The Bond Bear Cub Grows Claws, but a Productivity Hibernation May be Coming

03/06/ 2018
By John Turner 
February 22, 2018

For some, you may have read my commentaries musing over the credit markets over the past couple of years: “Death of the Bond Bull” and “Cubs Win”, etc. If you haven’t, check out my posts on our website (www.hwfi.com). It has been sometime since I wrote my last observation/opinion piece but felt it was time to be provocative again. Traders, and now the media are talking about rising yields, somewhat amazed and with some alarm, as if the climate change was the only thing that adjusted.

As Central Banks shut the morphine drip of QE/Zero rates off, the “patient”, the economy, is beginning to grow. In fact, rear view mirror economists and deflationists have found themselves speeding along, as the traffic jam is released with higher employment, wages and prices. The long sought after 2% inflation targeting by central banks is in sight.

Political central planners and their billionaire backers have been shaken by unexpected fiscal stimulus, namely a blowout tax and regulatory cut in the U.S. In addition, the unknowns: Brexit and China are becoming bigger customers. A nascent change in the Saudi Kingdom has also dynamically changed their stale political and economic models. Indeed, Bond Bulls, Stock Bears and Gold Bugs have been bitten by a new generation of investors who look at bonds like a gasoline powered car in the age of TESLA. In addition, investors see returns better in stocks and view gold just another relic like the phone Michael Douglass used in the movie Wall Street.

Interest rates are rising for good reasons - not bad, as money velocity and growth have picked up. The ten-year U.S. rate has risen from 1.7% when I wrote “Death of the Bond Bull” to nearly 3%.

Past performance is not necessarily indicative of future results. There is risk of loss trading futures and options.

In my opinion, we are in the ‘Year of Living Dangerously’ and I hope this new risk, proves to be one of relearning what makes growth and change so important. Perhaps you guessed already but I am a huge fan of the stimulus and growth that I see. More people are at work, wages are higher, and a new found optimism exists - not just here but there are bright spots around the world. Optimism can be infectious and as I watch younger people finding jobs, startups continuing to boom, and an equity market that hasn't been talked into seizure by the latest ‘Rasputin Politician’ or economist, I see more smiles on people’s faces - except for Hollywood and some pundits.

Investors and traders alike must embrace the change. In my opinion, infrastructure spending worldwide will pick up and capital expenditures by corporations will gather steam. I believe growth and commodity investing will spur even higher valuations and pricing power. Indeed, some commodities are seeing all-time highs, lumber for one. Back in the 70's it was one of the leaders followed by food. Could we repeat this history? Maybe, but it should be on your radar with new millennial algos to apply (cobalt, lithium, copper etc.)

Past performance is not necessarily indicative of future results. There is risk of loss trading futures and options.

Productivity, which has been moribund, is beginning to show signs of rebounding and if the capital expenditures accelerate, bond bears maybe ready to hibernate and the deficit hawks chirping may be drowned out by a revving world economy. If we hold central bankers to their words, then they will stay slow and steady and somewhat behind the curve, allowing markets and productivity to work.

Yet, we have to be cognizant as traders and investors that a Soros led Marxist revolution, a bad tweetstorm, or a Middle East fire could upset confidence and turn the youthful steps of a growing world economy into an Al Gore style frozen topiary. Personally, Al could replace Jack Nicholson in the Shining. 

Past performance is not necessarily indicative of future results. There is risk of loss trading futures and options.

Contact the author John Turner at jturner@hwfi.com

Be advised that trading futures and options involve substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. This matter is intended as a solicitation. This material has been prepared by a Heritage West Financial broker who provides research market commentary and trade recommendations as part of his solicitation for accounts and solicitation for derivatives trades.  The opinions expressed in this article are the author's own and do not necessarily reflect the view of Heritage West Financial and its staff. Fundamental factors, seasonal and weather trends, and current events may have already been factored into the markets. 

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