David Hay: The Fed is Going to Overwhelm the Bond Market with Supply
Tom welcomes back David Hay author, Co-Founder and Co-CIO of Evergreen Gavekal. David discusses various economic indicators that may signal the beginning of a recession. Tightening of credit conditions, with credit spreads expanding rapidly, and how the recent events in the Middle East have affected the safety trade for US Treasury bonds. David expressed concern about the current federal fiscal funding situation and its potential consequences. He also mentioned the conflicting views in the market between short-term investors and long-term investors, which is creating tension in the bond market.
They discussed the Federal Reserve’s policies and how they have continued to increase interest rates despite the slowing economy, which is starting to impact the real economy with higher borrowing costs and tighter credit conditions. David also shared his observations about the job market and the economy, noting the strength of nominal GDP but attributing it to the large deficit spending.
They also talked about the current trends in the nuclear energy industry and how China and Russia are leading the way with new technologies, while the US is lagging behind. Environmental policies and the importance of separating fact from fiction in the green energy transition. Additionally, they touched on the current state of the oil industry and how it has managed to maintain record levels of production despite lower drilling activity. Lastly, David highlighted the importance of having dry powder, or cash, to take advantage of opportunities during market crashes.
Time Stamp References:
0:00 – Introduction
0:45 – Credit Contraction
3:36 – Bonds As Safe Havens?
5:41 – Treasury Demand
10:28 – Investor Sentiment
12:34 – Policy Lag & Labor
15:30 – GDP Strength/Deficits
18:25 – Fed & More Q.E.
21:20 – Dollar Strength & Gold
27:16 – Tech Bubbles & A.I.
30:00 – Energy & Nuclear Outlook
36:56 – SMR & Public Opinion
40:20 – Renewables & Realism
45:29 – Oil Industry & Drilling
50:40 – Natural Gas
52:49 – Bonds Now & 1987
55:06 – Wrap Up
Talking Points From This Week’s Episode
- Evidence of a slowing economy with nominal GDP growth slipping, inflation cooling, and earnings, GDI and tax revenue falling.
- Increased borrowing costs and tighter credit conditions having an affect on housing and retail markets.
- Unexpectedly high oil production in the U.S. despite decreased drilling activity, which could lead to higher prices in a recession.
David Hay is a longtime investment advisor and financial author from Bellevue, Washington. He and his wife, Mindy, now split their time between the Northwest, Southern California, and a few places in between (their two dogs love long road trips). They have six grandchildren, three of who live on the West Coast and three on the East Coast. Dave is desperately hoping for a better world for his grandchildren to grow up in than the one we have right now. In that regard, Dave is an ardent supporter of No Labels, a bipartisan political movement that currently includes roughly 70 members of Congress. He is the recently appointed Co-Chairman of No Labels’ Washington State organization. You can find his financial writings on his substack linked above on a weekly basis.