The Man Who Called The Last Bond Bear Market 40 Years Ago Says "Buy Bonds"

Tyler Durden's picture

74-year-old bond guru Lacy Hunt is among a rare breed in finance today: people who actually traded during a period when bonds continuously lost value. As a young bond manager coming of age during the Great Inflation and Richard Nixon’s wage and price controls, Bloomberg reports that Hunt saw the bear market in bonds coming in the late 1970s, and made a fortune for his clients. Today, as hints of inflation start to bubble and calling the next bear market becomes the industry’s favorite pastime, Hunt says no, "I’m still long bonds, especially the long-end."

Hoisington Investment Management’s Hunt shrugs it off and says “it’s just more of the same.”

Using an out of fashion metric known as the velocity of money, the Austin, Texas-based economist says he’s convinced the rout since the election of Donald Trump is just a bump in the road for an extended rally.

The velocity is the rate at which money circulates in the economy and is usually measured as a ratio of nominal gross domestic product over the total supply. In other words, it measures how well an economy is able to generate transactions, and in turn growth, with an incremental increase of money in the financial system.

The problem is money velocity in the U.S. (as measured by M2) has fallen to a record-low of 1.44, meaning every dollar spent circulates only 1.44 times in the economy, down from over 2 times at the peak in 1997. To Hunt and other adherents, that shows even after years of unprecedented money printing by the Federal Reserve, inflation will remain subdued and elusive, largely because the private sector has chosen to hoard, and not spend, the money in the years after the financial crisis.

 "When debt is at high levels and increasingly counterproductive, the most important lesson of economic history is that the velocity of money falls," said Hunt said, who helps manage $3.6 billion in assets.


"I’m still long bonds, especially the long-end," the part of the yield curve that’s the most sensitive to rising inflation.


The $308 million Wasatch-Hoisington U.S. Treasury fund gives reason to listen to Hunt. The fund has outperformed over 90 percent of its peers in the past three and five years, and has returned 1.7 percent this year.

As Bloomberg notes, however, Hunt isn’t the only one seeing the record-low pace as an ominous sign.

The fact that money velocity declined rapidly during years of near-zero interest rates may signal aggressive monetary easing actually led to deflation instead of inflation, economists at the St. Louis Fed wrote back in 2014.


"In this regard, the unconventional monetary policy has reinforced the recession by stimulating the private sector’s money demand through pursuing an excessively low interest rate policy," economists Yi Wen and Maria A. Arias wrote.


"I know I’m the minority here,” Hunt said. “I’m just trying to see the world as I think it should be seen.”

And bearing in mind that the world and their pet rabbit is short Treasuries..

Hunt may be more right than he knows.

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InjectTheVenom's picture

who cares what Mr Guru Lacy Cunt says ...

just tell me what Gartman thinks !!   Cha-ching !!!

idea_hamster's picture

The whole piece didn't mention the fact that the Fed pays IOER now.  And they index it to their fed funds rate hikes.

So why the fuck wouldn't a bank park huge amounts of M1 for a zero-risk 50 bps?

If Trump cuts IOER to zero (which is where it should be for the risk they take), *then* fasten your seatbelts.  Until then, velocity can wilt while the shit-bag commercial banks get to nurse on a(nother) stealth bail-out.

GGuy's picture

I thought he said BONGS...cleans glasses.....

mary mary's picture

:-)   Bongs.  Jane's Bongs.  Best bongs on the planet.

knukles's picture




milking institute's picture

It's an insider thing,man,shaped like jane fonda but with six nipples so it's geat for parties! you really need get up to date...

SafelyGraze's picture

the 'velocity of money' is somewhat different now.

the state issues a digital amount to you.

then you "pay" via a digital transaction.


the nation of india 

mary mary's picture

State of India to Indian citizens: "And.... it's gone."

mary mary's picture

It's a spoof on "Bond.  James Bond".  Sort of a pun, in that it's an imaginary ad for an imaginary retail franchise, "Jane's Bongs", whose imaginary retail products are bongs, aka, waterpipes, supposedly for smoking medical marijuana in.  So Jane sells bongs which she names Jane's Bongs.  Silly joke.

Urban Redneck's picture

Hunt's thesis is founded on a rank misunderstanding of the velocity of money.

