Bonds!

[Spekulatius]

Crack in the bond market:

https://www.wsj.com/finance/jpmorgans-jamie-dimon-predicts-crack-in-the-bond-market-citing-u-s-fiscal-mess-9d90cb3f?mod=trending_now_news_3

 

https://archive.ph/THArZ

[wabuffo]

Crack in the bond market:

 

Spek - we already covered this upthread and my response to Jamie was:

 

lol.

Edited June 1, 2025 by wabuffo

[wabuffo]

I've gone through the logic of sectoral balances before - so I won't repeat myself.  But here is the single most important table one needs to understand US Federal deficits, domestic private sector financial health and reserve currency status (foreign sector net exporting to the US in order to save in US dollar assets).

 

Bill

 

[Spekulatius]

3 hours ago, wabuffo said:

Crack in the bond market:

 

Spek - we already covered this upthread and my response to Jamie was:

 

lol.

Jamie as a banker is incentivized to be extremely cautious. He also knows he got this administrations ear.

 

As far as cracks or not, it really depends not just on cold hard data, but also the implicit trust the bond market is having in the administration. I think Liz Mini Budget disaster in the UK is an example where the objective data wasn’t that bad and not the budget nit even that outrageously but the Mr Bonds collectively held a vote and voted “no confidence” and that’s was that.

 

Those who think it can’t happen don’t take into account the reflexive nature of markets, imo.

Edited June 1, 2025 by Spekulatius

[Blake Hampton]

36 minutes ago, Spekulatius said:

Jamie as a banker is incentivized to be extremely cautious. He also knows he got this administrations ear.

 

As far as cracks or not, it really depends not just on cold hard data, but also the implicit trust the bond market is having in the administration. I think Liz Mini Budget disaster in the UK is an example where the objective data wasn’t that bad and not the budget nit even that outrageously but the Mr Bonds collectively held a vote and voted “no confidence” and that’s was that.

 

Those who think it can’t happen don’t take into account the reflexive nature of markets, imo.

 

Watch him speak in the video I sent.

 

I really don’t think this is him being cautious — I think he’s genuinely trying to warn people. He’s been doing this for a while now, just not this blatantly.

[Blake Hampton]

Here’s arguably the most important American banker who’s ever lived, telling us that a credit crisis is looming and that the bond market is on thin ice.

 

Remember Buffett mentioning how he primarily focuses on balance sheets?

 

If you own anything that's dependent on well-functioning credit markets, you really ought to take a look at the balance sheet and figure out whether it can survive a relatively prolonged period without them. Jamie has been sitting here warning banks for years that they need to get their act together before shit eventually hits the fan—and, of course, almost no one listened to him.

 

I'm quickly coming to realize that this is seemingly a common trait among humans. If Congress had taken half a fucking second to consider anything Buffett has ever said, we might not be in any of these problems in the first place.

 

But, of course, no one wants to listen.

 

"Unfortunately, it may be that we need that to wake us up."
— Jamie Dimon

[Blake Hampton]

1000th post mfs

[Munger_Disciple]

FWIW, op-ed piece by Bill Dudley, former NY Fed President:

 

https://archive.ph/941to

[wabuffo]

I prefer the clear-headed thinking of that great economist and Veep, Dick Cheney, who said:  "Reagan proved that deficits don't matter".   This was in the context of the United States and its role as the reserve currency provider to the rest of the world.

 

The only constraint is inflation - the US Treasury is money good and the amount of securities will only go up because the US economy is generally always growing.

 

Bill

Edited June 1, 2025 by wabuffo

[Munger_Disciple]

45 minutes ago, wabuffo said:

The only constraint is inflation - the US Treasury is money good and the amount of securities will only go up because the US economy is generally always growing.

 

Bill

 

I am (slowly) coming around to this point of view. But how we tell if inflation is becoming an issue? Would rising LT treasury bond yield (or a lower USD) act as a signal of the problem?

[TwoCitiesCapital]

On 5/30/2025 at 6:17 PM, Libs said:

How come I hear so little about TIPS around here? No one fears inflation?

 

TIPS are only a decent inflation hedge if you wait around for the principle to pay. Otherwise, they're basically as bad as any other bond due to their overall interest rate sensitivity and the expectation that interest rates would rise in response. Look no further than 2022 when TIPS were just as miserable as most of the bond market and you were better off in cash/short-duration instruments vs TIPS. 

 

On 5/31/2025 at 1:38 PM, Malmqky said:

Not to hijack the bond thread, but If things really do hit the fan, don't we want to own businesses that come out stronger after crises (often because their lesser competitors get hurt)?

 

Fairfax, Amazon, Berkshires, JPM, etc.

