The bond market rout is far from over

Sell-side analysts and fund managers would have you believe otherwise

2022 was the worst year in the bond market since 1871 with a drop in bond values of almost 16%. 2023 is on track to be worse still. Buyers of U.S. treasuries are becoming wary of the risks and bond auctions are less well-attended now than in the past decade. Federal Reserve chair Jerome Powell sees the market forces helping him curb inflation and is extending the pause in rate rises for the time being. He could not be more wrong.

“Experts” on Bloomberg, BNN, MSNBC, CNBC and a host of other financial news media shell out optimistic reasons to “buy buy buy” and tout already overpriced technology stocks as “sure to rise” owing to AI and “the next technology revolution” already underway, in their eyes. But the only real value in the market today is resource stocks with clean balance sheets and low operating costs. Inflation eventually drives up the cost of commodities just as it drives up the costs of everything else. Resource stocks get pummeled in the recession only to emerge stronger in the ultimate recovery.

The mid-East war is triggering higher prices for oil. Expect that to continue.

Higher energy prices are the primary contributor to inflation worldwide and the “progress” in curbing inflation that central banks credit to their monetary policies is in actuality a result of softening oil and gas prices, a temporary phenomenon. Silly “climate” policies are manfesting themselves in less capital going to into fossil fuel development and money squandered on so-called “renewables” is not displacing demand for fossil fuels, it is just raising the cost of alternatives which are now demonstrably both costly and unreliable. It will be fun to see the effect of the coming solar eclipse on the power grid when it occurs qutie soon.

Some analysts now see US$150 oil in the cards versus about $90 today. A 70% rise in oil prices will see inflation rise by several hundred basis points despite dampening global growth in real GDP by about 1%. Higher inflation will led to an even deeper collapse in homebuilding, more militant unions like the auto workers holding out for a 30% raise, and many households unable to make ends meet. The dream of a “soft landing” is just a dream, a hard landing is on its way.

The stalemate in the House of Representatives isn’t helping. Democrats blame Republicans despite reality that only a handful of Democrats voting for a Republican speaker will break the stalemate, but they would prefer to play brinkmanship and watch as legislation needed to prevent a government shutdown fails to make it to the floor. The Democratic hope that Republican will vote for Hakim Jeffries and cede to the minority the speaker’s seat is fantasy. Why would a majority party cede power to the minority?

The mid-East crisis is more likely to deepen than abate. Massive protests in support of Palestine seem to have cropped up now only in Arab states like Yemen but also in Australia, Canada, United States and Britain, despite the reprehensible violence inflicted on innocent Israeli’s by the militants of Hamas and Hezbollah. All out war seems inevitable in the region. Among other things, that will limit oil supply. Europe is on edge over the availability of natural gas for the coming winter despite quite high storage levels. A cold winter will deal Europe, particularly United Kingdom, a losing hand.

In the midst of all this, the “hold to maturity” bond portfolios of U.S. major banks are underwater by several hundred billion dollars, the commercial realty debt those banks hold and mortgage portfolios are similarly stretched, and a serious banking crisis can’t be ruled out. A deep recession is likely but not before extremely high interest rates occur as a result of monetary policy, excess borrowing by sovereigns in U.S. and Canada and Europe, and a buyers strike in parallel with inflation’s dogged persistence.

The scenario is eerily similar to earlier crises like the 1987 market crash or the 2008 global financial crisis - both the result of policies that preferred ideology to common sense and fiscal prudence.

Keep your head and your ass down, and keep a cash reserve to capitalize on the inevitable collapse in equity prices sure to follow.