The Good, the Bad and the Ugly Yields
Updated
I have this question... Why are high yields bad? What is bad?
We are in a period of big changes. There are lot's of balances changing, one of them is money. We have just passed (?) the biggest monetary experiment ever (QE) and we are about to enter the successor to that experiment, digital money. Digital money conveniently came about just at the time when hyperinflation became an expected reality. If you talked about hyperinflation 4 years ago, you were crazy, now it is expected (and perhaps actually coming).
... Instinct tells us that the unknown is a threat, rather than an opportunity. Instinct slyly and covertly compels us away from change and progress. ...
-Dr. Breen
In the center of the stages is the paradigm shift in yields. After decades of consistently lower yields, now we are expecting consistently higher ones. Many (including me) have prejudged themselves into believing that high yields are inherently bad.
I cannot conclude into what high yields are bad at. The title suggests that they have 3 faces, good bad and ugly. I can conclude that now, like always throughout history, we are rolling in a cycle.
Some things have changed in unpredictable ways. This unorthodox chart shows us that this year, we have lived through something unique. Perhaps this will be the way things move forward.
From the charts above I have tried hard to conclude into something. The only thing I have learned is the following:
Bonds are the new equities.
In QE world, lower yields made more money. How? Money printing and borrowing needs low yields for it to be popular. Immense liquidity bubbled everything and productivity skyrocketed. QE is the fuel of globalism. Equities paid out dividends, so higher equities led to even more money.
In QT world, higher yields make more money. How? Money burning and lending needs high yields for it to be profitable. Money makes more money, and every day it makes even more money. Commodity producers (GOLD*PPIACO as an example) and wealthy individuals/corporations/nations can enjoy this new era. QT is the fuel of war. Everything is precious and everyone fights for it.
In a globalized world, you could make money by being an intermediate entity. Now to make money you must actually own the resources and money. Rich get richer, and poor get poorer.
This is the purchasing power of the consumer dollar. Poor get poorer...
Poor get poorer when rich get richer.
These charts above are simple to understand and analyze. Down below I will add some of my favorite charts. These charts calculate the value of commodities compared to equities or money supply.
Commodity production bull-flags against equities.
Commodity production bull-flags against money supply itself.
The bull flag is against yields as well.
True Production Cost (PPIACO*yields) is bull-flagging (?)
PPIACO is used as a historical alternative to USOIL. For some reason, we cannot perform old historical calculations using oil.
They show that the commodities prove a big motive for everyone. Especially to those who seek war.
Would anyone in their clear mind expect WWIII to be talked about in the 2020s? With the knowledge we have collected throughout all these years, this would be out of the question! Yet, here we are, casually talking about it. Again, changes are happening but we are stuck in a cycle. All we can do about it is to understand where we are, and not constantly deceive ourselves and others into thinking otherwise. So there is a clear benefit into just realizing where we are, it is not financial profit, it is speaking truth.
Conclusion? This is a zero-sum game for consumers. Also, with bonds we are committing hubris. Bonds is a mechanism that helps money itself make more money.
Have you heard about the Ancient Greeks? They talked about the fact that when money makes money, it is Hubris (something like sin, only worse).
Equities gave more output than there was input, if someone includes long-term dividends. You working and making money is not Hubris (according to Ancient Greeks). Making a system which enables money to make money, then you commit Hubris. Consistently higher yields will help money make even more money.
Equities are facing Nemesis (compared to bonds). Bonds have just now committed Hubris. There may be many years until they face Nemesis as well.
Tread lightly, for this is hallowed ground.
-Father Grigori
PS. This movie "good bad ugly" was released in 1966, a period financially similar to the one we live now.
We are in a period of big changes. There are lot's of balances changing, one of them is money. We have just passed (?) the biggest monetary experiment ever (QE) and we are about to enter the successor to that experiment, digital money. Digital money conveniently came about just at the time when hyperinflation became an expected reality. If you talked about hyperinflation 4 years ago, you were crazy, now it is expected (and perhaps actually coming).
... Instinct tells us that the unknown is a threat, rather than an opportunity. Instinct slyly and covertly compels us away from change and progress. ...
-Dr. Breen
In the center of the stages is the paradigm shift in yields. After decades of consistently lower yields, now we are expecting consistently higher ones. Many (including me) have prejudged themselves into believing that high yields are inherently bad.
I cannot conclude into what high yields are bad at. The title suggests that they have 3 faces, good bad and ugly. I can conclude that now, like always throughout history, we are rolling in a cycle.
Some things have changed in unpredictable ways. This unorthodox chart shows us that this year, we have lived through something unique. Perhaps this will be the way things move forward.
From the charts above I have tried hard to conclude into something. The only thing I have learned is the following:
Bonds are the new equities.
In QE world, lower yields made more money. How? Money printing and borrowing needs low yields for it to be popular. Immense liquidity bubbled everything and productivity skyrocketed. QE is the fuel of globalism. Equities paid out dividends, so higher equities led to even more money.
In QT world, higher yields make more money. How? Money burning and lending needs high yields for it to be profitable. Money makes more money, and every day it makes even more money. Commodity producers (GOLD*PPIACO as an example) and wealthy individuals/corporations/nations can enjoy this new era. QT is the fuel of war. Everything is precious and everyone fights for it.
