David Rosenberg catches a lot of flak for being excessively bearish about US equities, however, there have been a lot of good calls within his commentary over the years. One of the best calls has been his outlook for inflation. While many commentators have called for hyperinflation or a 1970′s style inflation Rosenberg has remained staunchly at the opposite end of the of the spectrum. And to this day, he still says deflation is the principle risk. In his most recent note Rosie elaborates:
“There was no shortage of press articles over the weekend attacking the enemy – the bond market. After all, for the typical equity market portfolio manager who is overweight this market, it must be a nagging feeling going home every night now seeing bonds yields lower – a clear non-ratification for the near-universal view of sustainable growth in the economy and earnings. At a time when the Fed is incrementally withdrawing, the extent of the fiscal drag at all levels of government should not be underestimated…
Meanwhile, sentiment towards bonds remains deeply negative (which in market parlance is a “contrary positive”). See Own Government Bonds? Here’s Something Else To Fret About on page B1 of the weekend WSJ. And Treasurys Gains at Risk on page C2 of yesterday’s edition. Or how about the article on B7 – Municipal Bonds Have Surged – But Investors Need To Be Skeptical. Here’s Why. This second article draws the conclusion that “the problem is that the trend could easily reverse. With rates this low, the best-case scenario is that they remain flat; the worst and most likely scenario is that they will rise” (although nobody seems to be very concerned over the corporate market, even though we just came off a week of record supply issuance of $30 billion last week!).
Geez – didn’t we hear that sort of talk all last year? And what do we have? A 10-year note yield pervasively stuck in a 2-4% range. And here we have the end of government support for risk assets, the global economy cooling off and commodity inflation peaking out. Worries over Greece are also giving a lift to safe0havens and the 10-year yields in Greece moving above 16.5%, it would seem a safe bet to say that the markets are bracing for some sort of default, even if couched in more palatable terms….
And event, the 3.07% yield level for the 10-year note would represent a key technical break – where the 200 day moving average resides. Mortgage convexity would then very likely take the yield down to 2.9%. And the rally we are seeing of late in the Treasury market is occurring on the back of renewed deflation pressure – the 5-year CDS spreads, measuring US government default risks, actually widened 10bps last week to 51bps.
Of course, deflation is now going to rear its head again. Oil prices are down 13% from the nearby peak. The base metals complex is down 10% from the recent high as well and trading both below the 50 and 200 day moving averages. The agriculture price sphere has corrected 10%. Gold is off the boil and silver has plunged 35%. Deflation is the principal threat, not inflation.”
Of course, I agree to a large extent. All of those cries about the bond bubble last year and hyperinflation have turned out to be dead wrong. The current environment is not consistent with past hyperinflations or even periods of high inflation. What is boiling beneath the surface is the balance sheet recession, however, the USA has done enough spending to fend off this beast for the time being. That said, the risk is still not hyperinflation in the USA. In fact, I believe the risk of hyperinflation remains close to nil. At the beginning of the year I said we were likely to experience inflation in the 2.5% range this year – higher than what I had been calling for over the last 2 years, but lower than the historical average. That’s been pretty close to dead right so far. I also think Bernanke is likely to finally get something right – this surge in inflation (mostly due to motor fuel prices) is likely to be transitory.
As for bonds, Rosenberg has nailed it. You can’t be super bearish about bonds unless you believe in one of two scenarios – hyperinflation or booming growth. Ironically, the paper bears don’t understand that the history of hyperinflations (as previously covered here) is not even remotely consistent with the current state of the US economy. So, the only way they will likely be right about bonds is by being wrong (about US economic growth). And while I’d love to be a believer in booming growth I just don’t see the USA experiencing strong economic growth with such enormous slack remaining in the economy and the increasing likelihood of austerity in the coming years. We remain deep in the balance sheet recession and until policy makers recognize that the likelihood of stronger growth is very low. And because of this malaise and persistent government ineptitude (around the globe) US bonds will continue to perform just fine.
Source: Gluskin Sheff
The only losers here have been the people who keep calling for high inflation. When do all of these people just admit that they’ve been wrong?
There is no inflation?
What planet do you live on sir?
Haven’t you noticed how food and energy prices are going through the roof? Haven’t you noticed how insurance premiums and school fee are going through the roof?
