Wednesday, August 2, 2017

Is the Maestro Wrong on Bonds?

Greg Robb of MarketWatch reports, Greenspan stresses ‘ominous’ worries about bond bubble:
On Monday, Federal Reserve Vice Chairman Stanley Fischer gave a 22-page speech, with charts, trying to explain that global interest rates appear stuck at historically low levels even as the U.S. central bank is tightening monetary policy. His angst crept through.

Hours later, Alan Greenspan essentially told Fischer not to worry so much about low interest rates. The former Fed chairman said the low level of rates won’t last, and when they move they are likely to move “reasonably fast.”

That should be the concern, he said.

“We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace,” the 91-year-old Greenspan told Bloomberg.

Greenspan didn’t say exactly when bond yields would move higher, but said it was inevitable.

“We are moving into a different phase of the economy—to a stagflation not seen since the 1970s. That is not good for asset prices,” Greenspan said.

Lindsey Piegza, chief economist at Stifel, said that Greenspan’s forecast was “ominous,” but noted that the former Fed chief has been “puzzled by low rates and low inflation for decades.”

It was almost exactly a year ago that Greenspan last sounded the alarm about a bond market bubble.
The Maestro is at it again, warning investors the real bubble isn't in stocks but in US long bonds.

It was exactly two years ago that Alan Greenspan sounded the alarm on bonds, and he was wrong then as he is wrong now.

And he's not alone. Last year I exposed other bond bubble clowns who were warning of the impending collapse of bonds.

In November after Donald Trump got elected, I warned investors that he won't trump the bond market (and right before he got elected, I told investors it's America's biotech, not Brexit moment).

At the start of the year, I dismissed the silly notion that it's the beginning of the end for bonds, and right now let me repeat my top macro conviction trade going into year-end which I stated in my last comment on the silence of the VIX, namely, to load up on US long bonds (TLT) while you still can (click on image):


In fact, I'm so convinced long bond yields are going to make a new secular low (meaning bond prices are headed much higher), I went from a barbell approach of biotechs (XBI) and US long bonds (TLT), meaning 50% biotechs and 50% US long bonds, to a bullet approach where all my money is in US long bonds (TLT).

I did this two weeks ago on a Friday and while I should have waited till last week, I'm not looking back and let me explain why.

In order for the Maestro to be right, US inflation expectations have to pick up in a significant way. This won't happen and to understand why, read Gary Shilling's recent comment on three things central bankers don't get about wages.

Shilling is a deflationista like me and hasn't budged in a very long time. In my comment on why Citadel's Ken Griffin is wrong about inflation, I stated six structural factors that lead me to believe we are headed for a prolonged period of debt deflation:
  1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
  2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
  3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
  4. Excessive private and public debt: Rising government debt levels and consumer debt levels are constraining public finances and consumer spending.
  5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
  6. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.
Folks, the six structural problems I've outlined above aren't going to get better, they're only going to get worse in the decade(s) ahead.

So do me a favor, the next time you see anyone on television warning you of the impendending bond bubble collapse, ignore them at all cost and remember this comment. They may have all the credentials in the world, but they're totally clueless about bonds and global deflation.

"But Leo, what about Trump's tax cuts and massive spending on infrastucture?" What about them? Too little, too late. I've been warning my readers to prepare for a US slowdown because no matter what the Trump administration does, it's coming full force and there's nothing it can do to stop it.

If you don't believe me, believe my friend Francois Trahan at Cornerstone Macro. Earlier this week he and Michael Kantrowitz put out a report warning of lower bond yields ahead (read it and subscribe to their research).

In an email to me on July 21st when I shared my macro conviction calls, Francois shared this with me: "We put a 1.5% target on the 10-year in our outlook piece back in January ... all 51 forecasts on Factset are calling for higher yields." I replied "Yup, I remember you in Montreal (in January), agree completely and yields might even go lower than your forecast."

In fact, let me make a bold forecast here: Yields on the 10-year Treasury note are headed below 1% and might touch 0.5% or head even lower if a global deflationary crisis develops.

"Leo, what's the matter with you? Have you been reading the doomsday garbage on Zero Hedge?" (to be fair, Zero Hedge is getting better). Nope, I am convinced the music will stop very soon and only US long bonds will save your portfolio from being decimated.

But Alan Greenspan, Ken Griffin, Paul Singer and many others think stagflation is coming and bonds are doomed. Yeah, whatever, I'll gladly take the opposite side of that trade.

Once again, my top three macro conviction trades going into year-end are listed below:
  1. Long US long bonds (TLT) is my highest conviction trade going into year-end, stay long & strong, US economy is slowing, bad economic data on the horizon.
  2. My other macro conviction trade is that the USD (UUP) will bottom soon and rally going into year-end. Start nibbling here and add to your postion. Global economy will slow and their currencies will start declining realtive to the USD.
  3. My third and last macro conviction trade is to underweight/ short oil (USO), energy (XLE) and metals and mining (XME) as the global economy slows. Sell commodity indexes and currencies too.
Below, Bloomberg reports on Alan Greenspan's bond bubble warning. Total rubbish, the real bubble now is in risk assets which comprise of stocks, corporate bonds, private equity, real estate, infrastructure, leveraged loans, commodities, commodity currencies & emerging markets stocks, bonds and currencies.

Some risk assets are a lot more vulnerable than others, tread carefully but my advice is stick with good old US long bonds (TLT) . When the going gets tough, your portfolio will be spared massive carnage.

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