This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration. Need a new registration confirmation email? Click here
Michelle started by saying that this call could be an epic one.
My view is that bonds, which were known as "certificates of confiscation" 30 years ago, could again be called confiscatory.
I started by giving a perspective on the bond market.
Bonds have returned close to 50% since the beginning of 2010 and, over the last 40 years, have lost over 5% in only four years: 1987, 1994, 1999 and 2009.
Stated simply, bonds are no longer risk-free assets; going forward, they are return-free assets with a lot of risk.
I cited five reasons for the end of the bull market in bonds:
diminished flight to safety;
flow of funds out of bonds and into stocks;
recovery of confidence;
rising inflation; and
the failure to address the U.S. fiscal imbalances (specifically, Europe has made progress, as evidenced by lower sovereign debt yields and rising markets).
Based on the schmeissing of gold, the fear trade might be over. (Gold is at a seven-month low relative to the
Guy asked whether stocks and bonds can drop at the same time, and I responded that there is ample evidence over history. Bonds can fall in price, even in a muddle-through setting.
I put 10-year yields into perspective; they are about one-half the yield of the recession 11 years ago. Bond holders today are accepting a negative real rate of return, as the 2.10% (now this morning at 2.20%) yield compares to the implied inflation rate in the 10-year generic TIPS at 2.32%.
Brian Kelly got into the next discussion. I said that, over history, long-dated bond yields track nominal GDP. Nominal GDP (currently about +4.3%) is the sum total of real GDP (now about +2%) and inflation (now about +2.3%).
Brian asked what value there is in shorting the 10-year when real growth is low, but I think he misunderstood the point I was making. It is not real GDP that yields track but the summation of real GDP and inflation.
Brian also asked my view on banks, a sector on which I was previously positive. I suggested that, given the robust rally this week (and over the last five months), banks should now be sold, as the economic recovery remains weak and that should trump the steepening yield curve. Net interest margin will remain pressured, and loan growth (especially in the seasonally weak first half) is disappointing. (Total domestic loans are barely up year over year). Meanwhile, fee income is limp, and expenses are elevated (as FICA and compensation costs are increasing). All of the above could abort the bank stock rally.