CAMS Weekly View from the Corner - Week ending 10/11/24
October 14, 2024
There is a subtle scene in the movie The Big Short whereby a small cohort of market trader’s are meeting with an individual who is offering a narrated view that X issues are developing in the socioeconomic landscape. As a result he offers X opportunities exist in the markets’ landscape.
Like a dog hearing a whistle one of the lead trader’s of the cohort immediately looks to his screens to observe current market relationships relative to the topic.
What he displays with his near involuntary response to hearing X narrative is to get a sense of collective market participants downstream messaging via the then current day pricing and inter-market relationships.
While the referenced moment within the subtle scene escapes casual viewing what is displayed are experienced participants succinctly summing up sound socioeconomic observation and experienced markets’ participation.
Said observation and participation is a constant process of observing, asking questions, checking questions for validity, asking more questions based on X discovery of the initial questions, confirming current collective market participant assessments via various market relationships, checking outright trend behaviors to include market relationship trends which takes you full circle to more questions and on and on you go all while deploying capital in the process.
In this process, similar to the referenced Big Short scene, the offered narrative is one thing which at best is a starting point, at best.
Narratives are easily conjured up and the vast majority of the time they have an agenda behind them that best suits the people or entities that have created them or participated in propagating them to the masses.
For our part as soon as a narrative is offered questions rapidly arise to get our heads around its potential validity.
Below we offer a doozy that seriously questions the developing and growing narratives that price inflation is dead and the economy/employment landscape is or already has toppled over.
The Bond Market
In today’s edition we go back to the bond market – the smartest market as it is often referred to when discussing various markets.
There is an old adage relative to the bond market that offers when you are playing for basis points you better have your act together as a market operator.
As a fixed income product bond holdings can chew up your capital via outright losses or worse, via the “thief in the night” stealing your wealth unknowingly right before your eyes.
The thief in the night is also known as the “hidden tax” both of which identify price inflation.
Price inflation is the death knell of bond holdings. In light of this bond market participants are hyper-focused on price inflation.
With this they can radicalize on a trend basis what is supposed to be a sound and secure bond investment by moving its price up, down and all around.
If you mentally reply with “I hold bonds to maturity hence price movements do not concern me” you are left exposed to the thief in the night stealing your wealth via price inflation once maturity is reached.
Upon said maturity you realize your returned principal and interest payments left your wealth underwater when factoring in the cumulative price inflation you incurred while holding to maturity.
This is a succinct attempt to underscore the bond market is a very smart market that processes a wealth of socioeconomic inputs as prices are determined via collective bond market participant operations.
In particular it does not take kindly to price inflation backdrops regardless of how consistent or forceful a narrative may be that price inflation is no longer a thing.
Similar to our aforementioned Big Short scene they hear the narrative but they use a wealth of processes in order to confirm or deny the offered narrative.
Bond Market Messaging
Above is a two year relationship chart within the bond market.
The brown line depicts one of the long viewed “safest investments on earth” via an investment vehicle that holds 7-10 year Treasury bond maturity ranges.
The green line represents an investment vehicle that holds corporate bonds rated CCC. Triple C’s as they are known represent an area of the corporate bond market that are viewed - even in good economic times - as being one misstep away from life support. Simply, their risk is high hence their Triple C rating.
The displayed relationship of the two over the previous two years leans into remarkable. Simply put, the “safe” (brown line) appears to be dangerous while the “dangerous” (green line) appears to be safe. What?
Bond market participants have presented a wealth of pricing volatility for the long viewed safe Treasury securities while presenting a relatively stable pricing trend for the high risk Triple C’s.
This underlines how investments perceived to be safe can be treated otherwise by market participants and vice versa depending on the socioeconomic environment and how collective market participants process the environment via their market operations.
In recent time, via the two year chart above, Triple C’s have been the safe, stable and performing bond investment. Remarkable.
(Importantly, this is not an investment recommendation – we are using these as tools to display bond market messaging.)
Message Extraction
While we could offer multiple editions on the above messaging we will keep this succinct for this edition and address two stand-out items that are pertinent to narratives that are growing in popularity. They are price inflation is dead and the economy/employment market is or already has toppled over.
On a personal note just late last week I received an emailed piece offering we are already in recession – current day. We are? In addition I’ve seen a plethora of headlines lackadaisically offering price inflation – enough already – that is over let’s move on with the Fed rate cuts.
If we employ the use of corroborating evidence across the economic and markets’ spectrum it is a tremendous stretch to conclude – yep, we are in recession right now. Ditto that relative to price inflation.
Let’s allow Mr. Bond market to speak on the topic.
The Treasury market displayed above via the brown line is extremely focused on price inflation and to a lesser extent - as compared to Triple C bond market participants – the health of the economy.
As offered, Triple C bond issuers are one misstep away from life support even in good economic times so participants in this space are hyper-focused on the overall health of the economy.
In the far right corner of the chart we see Treasury bond market participants have sent Treasury prices straight down via our red arrow since the Fed announced their ½% interest rate cut coupled with their verbal messaging that a rate cutting cycle has only begun.
These participants clearly are not buying into the aforementioned narrative that price inflation is a done issue. Nor are they seeing an imminent economic recession let alone that we are already recessing.
If they collectively concluded we are heading right into recession they would be bidding up Treasury security prices and hence the brown line would be moving notably upward not down.
For their part Triple C bond participants have displayed no concern with the near-term health of the overall economy via our red circle depicting the steadfastness of these bond prices.
Rest assured Triple C’s would be taken to the proverbial wood shed if participants were concerned that recession was imminent let alone already upon us.
All told, relative to only two of several messages that can be addressed from the above relationship chart, the bond market (smartest market) offers price inflation is anything but dead. In addition, they are offering the near-term economic outlook remains in growth mode regardless of the growing popularity of narratives to the contrary.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Comments