If the purchasing power of your savings is going up, perhaps you can help out the rest of us by donating some of your money because my money is definitely buying me less with each passing year!
come on now paul…u know food n fuel are not in the CPI……we are supposed to only be worried about some guy with his 3 mortgage macmansion…..at 6% bread and 7$ gas WE will be in effect bailing them out.
i can’t EAT an ipod:
http://online.wsj.com/article/SB10001424052748704893604576199113452719274.html
Good post. I concur. It feels very lonely at times being a bond investor and feeling “left behind” while the equity investors are caught up in the “rapture”.
Cullen, being right matters less in this world than screaming the loudest. Maybe if you scream louder and continue to be right you’ll get more attention.
No, what I need to do is scare people more. That seems like the way to get famous and rich these days. Just scare the daylights out of everyone.
Haha. Aint that the truth.
What’s your algo saying these days? Risk on or risk off?
Been risk off for about 30 S&P points now….getting close to a buy point in my opinion. Maybe next week? 1300?
Thanks. How’s it performing this year?
Par for the course. 7% gains with insanely low volatility. On pace for 16-17% this year with risk adjusted returns that would make people accuse me of being Madoff. You should see the chart on this thing….it’s incredible.
Cullen, do you manage other people’s money, or do you know of anyone who can manage it like you are talking about? This kind of performance, if you can access it, is what a lot of investors (like me) would love to have. “Par for the course. 7% gains with insanely low volatility. On pace for 16-17% this year with risk adjusted returns that would make people accuse me of being Madoff. You should see the chart on this thing"¦.it's incredible.”
Larry,
I am not managing new client assets, but I’ve had so much interest in it that I am looking into various solutions. If anyone has any bright ideas shoot me an email. I am open to any and all ideas. If I can help out more small investors then I am all for it. That has always been the essence of the site after all….
Cullen, your Pragcap website has helped me a lot, and I thank you! Just want to ask if you might consider doing what Jim Jubak of MSN Money has done, namely start up and manage his own mutual fund. Jubak manages the fund JUBAX, but it has not done too well. Nor has Hussman’s Growth fund done well lately. If you are interested, I would bet your fund would do well for a lot of investors. In the meantime, your recommendation of Jeff Gundlach has led me to invest in DLTNX, which is doing quite well. Thanks!
Hmm, I am not so sure about running a mutual fund. They tend to represent everything I dislike about the industry. I’d be open to something that benefits small investors, but doesn’t go against my principles – which is that Wall Street should be client driven and not fee driven.
There are ways, but it would depend on knowing a lot more about what you actually do as far as trading. What securities, leverage needs and other issues. It would also depend on your definition of smaller investors and what is a reasonable fee.
I would be glad to get a thorough understanding of your approach and run it by some people and brainstorm with them. There is usually a way.
Cullen, consider the merits of a wealth management service using folioinvesting.com as the vehicle. I like how it works for my account with Zacks’ wealth management and I’ve seen a number of positive comments on websites for fund managers.
Many thanks for your exceptional commentary, Ubu.
turns out the “rapture pastor’s” church controls $100MM; it would seem scaring is the way to go…
Geez. Who gives these people money? It’s frightening.
I need to start a company that focuses on helping people do the exact opposite of getting scared into giving these sorts of people money.
I’m a loser. UK bonds maybe but why I don’t I feel poorer?
The biggest reason for the inflation-phobia is, to my mind, the misconception that QE2 is “printing trillions of dollars” and “monetizing deficit spending.” Once you figure out that isn’t the case, there is not much “inflation” to hang your hat on. I am still in disbelief at how many otherwise bright people cannot do a simple exercise of following the money…
…the Fed buys treasuries from the banks
…this removes treasuries and adds reserves $-for-$
…no financial assets added or substracted
…simply increases bloated bank reserves
…and banks are not reserve constrained anyway
…so what is the fuss all about?
…especially since lending is falling despite ZIRP
…and wages and labor costs are in the tank
…foreclosures still piling up on levered asset
…in what alternate universe does this cause inflation?
Amazing isn’t it Chad? The misinformation out there is incredible. And we are talking about REALLY smart people who don’t understand this stuff…..
Rosie recommended corporate bonds in March 09 — they outperformed stocks for the remainder of the year. nobody remembers that call
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