EPB Macro Research

An Update On The Bond Market May 10, 2021

Long-term bonds have been a powerful addition to any portfolio over the last few decades. Over the multi-year view, that will remain the case.
Long-term bonds perform poorly when nominal GDP growth is increasing or is expected to increase. This is because the long-term Treasury rate will move with the long-term fluctuations in nominal GDP growth.
High levels of government involvement in the economy, mainly in the form of transfer payments, will reduce long-term growth.
...

US Economy Showing Strong Cyclical Momentum Apr 29, 2021

Preliminary Q1 GDP data was reported and showed strong cyclical momentum in the US economy.
The housing sector and durable goods consumption sector continue to show outperformance, a positive cyclical signal.
It is highly uncommon to see an economic downturn while housing and big-ticket consumption are rising.
The secular economic conditions are still pressing downward, highlighted by a persistently weak measure of velocity, but there are no signs of downside cyclical...

Fiscal Stimulus: The Economy's Third Strike Apr 14, 2021

Interest rate policy has failed to generate an increase in the growth rate of real GDP per capita.
After interest rates reached the zero-bound, expansionary monetary policy in the form of Quantitative Easing was tried, and the results have proven ineffective.
After failed attempts to stimulate real GDP growth through interest rate policy and monetary policy, we are now attempting to generate lasting economic activity through fiscal policy.
Decreases in the marginal revenue...

Initial Conditions For Inflation: 1940s, 1970s & 2020s? Mar 19, 2021

A period of aggressive monetary and fiscal support has ushered in a consensus view of sustained inflation.
Today's initial conditions are far different from the start of the last two inflationary episodes in the 1940s and 1970s.
Inflationary pressure will emerge over the next couple of months, but transitory/cyclical inflation and sustained inflation are different.
Without a clean balance sheet, high real GDP growth, or a boom in demographics, sustained inflation will be...

The Money Supply Mystery Mar 03, 2021

Broad money supply has surged to record levels in the United States, causing inflation fears and overstated claims citing the US Dollar demise.
A money-centric view of the economy ignores our economic system's foundation, which states that money has an equally important counterpart - velocity.
It has become fashionable to denounce velocity as a measure of our economic and monetary system, but that still does not change what the measure of velocity is telling us.
Today's...

'Taper' Tantrum 2.0 Feb 22, 2021

Interest rates are rising with a speed that is being referred to as the "taper tantrum 2.0"
Are yields really rising due to an expectation of the Fed reducing the size of its balance sheet? No.
Yields are increasing because growth and inflation expectations are rising, combined with an uncertain regulatory backdrop adding fuel to an existing trend of higher interest rates.
The direction of interest rates (higher) is correct, but the speed is likely an overshoot, something...

Reflationary Momentum Has Not Subsided Feb 02, 2021

Cyclical equities continue to outperform large-cap "defensive" equities.
The Treasury curve is bear steepening as long-term yields rise and short-term yields remain flat-to-down.
Leading indicators of cyclical inflation pressure continue to point higher, which will pressure long-term bonds and support cyclical equities.
Corporate credit spreads highlight the exuberance and lack of caution in risk-assets.
While cyclical growth and inflation indicators remain higher, risk...

The Role Of Gold In Your Portfolio Feb 02, 2021

Gold plays a critical role in preserving wealth and should be considered in a context beyond a securities portfolio.
The long-history of gold and correlation to real interest rates makes gold a sound proxy on the price of money.
Gold also serves a separate role in a diversified securities portfolio, outpacing risk assets during large declines in real interest rates.
Investors should consider "linking" or "backing" a percentage of net wealth in gold, in addition to the...

Unintended Consequences Feb 01, 2021

Short-term interest rates are coming under pressure in a fashion that will require the Federal Reserve to defend the zero-lower-bound.
Rapid growth in total banking reserves will cause banks to lower the rate on some deposits to limit their balance sheet growth, which comes at a cost.
The demand for Treasury bills from money market funds and the Federal Reserve will outweigh the limited supply of new bills in 1H 2021 due to an overfunded TGA.
The Federal Reserve will be...

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