This turbocharged debt cycle will end miserably — it’s just a matter of when
This turbocharged debt cycle will end miserably — it’s just a matter of when by David Rosenberg via The Burning Platform
It is clear that it would have been a very hard sell a year ago that every single risk-on asset class from equities, to corporate bonds, to commodities would end up rallying as much as they did in 2019.
And so perhaps the message for 2020 is to fade all the optimism since fading the pessimism a year ago paid off very well. The sharp slide in Treasury yields this past year does not exactly comport with the risk-on view that has morphed into the consensus forecast.
Fed policy, the trajectory of GDP growth and global economic fundamentals in general all tell a cautionary tale. Both bonds and stocks can’t be right at this moment in time.
We have to choose which asset class has the story right, and history sides with the Treasury market. So, that indeed is how we are tilted for 2020. Defensively positioned — again. In addition, from a total return perspective, a near-20 per cent gain in the long bond not only didn’t hurt you, but meaningfully outperformed the S&P 500 on a risk-adjusted basis and by not having to take on any inherent equity (capital) risk.
Another year of double-digit returns on the highest quality, long duration bonds is our expectation
Right now, it is critically important to get as close to the truth of clients’ risk tolerance. There have probably never been as many characteristics of a top as we are experiencing today. At some point, as unpopular as contrarianism can be, we all need to ponder deeply about Bob Farrell’s Rule #4:
“Exponentially rapidly rising or falling markets usually go further than you think but they do not correct by going sideways.”
No one really knows how far up the top is, but what happens after the top does not fit into very many people’s risk tolerance. In the meantime, another year of double-digit returns on the highest quality, long duration bonds is our expectation and the interest rate risk associated with them is entirely manageable from my perspective as a market economist.
While I cannot pick the date, I can tell you that this turbocharged debt cycle will end miserably, not unlike 2008 and 2001. Don’t try to time the inevitable mean-reversion trade. Just heed this first Bob Farrell rule of investing on ‘mean reversion’ and know that it’s out there. In nearly 11 years the S&P 500 has soared nearly fivefold to multiples (on earnings, sales and book value — take your pick) we have only seen twice in recent history.
There really is no reason to wait for the herd to head for the exits
Corporate bond spreads off Treasuries are squeezed to levels that fall well short of compensating for imminent default risks, and there really is no reason to wait for the herd to head for the exits. That time will come sooner rather than later because Mother Nature will not tolerate leverage and multiple-expansion supplanting corporate earnings and productivity growth indefinitely.