E The Gift Of Clarity: Everything Isn't Complicated

In many ways, it’s pretty amusing how frustrated everyone is about the direction and meaning of interest rates, and how uncertain they are about the economy and the direction of stocks and bonds.  In my view, they should be just the opposite.  They should be saying “this is an obvious slam dunk.  Interest rates are headed DOWNward, and whether at the long or short end of maturities, you should be long bonds.  End of story.”  After all, when do you get gifts of clarity like that?

Kevin Muir of the Macro Tourist is a man I read unfailingly and, while I do not always agree with all of his takes or recommendations, he is invariably loaded with good reasons and empirical evidence to back up whatever he says.  But what is always true about Kevin’s fine work is his underlying theme of purpose, which is essentially that it does not matter what OUGHT to be happening, or whether what is happening is different from what ought to be happening (and therefore don’t highlight any observation of that nature…NO!)  Forget such considerations, says Mr. Muir.  What you want to know is what IS happening, and based on getting that observation right, what is more, likely to happen in the future…whether market direction or associated policy.  In other words, forget what is in your heart or your desire to be master of the universe and instead engage your eyes and ears and use your brain to summon up the history, analytical framework, and rational inference to PUT FOOD ON THE TABLE by harnessing rational probabilities.

So I look at the direction of interest rates—DOWNWARD—and what I see is “be long bonds.”  And as for associated policy, it doesn’t really matter to me what the Fed is going to do in the future or why they would do it.  And there are pretty much two choices on that.  They can either join the panicky ranks of Kudlow and Moore and get ahead of the curve and cut by 50 basis points now to try to stave off a recession, or they can wait and do so later, and thus follow the softening direction the bond market is indicating economic activity is already forecasting for the future.

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Farah Kincaid 2 months ago Member's comment

Yes, I'm a big fan of Kevin Muir as well. Definitely appreciate your bringing more attention to him.