Recession Looms, Bond Bulls Charge Ahead
$DIA, $SPY, $QQQ, $VXX
Bond investing has been hugely profitable with central banks like the Fed, ECB, BOE and BOJ driving debt values higher for as long as anyone can remember.
And Bond Bulls can expect even more gains ahead as governments desperately try to stimulate economic growth with deficit spending and QE (quantitative easing) by central banks, according to Albert Edwards, global strategist at Societe Generale.
“In the next recession, I see both more fiscal expansion and more QE,” he says in a 19 October note to clients. “I expect US 10-year yields to converge with Japan and European yields at around – 1% in the next recession.”
He noted the US economy is signaling recession with the drop in GDI (gross domestic income), another way of measuring the country’s output beside GDP (gross domestic product).
GDI fell 0.2% in Q-2 from the prior frame, GDP rose 1.2%.
“The pronounced weakness of GDI relative to GDP might be an ominous sign, for it may well be indicating that a US recession is already underway, just as it was in 2007,” he wrote.
The 10-yr US Treasury yield hit a record low of 1.36% in July as investors fretted over the UK vote to leave the EU and bid up the price of safe-haven assets like U.S. government debt. Yields fall as bond prices rise.
The last recession started in December 2007 as the collapsing housing bubble took a toll on the broader economy. That economic contraction ended up being the worst in 80 years as unemployment jumped and major banks needed taxpayer bailouts to stay in business.
The Fed responded to the financial crisis by cutting interest rates to record lows near Zero%. It also began so-called QE, or buying trillions of dollars of government debt and mortgages to keep cash flowing through the economy.
The central bank raised its key rate by 0.25% in December, the 1st hike in 10 years, on signs of an improving US economy.
The Fed retreated from plans for four more rate hikes in Y 2016 as China showed signs of slowing and oil prices fell to a 13-year low.
Mr. Edwards says the Fed’s money printing will only increase as US monetary policy emulates Japan’s. Asia’s 2nd-biggest economy after China has suffered 4 recessions in the past 7 years.
Easy monetary policy means the 35-year Bull market for bonds will last in accordance with his “Ice Age” thesis, which advised investors to put money into bonds and be cautious with stocks as deflationary pressures like those seen in Japan spread throughout the world.
“Japan is the template going forward as all pretense at fiscal and monetary policy rectitude will soon be thrown out of the window,” Mr. Edwards writes.
Thursday, the 3 US major stock market indexes finished at: DJIA -40.27 at 18162.35, NAS Comp -4.58 at 5241.84, S&P 500 -2.95 at 2141.34
Volume: Trade was light with 773-M/shares exchanged on the NYSE
- Russell 2000 +7.4% YTD
- S&P 500 +4.8% YTD
- NAS Comp +4.7% YTD
- DJIA +4.2% YTD
|HeffX-LTN Analysis for DIA:||Overall||Short||Intermediate||Long|
|Neutral (-0.13)||Neutral (-0.17)||Bearish (-0.25)||Neutral (0.04)|
|HeffX-LTN Analysis for SPY:||Overall||Short||Intermediate||Long|
|Neutral (-0.17)||Bearish (-0.49)||Neutral (-0.15)||Neutral (0.12)|
|HeffX-LTN Analysis for QQQ:||Overall||Short||Intermediate||Long|
|Neutral (0.19)||Neutral (-0.15)||Bullish (0.29)||Bullish (0.42)|
|HeffX-LTN Analysis for VXX:||Overall||Short||Intermediate||Long|
|Bearish (-0.35)||Bearish (-0.29)||Bearish (-0.40)||Bearish (-0.38)|
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