Update: We have published Black Diamond Bay - August 2019!
Black Diamond Bay
More than 90% of developed market government bonds were trading at lower yields than the Federal Funds rate before the Fed dropped rates by 25 basis points on July 31st. As trading opened on August 2nd, 10-year Treasuries traded at a 1.87%, its lowest since 2016. Virtually all government bonds trade at negative real (i.e. inflation adjusted) yields. Competing with roughly $14 trillion of negative interest rates in Europe and Japan, the Federal Reserve inched rates below the official rate of inflation (it was already well below the actual rate of inflation in my view based primarily on weakness in the global economy (its concern about inflation, as discussed below, is profoundly misplaced). The July rate cut constitutes another in a long line of critical policy errors committed by a haggle of academics clinging to discredited theories and broken models.