End of the 40-Year Bull Market in Bonds: An Exclusive Debate
In a debate hosted by renowned short-seller Bill Fleckenstein, bond bull David Rosenberg and macro researcher Jim Bianco discussed the future of U.S. Treasury Bonds. Despite the current yield of over 4% on the 1-year, the question of their long-term safety remains.
Bianco's Perspective on the Economic Cycle
Bianco opened the debate with his belief that the long-term economic cycle took a turn in 2020. He stated, "the 40-year bull market in bonds ended in August of 2020 when the 10-year yield hit 51 basis points on closing." He linked this cycle to the financial crisis and recession caused by the Covid-19 shutdown in 2020. Bianco suggested that such crises and recessions always bring about changes in the economy.
According to Bianco, we are now in a period of higher nominal growth and stickier inflation at around 3%. He noted that the first move in interest rates from 0 to 5% was extremely painful for bond investors as there was no coupon to cushion them. However, he predicts that interest rates will settle in the 4 to 5% range, warning of an inflation problem in the latter half of 2025 due to overstimulation.
Rosenberg's View on Inflation
Rosenberg disagreed with Bianco's view on inflation, stating that inflation has come down almost as quickly as it rose. He attributed the inflation spike to the severe depletion in the labor supply caused by the pandemic, coupled with stagnant productivity growth. He believes that the Covid stimulus has largely worn off, and with an increasing labor supply and rising productivity, inflation will be killed off.
Rosenberg also pointed out that businesses were forced to digitize and automate due to the lockdowns, leading to increased efficiency and reduced labor costs. He warned of a potential black swan event that could bring back inflation - the "One-Party Rule", wherein either the Republicans or Democrats control both the Presidency and Congress. He also predicted increasing oil prices and shipping disruptions if the conflict between Israel and Iran escalates.
The Debate on Inflation Continues
Bianco countered Rosenberg's argument by stating that inflation is here to stay due to rising housing prices and increased immigration. He also pointed out the high level of government spending, which he believes will keep the inflation rate sticky due to the massive demand push.
The "Animal Spirits" in the Bond Market
The debate also touched on the emotional swings of bond traders. While Rosenberg insisted that the bond market is purely mathematical, Bianco and Fleckenstein questioned whether bond traders are as susceptible to emotional swings as equity traders.
The Fed Cutting Cycle
Fleckenstein highlighted the unusual sell-off in the 10-year after the Fed cut the FFR by 50 basis points. Rosenberg dismissed this as a common occurrence, stating that there's always an initial knee-jerk risk-on trade after the first cut.
Bottom Line
The debate between Bianco and Rosenberg provided valuable insights into the future of U.S. Treasury Bonds and the economy as a whole. While they disagreed on several points, their discussion highlighted the complexity and unpredictability of the market. What are your thoughts on their arguments? Do you agree with Bianco's prediction of an inflation problem, or do you side with Rosenberg's belief in the demise of inflation? Share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.
