Yield = Poison

If you do remember the first time I wrote about yield being poison, you are unusual, because it was the first real post at Aleph Blog.  A very small post — kinda cute, I think when I look at it from almost ten years ago… and prescient for its time, because a lot of risky bonds were about to lose value (in 19 months), aside from the highest quality bonds.

I decided to write this article this night because I decided to run my bond momentum model — low and behold, it yelled at me that everyone is grabbing for yield through credit risk, predominantly corporate and emerging markets, with a special love for bank debt closed end funds.

I get the idea — short rates are going to rise because the Fed is tightening and inflation is rising globally, and there is no credit risk anymore because economic growth is accelerating globally — it’s not just a US/Trump thing. I just have a harder time playing the game because we are in the wrong phase of the credit cycle — profit growth is nonexistent, and debts are growing.

I have a few other concerns as well. Even if encouraging exports and discouraging imports aids the US economy for a while (though I doubt it — more jobs rely on exports than are lost by imports, what if there is retaliation?) there is a corresponding opposite impact on the capital account — less reinvestment in the US. We could see higher yields…

Charles Gave:THE END OF THE DOLLAR STANDARD https://t.co/WZxUWX15SN I have wondered the same: Won’t Trump’s policies undo USD standard? $$

— David Merkel (@AlephBlog) February 4, 2017

That said, I would be more bearish on the US Dollar if it had some real competition. All of the major currencies have issues. Gold, anyone? Low short rates and rising inflation are the ideal for gold. Watch the real cost of carry go more negative, and you get paid (sort of) for holding gold.

If growth and inflation persist globally (consider some of the work @soberlook has  been doing at The WSJ Daily Shot — a new favorite of mine, even his posts are too big) then almost no bonds except the shortest bonds will be any good in the intermediate-term — back to the ’70s phrase “certificates of confiscation.”  One other effect that could go this way — if the portion of Dodd-Frank affecting bank leverage is repealed, the banks will have a much greater ability to lend overnight, which would be inflationary. Of course, they could just pay special dividends, but most corporations lean toward growing the business, unless they are disciplined capital allocators.