And here is another reason the bond bull is supposedly over from Karl at the Market Ticker. He's really good at making things sound like the end of the world, and has been for years, but the exponential mathematics he always quotes as being unsustainable never seem to arrive. Not saying he is wrong, but somehow the can is able to continue to be kicked for years and years.
I don't think this will change my allocation, just something else to think about.
https://market-ticker.org/akcs-www?singlepost=3424262
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No, the "risk" from "quantitative tightening" is not The Fed.
Yes, the reduction of their balance sheet will be a tightening.
But you're a fool if you think this is the only -- or even the largest source of such tightening over the next number of years -- 10 to 15 years from now, in fact and starting effectively now.
There is in fact, as of right now, $5.486 trillion worth of "tightening" that will take place between now and 2034 and it will probably start in permanent form within the next two years.
Where is it?
Social Security and Medicare.
The system holds bonds as a buffer between demographics. This is a good thing, by the way, because there are baby booms and baby busts in any economy. By holding bonds during "boom" times the system has the assets to pay liabilities during busts.
When it acquires said Treasuries it is effectively bidding for said assets, driving prices higher and yields lower than they would otherwise be. This has the same monetary effect as "Quantitative Easing" if the banks do not lend the 'money' they acquire by such sales to The Fed, and in the current cycle they have not.
But when Social Security and Medicare sell said bonds it effectively offers them into the market which drives prices lower and yields higher. This is exactly the same monetary effect as a Fed balance sheet reduction - - that is, "Quantitative Tightening"!
There is nothing that can be done about this; it is going to happen. If you try to raise taxes so the system doesn't have to sell its cache of bonds then you withdraw money from the system exactly as you do if you sell the bonds, so trying to mitigate the effect with a tax increase won't work either.
This isn't "bad" or "good" -- it just is, and is a function of the boomers going through the system. It cannot be avoided no matter what political or monetary decisions are made.
But this, along with The Fed being at or near zero, is why the 30+ year trend of ever-lower interest rates has ended and cannot extend.
Folks, virtually everything you know about financial leverage and how business works -- especially public firms that have been issuing debt like crazy to buy back stock (they're the only net buyers over the last five years, in fact) along with municipalities and the federal government to fund this and that are all predicated on ever-lower rates which allows you have more "money" outstanding for the same interest payment every time you refinance.
That is over.
It is mathematically over and inescapable.
I've written on this for years but nobody wants to hear it. Well, it's here folks. It's starting now. We had a couple of years where very small amounts of these trust funds were redeemed during the '09 timeframe but the fact that a steady and unrelenting drawdown was going to take place over the space of more than a decade was known then and in fact was known all the way back to the 1990s.
Yet companies continue to buy back stock with debt (which eventually must be rolled) and both the federal and state governmental units continue to issue more and more debt with no plan to ever pay it off which also must be rolled. This continual roll will run smack into the demographically-caused Quantitative Tightening starting now and accelerating through the next decade and there is exactly nothing that anyone can do to stop it from happening.
Why Wall Street continues to "reward" companies that pull this crap (such as Tesla) rather than drive them into the ground is beyond me -- but down this road lies bankruptcy for all of the firms that engaged in this tactic -- and that's most public companies. At the same time bankruptcy also lies ahead for both the Federal and State governments unless they can run permanent surpluses sufficient to pay not just coupon expense today but also the maturity of bonds so they do not have to roll them.
There is exactly one way to do that: Defang the medical monopolies and cut the cost of medical care by 80% now. We have less than four years to do it and have it all take effect and play out before the mathematics overtake us and the spiral gets to the point that it will be virtually impossible to change the outcome without basically zeroing all discretionary spending at both Federal and State levels.
We are out of time.