Michael Pento | Aug 25, 2023 04:03PM ET
The Fed's minutes for their latest meeting held in July showed the committee's interest in raising interest rates further due to upside risks to inflation that are already well above their target level. The Fed is also perpetually worried about growth, which of course has nothing to do with inflation. After all, people working and producing goods and services can never be at the root of inflation.
Nevertheless, the Atlanta Fed's GDP Now model claims GDP growth in Q3 will be 5.8%! This, of course, is compelling the Fed to power on with rate hikes with the specious logic that the central bank must bring pain to the economy in order to quell inflation. There is just not any talk about money supply growth, which is the primary issue at hand when it comes to the US dollar's purchasing power getting destroyed. The Fed avoids this discussion because it would then lay the blame for inflation at the feet of those in charge of the printing press.
The market’s misperception of a stronger economy is just one of the reasons to be cautious about going out along the yield curve at this time. Indeed, there are five other very good reasons to avoid owning long-term treasuries right now:
Contrary to Fed models, more evidence of the actual anemic state of the US economy can be found in the S&P Global PMI report. Business activity in the US private sector barely expanded in early August, with the S&P Composite PMI falling to 50.4 from 52 in July. This reading came in worse than the market expectation of 52. Manufacturing PMI dropped to 47 from 49 in the same period while the Services PMI edged lower to 51 from 52.4.
Commenting on the survey's findings, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence had this to say:
“A near-stalling of business activity in August raises doubts over the strength of US economic growth in the third quarter. The survey shows that the service sector-led acceleration of growth in the second quarter has faded, accompanied by a further fall in factory output."
The US economy should stumble hard in Q4 of 2023, or by Q1 of next year at the latest. The reasons for this are clear:
Therefore, while we believe Treasuries are a no-touch right now, they should begin to see big inflows once the labor market begins to crack and the recession begins to manifest. We first need to see an uptick in initial unemployment claims above 275k and/or the Non-farm Payroll Report numbers to descend below 100k before duration Treasuries will become a buy.
A recession will eliminate five of the six reasons to avoid duration bonds. Unfortunately, a contracting economy will also send deficits skyrocketing from their already disruptive amount of annual red ink. Therefore, whereas, labor market stress will provide a good timing signal to take on an allocation to the long end of the Treasury curve, given our government’s proclivity towards helicopter money and inflation, the sojourn towards lower rates should (unfortunately) not last very long.
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Michael Pento is the President and Founder of “The Coming Bond Market Collapse.”
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