The velocity of money has NOTHING to do with circulation of the money supply.  

The mathematical formula is simply GDP divided by money supply, so the higher the number, the more effective the money supply is at generating GDP.

As to CIRCULATION, the Federal Reserve clears more than the US GDP every week, yet no one claims the velocity of money is over 50.

Would you really trust your hard earned money to a senile coot with a such gross misunderstanding of basic economics?

That said, there is a YUUUGE money supply outstanding which can be leveraged to increase GDP (and inflation) with certain policies.


ZH Snob's picture

40 years ago we weren't completely insolvent.

milking institute's picture

Exactly,the ONLY guy i follow as well,a true giant,followed closely by jimmy the creamer,LEGENDS!

wisehiney's picture

Be right and sit tight.

Get paid to wait.

Money_for_Nothing's picture

Trump gets velocity up or we get a third hope-and-change President in four instead of eight years. I don't know how to trade bonds but the velocity argument is slanted the wrong way. Interest rates on risky bonds is going to go up. Defaults on bonds not backed by the US Federal Government are going to happen. NY, New Jersey and California are going to renegotiate. And they won't be the only States to do so.

jamesmmu's picture

Don't forget to sell your stocks first before buying bonds.

mary mary's picture

Why not 60% stocks and 40% bonds, like John Vogle sometimes says.  Or 10% precious metals, 55% stocks, 35% bonds.  Or something.  "Diversify".

milking institute's picture

Or 90% precious metals,like me. well diversified too,30% phys gold 30% phys silver and 30% miners. what do you mean my holdings are not balanced? i do own 10% in QID,so there....

mary mary's picture

Because I am not as courageous as you.  I might be able to do 1/3 precious, 1/3 bonds, and 1/3 stocks.  I believe in precious, but it has those huge drawdowns.

Greenspazm's picture

The name is Bonds. James Bonds.

Vlad the Inhaler's picture

He outperformed 90% of his peers and returned 1.7% last year?

buzzsaw99's picture

1.7% before or after fees? ...that is the question. [/hamlet]

mary mary's picture

I think it said, "returned 1.7% THIS year".

mary mary's picture

Hard to realize there IS already a "this year".  But there is.  Life goes by fast.   :-)

buzzsaw99's picture

there is no way he came to that conclusion using the bullshit reasoning cited above. he came to that conclusion the same way the rest of us did.

once you eliminate the impossible... [/holmes]

mary mary's picture

FWIW (very little, no doubt), I am currently 18% in an intermediate term bond fund (mix of government and corporate) and 11% in a high-yield bond fund (mostly corporate).

fearnot's picture

The two charts that matter the most are $UST:$JPY and $USB:$JPY

$UST and $USB are ancillary

taketheredpill's picture



"Battle of the Economists"

Irving Fisher studies recessions and said that as Debt increases it causes Velocity of Money to decrease regardless of increase in Money Supply.

Lacy Hunt uses % M2 + % Change Velocity as Nominal GDP Proxy and highlights the decrease in Rate of Velocity (-4%) pegging Nominal GDP below 4% , real GDP at 2% and stuck going nowhere.  Increasing Debt will just cause Velocity to drop even faster.

Milton Freidman said that if Money Supply was increased enough, then you could overcome the drop in Velocity.  Hence MOAR....



milking institute's picture

It's an insider thing,man,shaped like jane fonda but with six nipples so it's great for parties,you need to get up to date!

Moe Howard's picture

I'm bonding with this guy.

Youri Carma's picture

U.S. mortgage activity stabilizes as loan rates slip: MBA - Jan 4, 2017

U.S. Libor breaks above 1% for first time since 2009 - Jan 4, 2017

Rising REITs back bets on stronger economy - Jan 7, 2017

acetinker's picture

Bunker and Lacy almost got it right- once upon a time.

I'm gonna say this once for all time-  Value is not measured in ounces or pounds, cuz nobody can eat either.

This world is awash in edible things that provide no real nutrition.  Likewise, it teems with phrases and buzzwords that provide no wisdom.

But just today, an asshole from New York, a perfect example of an alpha male was inaugurated leader of the free world.

Should that have happened?

My answer is yes- the Bull in the china shop is exactly what we need, just now.