) are affected more by interest rates and macro conditions, and behave differently. But there too, if the thesis is rising interest rates, those would mitigate asset inflation.

  26. NJB says:

    “Tapering asset purchases is the first step. It means the Fed brings its balance sheet expansion to a halt.”

    It’s my understanding that tapering refers to a reduction in the pace of bond buying. The balance sheet expansion will continue but at a slower rate.

    • Wolf Richter says:

      Tapering means the process of maybe 6-12 months during which the Fed “tapers” its asset purchases from $120 a month to $0 a month. When they drop to $0 a month, the balance sheet stops expanding and remains at that level. At that point, tapering is finished.

      Later there may be balance sheet “normalization,” when the balance sheet actually declines.

      This is how they did it last time. Only this time, there is a lot of inflation, and more urgency.

  27. Franz Beckenbauer says:

    You americans are so funny.

    You flood the whole planet with your yankee dollars for decades and then just forget about them and where they went. Or where they may be. Or where they may end up.

    Must be that cowboy mentality.

  28. Dazed And Confused says:

    One thing I don’t understand is why anyone would buy a 10 year Treasury with a real yield of -4.1% when they can buy a 10 year TIP with a real yield of -1.1% – fully 300 basis points higher.

    And why wouldn’t holders of 10 year Treasuries sell them and but 10 year TIPs until both have the same real yield?

    10 year Treasuries and 10 year TIPs are essentially identical (credit risk, liquidity etc.) except for the inflation protection offered by TIPs.

    • While inflation may be transitory, deflation is not. The last 10yr TIP sold at a fixed rate of nearly zero, and sold at a premium of 10%. So you pay to play

  29. David Shea says:

    This article is why I read Wolf Street – BTW I was at a bond desk in 1979 when the Saturday Night Massacre was performed and I believe we are in something far more complicated – a tightly woven and reactionary global economy. The only thing keeping the US bond market afloat is the fact that global investors obviously believe that the US dollar is only global currency backed by both a vibrant economy and the rule of law – especially regarding property. Remove this and its 20% mortgages in a heartbeat.

  30. Auldyin says:

    The BoE in UK is subject to huge political pressure about QE (at last) so their first move is to not roll-over maturing stuff that they have already bought. I guess the Fed will do the same before actual tapering of purchases begins. It’s surreptitious and maybe MSM won’t notice it.
    There appears to be no direct anti-QE political pressure on the Fed as far as I can see, so I think they will put low interest ahead of inflation as a target, when it comes to financing future (massive) deficits. They’ll QE into it to keep rates low no matter what, because higher rates would blow up the entire western World. The political pressure to control inflation is going to fight it out with the political pressure to keep rates low.
    Who wins will be a great fight to watch, but one thing is guaranteed the will not stop deficit spending.
    UK is slightly different because QE is now out of the box and MSM is having to talk about it and people may start to blame it directly for inflation. Although UK just dropped back to 2% unbelievably.

  31. Chris says:

    I noticed something most but not every summer, bond yields generally go down. It looks to be a seasonal thing. In the fall and winter usually yields go up. Wolf, this is why they want get rid of cash and to go to digital money because they want to tell you what to buy, how much to buy, where you can buy and probably how much you can keep. They are a bunch of global communists and control freaks.

    It is not about maintaining any money system but just about their control and power over all of us.

    • Wolf Richter says:

      “this is why they want get rid of cash and to go to digital money…”

      They’re not going to get rid of “cash” (paper dollars). Not going to happen in the US. Cannot happen in the US. What is happening is that people have stopped using cash and are using plastic or mobile devices to pay. So that’s digital payments already. If there is a digital dollar that the Fed issues – this requires an act of Congress – then it would be in addition to all the other methods, not instead of.

  32. harry hv says:

    The Fed is on the same inflation-treadmill as every other banana-republic in history. The trajectory has always been the same, everywhere from Argentina to Zimbabwe: once the money-printing gets going it becomes impossible to stop. Inflation grows along the same explosive exponential curve as Florida Covid cases, until even the maskless morons realize that something is wrong here and the rosy official statistics are lies.

    The Fed has already made its choice: they selected hyperinflation as the lesser evil. The US currency is on the same path as Venezuela’s.

  33. Bam_Man says:

    When is the Venezuelan “bond market” going to realize that the Bolivar has hyper-inflated?

    (Their 10-year Govt. Bond yields 10.5%, while inflation is 2,450%.)
    The answer of course is NEVER. And the same will apply here in the US.

    • Wolf Richter says:


      Your statement about 10.5% is BS. This is the second time you posted this BS. So check into it and then report back to us what you found, including the last time that this bond traded, who actually issued it, what currency it was denominated in, and when it defaulted.

      All of this info is out there. You just have to look for it — instead of posting garbage here.

  34. T S says:

    Make note that Soros made his initial ‘killing’ when the pound went decimal. While the US is still using paper and coin, a major change, such as elimination of the penny, nickle and one dollar bill, along with changing the quarter into the fifth and a flood of golden dollars along with those Susan B Anthionies, would have about the same impact.. instant 20% change.. Talk about a ‘haircut’ in the bond market.. it would be crushing.

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