BUY BONDS

This is pure hypothesis here and almost back of envelope thinking...

But something came to me right as I woke up this morning.

What if, the market only goes down based off a big negative delta on the rate of change of global central bank liquidity on aggregate?

Hear me out...

Through 2023, we have seen QT sort of level off heavily.

ECB actions have been offset by Japan and China, leading to the rate of change in decline of quantitative tightening decreasing heavily.

It's probably easier to view it here...

In the context of how harsh the decline in rate of change has been, going from peak positive delta to the most negative ever is a big deal...

And then for it to pause and start reverting again, especially in the context of OK growth in the US, inflation declining and the pandemic having receded massively...

For the reversion to take place into those GOOD conditions is quite something.

The liquidity trap...

Yes, I know.

Only you David, you complete autist, could wake up and think about the liquidity trap.

But I did, purely because it's bothering me that the market is disobeying the TeXtBoOkS (not really, the market just exists in its own vacuum of human irrational decision making on aggregate).

From Investopedia...

The term was first used by economist John Maynard Keynes, who defined a liquidity trap as a condition that can occur when interest rates fall so low that most people prefer to let cash sit rather than put money into bonds and other debt instruments. The effect, Keynes said, is to leave monetary policymakers powerless to stimulate growth by increasing the money supply or lowering the interest rate further.

The thing that's bovvering me, is that consumers don't just act on a nominal basis, they act with inflation in mind...

And so if rates are so low at zero, what's to say that consumers don't think the REAL liquidity trap occurs at effectively negative rates with inflation included?

I feel that this can sort of be shown by how only now, yields on bonds are becoming heavily attractive.

Take a look at this FT article...

Why has this preference only occurred now?

Of course, fund managers aren't the consumer, but it feels like the real rate of interest is more important than the nominal rate...

Of course, however, it's obvious that a central bank dropping rates to near zero is effectively saying, 'we need more inflation,' meaning the real rate will be low anyway...

But in the context of our current situation with the reversion in RoC delta of aggregate central bank balance sheets, the fact that higher yields are now attractive to investors probably shows the level at which the real liquidity trap lies.

I mean, here's the real rate of interest for 2022...

No wonder bonds have been trounced, ay?

But following the example above, there's a screamingly obvious trade idea kicking up here.

I'm not a fan of picking bottoms, but I do like the sound of UK gilts here - follow the pensions money (they do infact know best, although their timing can be rather off).

If we follow the logic of the US' real rates, I think the UK looks tastiest here with regards to the potential delta between rate of change of inflation (disinflation) and how sticky interest rates are likely to remain.

You're sort of playing the BoE's incompetence off against them.

They are likely to be slower to act on the disinflationary effect (explained in article below from a month or so ago) than they should be...

So the bet you have to start making is this...

Do you think real rates are likely to increase from here, or continue decreasing?

And based on this...

Act accordingly 👇👇👇