TIM BOND: EQUITY INVESTORS ARE DANCING ON THE EDGE OF THE VOLCANO
by ilene - February 10th, 2010 12:21 pm
TIM BOND: EQUITY INVESTORS ARE DANCING ON THE EDGE OF THE VOLCANO
Courtesy of The Pragmatic Capitalist
Tim
“Never has a bull market climbed a steeper wall of worry. Despite a proliferation of positive economic indicators, the consensus remains resolutely gloomy. Bullish economists are still rarer than hens’ teeth. The average forecast for Q3 US GDP growth is an anaemic 0.8% increase, which would be by far the slowest first quarter of any recovery on record.”
He couldn’t have been much more accurate. The economic landscape is quickly changing, however, and Bond’s outlook is turning decidedly less optimistic. Bond now believes the problem of debt is becoming contagious in Europe and that higher bond yields will accompany the process:
“Fiscal dynamics point towards higher government bond yields in many economies, including the UK and US. History is unequivocal in linking fiscal deterioration to higher yields. This point is clearly becoming recognized by investors. As a result, a contagious process has started, during which risk premia in bonds, equities and currencies adjust higher to reflect the fiscal situation. This process is unlikely to remain confined to southern Europe, but will eventually embrace all those economies with sizeable budget deficits.”
Bond has argued for much of the last year that low rates and de-leveraging were actually very bullish for equities. As monetary policy begins to shift and fiscal policy remains imprudent the landscape is shifting. Like Teun Draaisma, Bond is concerned about the impending higher rate environment that will accompany global rate increases and continuing risks associated with an indebted global economy. Bond argues the long-term situation remains unfavorable for 3 primary reasons:
- 1) The majority of the G20 is a fiscal mess
- 2) Demographic trends of the G20 are highly negative
- 3) Containing the long-term government debt problem will be painful
Most alarming to Bond, however, is the close relationship between high…