 

In the long-run, I think this is the right approach. In the short-run I think it ignores that babies can, and do, get thrown out with the bathwater and I don't want all my babies in the bathwater. 

 

Fairfax went down significantly in 2008 despite minting billions on CDS. Fairfax went down significantly in 2020 despite have a fortress of cash/treasuries that they could invest in opportunities that also went down. Fairfax bucked the trend in 2022. 

 

So in 3 economic contractions, Fairfax was given credit in 1 of them. The other 2 times it went down significantly with the market despite being well positioned. Had you owned a small portion of bonds in those two instances, they could have been sold for a profit and Fairfax could have been purchased 10, 20, or 30% cheaper. 

 

I'm sure there are similar examples for Amazon, Berkshire, JPM, etc. 

[Blake Hampton]

1 hour ago, wabuffo said:

I prefer the clear-headed thinking of that great economist and Veep, Dick Cheney, who said:  "Reagan proved that deficits don't matter".   This was in the context of the United States and its role as the reserve currency provider to the rest of the world.

 

The only constraint is inflation - the US Treasury is money good and the amount of securities will only go up because the US economy is generally always growing.

 

Bill

 

I would say Reagan started the false ideology that deficits don't matter. Mandatory spending was a constant, while republicans always come in and cut taxes like clockwork.

 

Edit: Democrats also did their fair share.

 

I'd agree that "the US Treasury is money good," but I'd also argue you can have quite a bit of pain before the Fed decides to fulfill that promise. Every single time they bail out the system with liquidity is another test of confidence; I wouldn't expect them to do it until they absolutely have to.
 

It will be interesting to see how they try to spin it this time. Unfortunately, I don't think we'll have another pandemic up our sleeve to blame this one on.

 

Edited June 1, 2025 by Blake Hampton

[Blake Hampton]

What'll most likely happen is that orange son of a bitch will try to blame it all on Powell.

[Malmqky]

11 minutes ago, TwoCitiesCapital said:

 

TIPS are only a decent inflation hedge if you wait around for the principle to pay. Otherwise, they're basically as bad as any other bond due to their overall interest rate sensitivity and the expectation that interest rates would rise in response. Look no further than 2022 when TIPS were just as miserable as most of the bond market and you were better off in cash/short-duration instruments vs TIPS. 

 

 

In the long-run, I think this is the right approach. In the short-run I think it ignores that babies can, and do, get thrown out with the bathwater and I don't want all my babies in the bathwater. 

 

Fairfax went down significantly in 2008 despite minting billions on CDS. Fairfax went down significantly in 2020 despite have a fortress of cash/treasuries that they could invest in opportunities that also went down. Fairfax bucked the trend in 2022. 

 

So in 3 economic contractions, Fairfax was given credit in 1 of them. The other 2 times it went down significantly with the market despite being well positioned. Had you owned a small portion of bonds in those two instances, they could have been sold for a profit and Fairfax could have been purchased 10, 20, or 30% cheaper. 

 

I'm sure there are similar examples for Amazon, Berkshire, JPM, etc. 

 

Are bonds the best way to hedge/provide optionality during drawdowns? Curious to hear your thoughts (and others) on bonds compared to gold/oil/bitcoin, margin, and even just a cash position instead.

 

I've been lucky enough to have enough inflow where I've been able to ignore hedging/dry powder positions in the past and take advantage of drawdowns in other ways. Always happy to learn and hear different opinions however.

[RockNation]

1 hour ago, Malmqky said:

 

Are bonds the best way to hedge/provide optionality during drawdowns? Curious to hear your thoughts (and others) on bonds compared to gold/oil/bitcoin, margin, and even just a cash position instead.

 

I've been lucky enough to have enough inflow where I've been able to ignore hedging/dry powder positions in the past and take advantage of drawdowns in other ways. Always happy to learn and hear different opinions however.

Well when it comes to gold/oil/bitcoin, etc used as hedges for declining markets? you just don’t know what will be declining in value during a drawdown event - these things could be included in a drawdown so you’ll be unable to utilize them for liquidity to purchase what has just dropped.

Having enough cash inflow works well for a while as there is usually an opportunity for small amounts of money over time - but it is interesting to think about.. what is my margin of safety here? How much could this decline? How big is the position in my portfolio?… how quickly can I add if i wanted to or how quickly can I average my cost base down if a drastic market event occurred? Can this fall 50% and how will it affect me and my portfolio? 