In a globalized world, you could make money by being an intermediate entity. Now to make money you must actually own the resources and money. Rich get richer, and poor get poorer.
This is the purchasing power of the consumer dollar. Poor get poorer...
Poor get poorer when rich get richer.
These charts above are simple to understand and analyze. Down below I will add some of my favorite charts. These charts calculate the value of commodities compared to equities or money supply.
Commodity production bull-flags against equities.
Commodity production bull-flags against money supply itself.
The bull flag is against yields as well.
True Production Cost (PPIACO*yields) is bull-flagging (?)
PPIACO is used as a historical alternative to USOIL. For some reason, we cannot perform old historical calculations using oil.
They show that the commodities prove a big motive for everyone. Especially to those who seek war.
Would anyone in their clear mind expect WWIII to be talked about in the 2020s? With the knowledge we have collected throughout all these years, this would be out of the question! Yet, here we are, casually talking about it. Again, changes are happening but we are stuck in a cycle. All we can do about it is to understand where we are, and not constantly deceive ourselves and others into thinking otherwise. So there is a clear benefit into just realizing where we are, it is not financial profit, it is speaking truth.
Conclusion? This is a zero-sum game for consumers. Also, with bonds we are committing hubris. Bonds is a mechanism that helps money itself make more money.
Have you heard about the Ancient Greeks? They talked about the fact that when money makes money, it is Hubris (something like sin, only worse).
Equities gave more output than there was input, if someone includes long-term dividends. You working and making money is not Hubris (according to Ancient Greeks). Making a system which enables money to make money, then you commit Hubris. Consistently higher yields will help money make even more money.
Equities are facing Nemesis (compared to bonds). Bonds have just now committed Hubris. There may be many years until they face Nemesis as well.
Tread lightly, for this is hallowed ground.
-Father Grigori
PS. This movie "good bad ugly" was released in 1966, a period financially similar to the one we live now.
Note
Yields are related to inflation, which inherently makes the consumer dollar less powerful. The point is that the consumer doesn't "enjoy" the advantages an investor does. One could say that a consumer can get in the game, and not lose purchasing power, by being an investor.It is still a zero-sum game. Wasting all your life chasing money doesn't get you far. Either money printing or commodity inflation pull the rug from underneath our feet. There is only one Earth and we share it, there is not more that you can get. Seek the true value in life.
I have learned that when I analyze charts with dollars as a denominator, they made no sense. Don't value things based on dollars. The same applies to your daily life, not just trading.
Note
Final Conclusion:The recession we are all waiting for may never come. In fact, it may have already passed. High yields may not be inherently bad for equities. Well in reality, high yields are not bad for strong companies, those who don't rely on borrowing. They are bad for weaker companies. Strong get stronger, and weak get weaker.
Consistently higher equities (or steady), with consistently higher yields, will lead to a consistently stronger economy for the US.
What can this chart tell us about the Dollar Milkshake? The final piece of the puzzle is a US economy overperforming the rest of the world. We have news that the IMF is expecting the UK economy to be in a recession next year. They didn't make the same statement for the US (because it is not showing immediate signs of recession).
US bond dynamics suggest substantial strength against EU bonds. This will push dollar cost much higher. Dollar Milkshake confirmed?
One final chart. This year, DJI-as-wealth dropped by 50% compared to bonds-as-wealth.
While futher downside can be expected, it is interesting to see the scale of the paradigm change, from equities to bonds. Money is a new superweapon?
Note
Similar comparisons can be made for other currency pairs:UK Pound vs Euro
USDJPY
After decades of Europe and Japan having zero yields, now it is perhaps the time they pay for their actions.
Note
Instead of US10Y-EU10Y we can plot US10Y/(EU10Y+1) - I add the +1 to keep the chart meaningful. We can also plot mod(US10Y) / mod(EU10Y+1)Again, Dollar to overperform Euro.
Note
I talked about good yields, bad yields, and just now I found out I forgot to talk about the ugly ones.I am really thankful towards CryptoTaoist who gave me this idea of analyzing SPX based on yield inversion. Credit goes to him/her!!!
This yield inversion is definitely ugly...
This scale of inversion has never been seen. I don't count the 1980s inversion because the QE experiment was in it's infancy back then.
But what does yield inversion mean?
It calculates the amount of money creation and money destruction.
With this chart below, I naively attempt to plot the chart that calculates the following:
How good is SPX performing based on the current rate of money creation?
It seems that the recession we were waiting for it to come in 2022, well... it didn't come. It seems though that it is about to come up...
If we divide by M2SL, we get further verification that this here is a possible terminal ceiling.
PS. DGS2 gives us old data, that US02Y simply doesn't.
Note
I don't analyze all of these exotic charts in an attempt to "wake anyone up". I have the passion of sharing what I discover the moment I find it. No matter how small or big, how important or irrelevant it is, I must write it down.Perhaps this platform might not be a place to analyze and re-invent tools like the yield curve. Sadly, there is no other place to my knowledge where one can analyze and discuss the truth behind what we see in the financial world. Furthermore, I cannot be certain that all of these are true, if I don't discuss them with people who are interested. Just like traders get trapped in their actions, so do I.
Note
Made a mistake on one of the last charts regarding US10Y vs EU10Y...The mod-yields chart is as follows:
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