Where The Next Big Bond Trade Is Hiding | Harley Bassman
Episode publishedPodcast: Forward GuidanceForward Guidance
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What's up, everybody? Just wanna take a second out of the show to talk about the next major block works conference that's happening. Permissionless 3 is a leading crypto conference, and it's gonna be happening in Salt Lake City this year from October 9th to 11th. There's gonna be some major legendary speakers there from the likes of Balaji, Chris Dixon, and macro veterans like Dan Tafiaro will also be there. Not only that, but we're also gonna be doing a live recording of the weekly roundup guys in Quorum edition. So you can come meet myself and Tyler and Quinn and even Mike. If you're interes
Good morning. Great to be here. Thank you.
Yeah. Excited to have you here. You know, I was just reading your report, that you put out a couple weeks ago on on your website, and I think there's some, you know, very important components of that article that I'd love to begin with discussing on. And the first thing I'd love to discuss on is what the market has priced in in terms of the Fed rate cutting cycle that we have that just began a couple weeks ago. And first off, I'd love for you to explain this this idea of, you know, these these, no arbitrage forward rates idea. And that, you know, a lot of people folks will look at them and see
Forward rates are are are very tricky, and this is probably the part where you fall asleep, so please try to stay awake. If you remember the book Liar's Poker, where the Solomon guys are making all this money, this magical money machine they had, what was happening there was that they were figuring out how forward rates worked before anyone else did and just basically taking free money off the table. Forward rates are not a prediction of the future. They're the arbitrage free price where there's no money can be made. So a simple example of a forward rate is, grandma can buy a 1, a 1 year treas
everything you just described, you know, we can see here in just comparing the the 3 months SOFR, which is just that that market implied forecast that you mentioned versus the the Fed median dot plots from the recent meeting. And, yeah, as you can see, they they both net out for around a similar terminal funds rate of, you know, roughly, you know, 2.9 to 3%, something like that. But the speed at which we get there is very different. So I think, you know, there's a lot of confusion where I've seen some folks, you know, say that, oh, the bond market is pricing in a recession. You know, there's d
not pricing in a recession. It's practically a crash landing. I mean, to go that far, that fast, things are gonna get really nasty. And as far as I'm concerned, none of the data shows that. I mean, we have, you know, GDP is cooking along at, you know, almost 3, GDP now from Atlanta. Fed is at 3 or thereabouts. I wouldn't call that a recession. Nominal GDP is at 6 almost. Like, that's not a recession. So, I mean, something could happen? I suppose. But, I mean, you're really gonna be rather dire to go and say that. But there's 2 things happening here. One over here, which we're hitting on right
So if you know, if you're buying the long bond here, you're basically betting on a a pretty significant recession at this stage. Correct? Oh,
yeah. Oh, I mean, yeah. As as we say, power windows down. Yep. Okay.
So you mentioned a few things there around just, you know, inversion of this yield curve, and I think this is something that's thrown a lot of people off. So here's just a chart of of the 10 twos and the 10 3 month. The 10 twos has has normalized back to positive. The the 10 year, 3 month is is still negative, but starting to head higher here. Thi
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