NFTRH+; History & Implications of the Continuum (important update as an add-on to NFTRH 766)

A subscriber asked for a chart of the 30yr Treasury yield showing longer history and that prompted this update.

Interestingly, the Continuum of pleasantly declining long-term Treasury yields (bond bull market) was birthed at around the time of the 1987 market crash. What does that mean?

Well, under my tin foil hat I think that it means that after the volatility of the 1970s (yield, yield curve, stock markets, etc.) the Wizard said “never again!” and assumed complete control.

Yet I am not a bond market expert and am no authority on the machinations that the Fed uses in manipulating the bond market. So consider me a guy with a funny (to me) Outer Limits shtick who knows that something went on for decades after the ’87 crash and that something was biased toward disinflationary ‘Goldilocks’ macro signaling.

I also know that the crash of ’87 was a big event that drew a lot of attention, and continues to have an outsized legend (compared to more recent crashes) to this day. So, with respect to the chart above our job is to try to interpret the meaning of 2022’s volatile breakout in the yield as a bookend to the pre-1987 volatility.

The easy answer is that it’s the 1970s all over again. The more difficult answer is about the exponential levels of debt layered into the system today. Check out the graphic at this website, showing the debt levels by year. From that graphic I’ve selected 1987 (debt was 48% of GDP)…

…and 2022 (debt was 123% of GDP).

And yet the government continues to pretend that it cares about the debt while once again raising the debt limit.

How does this affect our investment orientation? Well, one interpretation is that yes it is like the 1970s, only more so. In other words, with respect to the inflationary 1970s, maybe we ain’t seen nothin’ yet. Why? Because the pressure on government to try to inflate away the debt must be immense. Nobody’s saying it, but perhaps the bond market is saying it.

It circles back around to the US dollar. If the government would try to use (fiscal) inflation as a means of escaping the debt trap, the USD will get hammered. If the market rebels and liquidates the gambit the USD will probably get a big liquidity bid.

Stay tuned. I am just another guy trying to interpret and I don’t have the whole puzzle figured out yet (obviously). But the literal view is inflation. The less literal view, in consideration of the debt leverage in the modern era, is deflationary liquidation. Input welcome.


This Post Has 3 Comments

  1. Armen

    What if other govs do the same? US is not most indebted as % of GDP. So I think USD in this case would be fine. Some non-inflatable assets may rise though, but not necessarily the companies that mine these assets.

    1. Gary

      Obviously, I am US-centric. But the projection is that USD is and will remain in a long-term bull market and can drop to the low 90s within that bull. With the US bond market painting such a striking picture of a broken trend I am thinking about the prospect that finally it is time for some ‘death of the dollar’ hype. But you are right. When one garbage currency is comp’d to another, does it really matter? Hence, gold, which has been struggling lately against most currencies other than USD. It’s all perception at any given time.

  2. Bart

    Well, there is government debt financed by domestic savings, and then there is government debt financed externally. Central Banks around the world are keeping a lot of dollars. And one day those dollars will find their way home.

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