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Jurrien Timmer

@TimmerFidelity

13 Jan

Is neutral the new restrictive? The economy has become so levered to low rates, perhaps a return to 2% is all that the Fed can do, or needs to do. Take a look at this chart, and I'll explain. (THREAD)

In the past, the monetary policy pendulum would swing all the way from 2-3% below R-Star to 2-3% above. That was the full Fed cycle. But in 2018 it only made it back to neutral, before the markets started to seize up. /2

So maybe neutral is the new-restrictive. Indeed, my bond model above suggests as much, with 2% as the upper bound of a rising range. /3

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Jurrien Timmer

@TimmerFidelity

17 Dec 21

Despite the choppy price action this year, Bitcoin’s network continues to grow unabated. Per Metcalfe’s Law, I expect that this growth will continue to underpin bitcoin’s valuation. (THREAD)

We tend to look at price, but for me valuation is the more relevant metric. Here we see bitcoin’s “price-to-network” ratio. Bitcoin’s fundamentals explain a lot of its meteoric price gains. Metcalfe’s Law at work. It’s not just about S2F. /2

While bitcoin’s network is growing steadily, Ethereum’s network is growing rapidly. Scale vs Scarcity. /3

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Jurrien Timmer

@TimmerFidelity

16 Dec 21

Curb your enthusiasm? The CAPE model for stocks, and its equivalent for bonds, don't suggest a stellar 2022. In fact, the trailing 10-year P/E ratio for the S&P 500 (37x) bodes poorly for the return expectations over the next 10 years. But there's more to consider. (THREAD)

Here is the relationship shown in a different way. The actual 10-year CAGR has diverged quite a bit from the model in recent months (i.e. it is stronger than the model predicted 10 years ago). So maybe that model is not the best way of looking at things. /2

The bond equivalent of CAPE (which holds that the current yield-to-maturity is what an investor will earn if holding the bonds to maturity) hints at low nominal returns and negative real returns from bonds. /3

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Jurrien Timmer

@TimmerFidelity

16 Dec 21

How have nominal yields remained so low? It's one of the true conundrums of 2021. (THREAD)

If you told me a year ago that the economy would be running at beyond capacity (measured by the spread between the U3 unemployment rate and “full employment”), and that inflation would be near 7%, a one-handle would not have been my base case for the 10yr. /2

Maybe the answer lies in the four Ds: debt, demographics, disruption & digitization (hat tip to Eric Peters of One River Asset Management). Perhaps those secular forces override any cyclical concerns about supply chain bottlenecks. /3

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Jurrien Timmer

@TimmerFidelity

1 Dec 21

Following up on my previous thread, which pondered what it takes to force the Fed's hand, this chart shows the 2015-18 tightening cycle in detail, and illustrates how much financial conditions have played a role in Fed policy. (THREAD)

The top panel shows the official Goldman Sachs series overlaid on my constituent factors. The bottom panel shows the Fed Funds target rate and a series of forward curves taken at different points in time. /2

During the 2014-16 phase, the spike in financial conditions was driven mostly by credit spreads and the dollar (and eventually stocks). In December 2015 the Fed finally raised the Fed Funds rate for the first time since the Great Financial Crisis. /3

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Jurrien Timmer

@TimmerFidelity

1 Dec 21

What’s next for the Fed? The Chairman made plenty of news yesterday, but IMO it all comes down to financial conditions. The GS Financial Conditions index (GSUSFCI) is a real-time look into the financial economy, which tends to lead the real economy. (THREAD)

Financial conditions are at their all-time loosest. Perhaps this is why the Fed is hinting at speeding up the timeline. To me the bigger question is: What needs to happen for the FCI to tighten, and by how much, in order to cause the Fed to pivot back to a more dovish outlook? /2

The chart above shows that, in both 2016 and late 2018, a sharp tightening of financial conditions forced the Fed’s hand to either slow down the cycle or reverse it altogether. We are far away form that outcome, it seems. /3

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