2021 Outlook For The Long Bond Yield, Equities And The VIX


  • Bond yields may rise during the first half of January 2021, equities should rise, and the VIX may decline. With RobinHooders running rampant, allow for overshoot in terms of time/price.
  • There's a recurring (even persistent) seasonal decline in liquidity flows after the first half of January which persists until the middle of March. This tendency may happen again this year.
  • This seasonal liquidity drought may be exacerbated by weak US growth outlook during Q1 2021, which may cascade into Q2. That could push yields and equities lower, and the VIX higher.
  • No technical growth recession in Q1/Q2 period, and if COVID-19 vaccines deliver their promise - these are unalloyed positives for growth but maybe not for the stock markets. Reason: There will be less pressure for the Fed and the Treasury to keep the money printers whirring. That's not optimal for stock markets, which have risen in lock step with the growth of global central banks' balance sheets.
  • If growth recovers robustly, that may force the Fed to end its unprecedented easy money policy sometime later in the year. Yields may rise, while stock markets could trend sideways, even fall. 2021 could very well play out the opposite of 2020 - the economy grows (and yields rise) but the equity markets fall or stay flat.

This 2021 outlook in fixed income, equities, and the VIX was prepared at the behest of our partners in Switzerland who were awed by the vast amounts of debt that the Biden government said it will likely issue in 2021 to forestall further worsening in the US economy.

Everybody is assuming that interest rates (bond yields) will rise given the huge amount that will be added to the deficit. But so far, all we have seen are narratives (very little graphical evidence), so we prepared this presentation to see just how the narrative stacks up, and compares to, the actual data.

The charts in the presentation are very "noisy" - there's a lot of data in every chart. It has been our experience that the juxtaposition of multiple data in one place has frequently provided additional information that would have been missed by striving for "clean charts," so our apologies in advance. The charts are labeled, however, so as to provide some clarity.

The origin of all the analytical platforms starts in September 2008, when the Fed started Quantitative Easing (QE). The period before that time are useless in the analysis of the behavior of asset class prices because the data pre-QE is totally irrelevant to the manner that asset prices behave today. Like it or not, assets prices are anchored to the rise and fall in money/liquidity coming from the US Federal Reserve and US Treasury.

Laying The Ground Work Of The Presentation

Here's the chart (below) laying the groundwork of this presentation.

  • US GDP vs. US total debt (issuance), Fed's balance sheet, bank reserves, Treasury Cash Balances (TCB).
  • The growth of debt issuance, Fed's balance sheet, bank reserves, and Treasury cash balance is countercyclical to GDP growth.
  • The growth of all these variables is response to the inverse growth of US GDP, to mitigate the loss of revenues (see chart below).

In September 2008, the Fed unleashed Quantitative Easing (QE1), creating money "ab nihilo," and bought government securities in the market. That expanded the balance sheet rapidly, and in the process, the level of bank reserves rose sharply. QE1 was followed by QE2 and QE3 one year apart (see chart below).

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Disclosure: I am/we are long ESH1, NQH1, YMH1, RTYH1, GCG1. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business ...

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