EPB Macro Research | Free 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.
'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...