BOND INVESTORS SHOULD WAKE UP (Guest: Guenter Grimm)

Guenter Grimm, founder of Zurich-based GGMA and a 30-year FICC veteran who worked at Goldman Sachs, JP Morgan, UBS, and Credit Suisse, argues that bond investors are structurally asleep because benchmark constraints force passive buyers to hold long duration automatically, without active consideration of risk. Fiscal spending continues unchecked precisely because the bond market has not punished politicians for deficit spending. Grimm says he would be short duration in the current environment given fiscal risks and bond market complacency.

Equity traders read the most recent Fed press conference as dovish while fixed income and STIR traders viewed it as the most hawkish conference they had seen. Grimm believes Kevin Warsh is being deliberately hawkish as a strategy to bring long-end yields down and anchor inflation expectations, with the ultimate goal of lowering rates over time. Two-year and three-year yields spiked and the curve flattened after the meeting, which Grimm treats as validation. Warsh has abandoned forward guidance, forcing market participants to independently forecast labor data and CPI, and Grimm raises the possibility that 50-50 pricing on a hike or cut becomes the new norm. His base case is no hike at the upcoming meeting, partly because oil price declines have improved the inflation outlook, and he notes that in modern Fed history a cut or hike has never occurred without being fully priced roughly three days before the decision.

On oil, Grimm says both the US and Iran have incentives for lower prices, and he thinks the pendulum may swing toward undershooting, with prices potentially falling to the low 50s or lower before finding a structural floor. The one-year inflation swap has already fallen from approximately 320 to 220 basis points over the last couple of months. Lower oil feeds into lower headline and core inflation and relieves central banks from pressure to hike. He breaks nominal yields into real yield, expected inflation, and credit risk premium, noting the 10-year real yield is just above 2 percent and the 30-year real yield is approximately 2.8 percent, representing passive tightening already occurring in the system.

On the longer-term inflation outlook, Grimm draws on Charles Goodhart's book The Great Demographic Reversal, arguing that shrinking workforces put upward pressure on wages, the China disinflation shock from cheap manufactured goods may be reversing, and de-globalization remains ongoing. He argues the anomaly was the low inflation period before 2022, not the spike itself, and that 3 percent may be the new 2 percent as a long-term baseline. Powell stated at the FOMC press conference that the inflation target is 2.0, not simply a 2 with flexibility on the decimal. Grimm also argues the Fed may try to engineer a negative wealth effect by pushing stock markets lower to tighten financial conditions, and notes Powell implied at Jackson Hole that the balance sheet created financial wealth rather than real economic wealth.

Grimm sees gold as a portfolio necessity rather than a trade. Central banks buying gold instead of dollars represents a structural shift that accelerated after the confiscation of Russian reserves, and central banks will likely keep real rates too low over the long term, providing a durable floor. Gold corrected for almost six months at the time of recording, with COT positioning reaching the zero percentile and CTAs flipping short. At around 4000, gold carries approximately 10 percent downside risk with a possible floor near 3600, while a subsequent rally could offer 20 to 40 percent upside, creating asymmetric risk-reward to the long side, though Grimm stops short of confirming a low. He does not view Bitcoin as having fulfilled the reserve asset role that gold has based on price action.

On equities, Grimm estimates short-term CTA trigger points sit around 7350 to 7400 on the S&P 500, and that a 5 percent correction to approximately 7100 would trigger nearly every CTA sell signal and pull vol control funds into the selling. The Nasdaq composite is showing distribution characteristics more pronounced than at any prior point in the current cycle. Google executing what he describes as the largest secondary offering in history at approximately 85 billion dollars, combined with rising share counts across the Mag Seven after a decade of buybacks, represents supply large enough to cause the market to hiccup. He estimates total current IPO supply at roughly 300 billion dollars, nearly triple the approximately 115 billion dollars seen during the 2021 to 2022 cycle. Grimm predicts a nasty July correction of roughly 8 to 10 percent, potentially bringing the index to around 7000, and sees Anthropic and OpenAI IPOs potentially launching in August or September as likely representing a market top. As of the June 23rd COT reporting date, large speculators in S&P 500 futures are at the 100th percentile of their 52-week positioning range, a degree of crowding he says creates stress points capable of causing squeezes or washouts.