Yves Lamoureux' Observations On Negative Risk Premium And Return Assumptions

Tyler Durden's picture

Solid analysis on long-term investor sentiment by frequent Zero Hedge guest Yves Lamoureux, who believes the peak in stocks has been reached and the only sensible investment category is bonds. With earlier disclosures by Albert Edwards of ongoing balance sheet deflation despite the Fed's liquidity pump, this view would seem quite sensible.

We also encourage readers to listen to Yves' recent appearance on Bloomberg Radio (Part 1 and Part 2)

Full Yves Lamoureux presentation can be found here.


Negative risk premium and return assumptions.

Yves Lamoureux – Blackmont Capital

I had used to believe that stocks delivered superior returns compared to bonds.

I looked at the following graph and realized that long term Canadian bonds had delivered twice the returns of Canadian stocks since 1987. It is particularly relevant since the Canadian market had been on a tear the last few years because of commodities.

Most market participants today still expect a positive risk premium for stocks even if extrapolating from recent past events results in confounding this expectation.

I expect bonds to deliver better or equal real returns with fewer risks than stocks going forward. Negative risk premium is the new normal and new behavioral shifts strongly underpin that case.

I had originally offered my case to buy the long bonds near the bottom of this cycle on the 19th June. http://yelnick.typepad.com/yelnick/2009/06/yves-on-the-greenshootfed-sacred-fed-bull-died-fat-and-happy.html

You create a spread of 4% or better between the Fed fund and the long bonds and in turn that becomes a trading buy signal. We had such a signal and ran with it.

We continued to run with this message digging further and came up with the primary dealers’ net treasury weekly positions graph in relations to bonds. What we found was most unusual. After averaging a net short position of -60 billions on average over many years, the primary dealers had suddenly turned bullish with net long treasury positions. http://www.zerohedge.com/article/guest-post-observations-unusual-bond-deal-behavior

In this next graph, I use TLT as a proxy for long term bonds and TIP as the proxy to represent the Treasury inflation protected bonds. The recent recovery points to TLT showing greater strength and the clear conclusion is one of deflation reasserting itself or the lack of inflation thereof.

In a negative risk premium world you would expect to have bonds outperform stocks for total return and the yellow line here (below) where bonds are compared to the S&P500 is definitely up.

From both charts long bonds are definitely turning up or have put in a good base from which to launch upward.

In reference to behavior, it’s become clear that investors attitude are changing and the new normal is not to invest one’s savings in stocks rather that money is flowing to bonds. Recent data points to exactly this type of behavior and perhaps getting trounced once is enough for a certain legion of investors but not all. As we had seen in 2000 in every drop of stocks, we are slowly loosing participants to join in this exuberant party. Investors who miss out this time are also assured of not feeling any party hangover.

Yves Lamoureux,
Investment Advisor,
Blackmont Capital Inc.

The opinions contained in this report are those of the author and are not necessarily those of Blackmont Capital Inc.. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor BCI makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. BCI is an independently owned subsidiary of CIFinancial. CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and IIROC.

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Cognitive Dissonance's picture

Solid assessment. Which means it will be ignored by the Red Bull HAL9000 SkyNet Wall Street GS crowd.

Facts? Fundamentals? I don't need no stinking fundamentals.

buzzsaw99's picture

I am absolutely fearless of higher T-bond rates, and have been since June as well.

…unexpectedly…'s picture

Invest in corporate bonds?  Please, list the top ten companies (along with their CEO and CUSIP) that I should trust (absolutely) to pay me my P&I over say the next 10 years.  This is particularly important when rates can only go up from here, thus precipitating the hold to maturity tactic.  Trade bonds?  Maybe.  Investing is so 2002.

I have a hard time listing the first one.











deadhead's picture

please do not use CUSIP numbers as it is a trite annoyance to some folks.

unless you are in the front office or back door operations.

…unexpectedly…'s picture

I don't think it will be a problem.  I postulate that in this environment, on a long enough timeline the hold-to-maturity-testicular-fortitude rate for everyone drops to zero.

Mos's picture

Coco Cola

Smith and Wesson

Maker of Trojan condoms


That's all I could come up with.

Anonymous's picture

It's like walking the midway at a carnival...

Yossarian's picture

Does the stock return include dividends? 

Anonymous's picture

of course not. Why let the truth get in the way of a good argument.

Anonymous's picture

Depending on user setting BB auto adjusts for dvds

Carina's picture

30-yr treasury yield down to 3.94 10-yr down to 3.17 - Watch the 10-yr go to 2.5.  The bond market is much smarter than the stock market.

Anonymous's picture

And now for something completely different...

I can't get over how many people misspell losing as loosing...

i wish they would lose the the looseness with their spelling - it is like spelling huge as hugh...

sorry, but i can't take authors of articles that contain errors like that that seriously.

now back to your regularly scheduled programming.

defender's picture

So, let me get this straight.  Someone makes a typo, and their opinion/research becomes invalid?  And not to be picky, but it looks like there is an extra "the" in the middle of your rant, but what do I no.

Anonymous's picture

know, a typo doesn't necessarily invalidate an opinion ore research but it does reflect on its credibilty.