I was a super bull of long-term bonds. I stated my case over 3 years ago with a yield target on 30-year maturities of 2.5%. Back then, the timing and structure looked right for another run to new highs. Discussions about hyperinflation were premature. The pre-condition I had been waiting for has now arrived. In my opinion, we have seen the end of the bull market in bonds. There is a delicate balance in time, where mega trends and short term trends meet. Price has now shaped reasoning and convinced investors of future stability, and such conviction could not come at a worse time. You see, we are heading toward the D.I.I.G. Can you dig it? The Demographically Influenced Investment Gap is one giant mismatch of assets to liabilities. The growing future needs of financing in equities and bonds cannot be matched with future available disposable savings. This will create great opportunities for long term patient investors as assets compete for your dollars. Hyperinflation in the sense that people understand it today will not surface as expected as it is not straightforward. The roadmap that we had been following involved removing investment choices one after another. We had the big boom of equities back in the 1990’s, when boomers converted their term deposit gradually to stock funds. It represented the first bubble and as one can see, we are at similar levels of that decade. Following that first stock crash, we had an exodus of investors moving to real estate and there we created our second bubble. Essentially, both stocks and real estate have been written off as principal choices of investment, and what remains and is now the prime focus of investing, are bonds. As a pre-condition to hyperinflation this choice must be removed as well and it will be. In the end, the herd will move to whatever play has not hurt them already. Lost choices remain the key driver of the herd crowding into hard assets. My own view of the coming loss of confidence or of a crystallizing moment is not based on high inflation but its substitute, i.e., credit risk. It might be a philosophical difference to other views, but in the end, the result is the same. Bonds have tended to act as expected as risk preference shifted. However, bonds now have neither a credit risk premium and nor an inflation risk premium. Our proprietary model is clear: treasury paper of 30 years has the correct valuation of 3.50% and above. That is the level we would feel confident as buyers. There will be short-term long opportunities in bond market, but they will be within the context of a very long term bear market. The coming volatility in rates will be huge an unnerving for the regular investor who opted for the stability of his capital. In my opinion, being both long and short would be an interesting proposition.
I had forecasted one year ahead the behavior of the Fed to buy bonds.It seems too obvious to forecast that they will have to sell. I had been frontrunning demand and it is time in my opinion to be frontrunning supply !
Yves Lamoureux www.lamoureuxandco.com