As you build a larger and larger portfolio your inflows mean less over time as… you just wouldn’t be able to build a significant position in relative size to your portfolio to make a difference even if a large drawdown were to occur. You’d need SO much more money to have it make an impact per se. When you live through it enough times you see how it pays to always be ready for an opportunity as you say “ugh… I’d love to have access to liquidity right now” …. After that happens a few times you always find it convenient to have a stash of bonds or other liquidity. The bonds have yield at least which cash does not, but the optionality when you need it is the magic. Margin? Maybe if the party gets really good, but it’ll have its limits anyway, like how much would you be comfortable getting, how much will make a difference, when will things rebound, what changes after this event in the company or industry, is this the bottom, etc. 

You’ll find a sweet spot for where you’ll debate how much you want in fixed income at some point. Like suggested above, you don’t want all your babies in the bath water and to just be ready for the opportunity of a drawdown will feel/be appropriate. 

[gfp]

If the Federal Reserve cuts interest rates by 1% tomorrow, would that increase or decrease inflation?  And why?

[TwoCitiesCapital]

3 hours ago, Malmqky said:

 

Are bonds the best way to hedge/provide optionality during drawdowns? Curious to hear your thoughts (and others) on bonds compared to gold/oil/bitcoin, margin, and even just a cash position instead.

 

I've been lucky enough to have enough inflow where I've been able to ignore hedging/dry powder positions in the past and take advantage of drawdowns in other ways. Always happy to learn and hear different opinions however.

 

Depends on the drawdown. I think oil is a pretty good hedge again inflation. 

 

Gold is a hedge against negative real rates or political uncertainty. 

 

Bitcoin isn't a hedge at this time IMO. 

 

Obviously shorting stocks and buying puts is going to be a better hedge than bonds....if you're right on timing. 

 

I've had mixed success with puts so do the bulk of my recessionary equity drawdown hedges with bonds. 

[73 Reds]

14 hours ago, Malmqky said:

 

Are bonds the best way to hedge/provide optionality during drawdowns? Curious to hear your thoughts (and others) on bonds compared to gold/oil/bitcoin, margin, and even just a cash position instead.

 

I've been lucky enough to have enough inflow where I've been able to ignore hedging/dry powder positions in the past and take advantage of drawdowns in other ways. Always happy to learn and hear different opinions however.

Not sure I understand the question.  Why is optionality or liquidity only necessary during drawdowns?  Seems like buying power is necessary any time a desirable investment becomes available at the right price.  Drawdowns only tend to provide more such investments.  As some have alluded to, at least a portion of an investment portfolio should provide recurring income in the form of dividends, interest or distributions.  I don't like bonds, gold or BTC.  For me, the best all-weather investments are great businesses with pricing power, real estate and private, secured paper.

[Munger_Disciple]

On 6/1/2025 at 10:33 AM, wabuffo said:

I've gone through the logic of sectoral balances before - so I won't repeat myself.  But here is the single most important table one needs to understand US Federal deficits, domestic private sector financial health and reserve currency status (foreign sector net exporting to the US in order to save in US dollar assets).

 

Bill

 

 

This is a terrific table @wabuffo! Makes the point that govt deficit = private sector savings very well. 

 

However there has got to be a limit to how big govt deficits can get (as a % of GDP). Clearly, that limit is higher for the US govt than for other govts because USD is the reserve currency of the world, but still one would think there is a limit somewhere. And if the inflation is the result of such too high govt deficits, how can it be controlled?

[gfp]

6 minutes ago, Munger_Disciple said:

And if the inflation is the result of such too high govt deficits, how can it be controlled?

 

By slightly increasing or decreasing the level of deficit stimulus.  Ironically, at present, one of the easiest tools to accomplish this (lowering deficit spending stimulus) would be to lower the Fed Funds rate.

[Munger_Disciple]

1 minute ago, gfp said:

 

By slightly increasing or decreasing the level of deficit stimulus.  Ironically, at present, one of the easiest tools to accomplish this (lowering deficit spending stimulus) would be to lower the Fed Funds rate.

 

Yes that's true because govt debt/GDP is way too high (~100% or so) and that probably dominates the offsetting effect from private sector activity from higher/lower rates. But things like entitlements (SS, Medicare & Medicaid) where growth rate is much higher than inflation, would be much harder to control. I don't think lower ST rates will have much effect on the entitlement spending which seems to be on auto-pilot. 

[rogermunibond]

Moody's warning on private credit as systemic risk

 

https://www.economy.com/getfile?q=2107637A-C535-4AFF-83BC-6CBA1AD1FAB9&app=download

[rogermunibond]

Supplemental leverage ratio reform

 

https://www.ft.com/content/20df1236-4370-4c7d-b2ed-09e95aa04f01

 

 

[wabuffo]

Moody's warning on private credit as systemic risk

 

[Blake Hampton]

Stupid ass investing strategies with other people's money.

 

The true American way.