The
Wall
John Mauldin
I
generally send out two letters a week. The letter that arrives in your inbox
over the weekend is Thoughts
from the Frontline and is written by me. The second letter, which
is called Outside the Box,
generally comes in the middle of the week and is an article or essay written by
someone else that I think merits your time.
Quite often I disagree with the
sentiment or analysis being expressed, but I find the writer makes me think
about alternatives to my personally favored presuppositions. It is always good to
listen to the other side of the story, especially when we are talking economics
and finance and our investment portfolios!
Over
the last month, most of my selections for Outside
the Box have leaned to the bearish side of things. Jawad Mian, who
writes a global macro letter called Stray
Reflections for Mauldin Economics, has been gently chiding me
about those bearish sentiments from his perch in Dubai. So today in Outside the Box I’m going to
let Jawad offer his views, which are of a decidedly more bullish nature. (I
should note that here at Mauldin Economics we pay attention to Jawad’s
out-of-consensus forecasts, even when we don’t agree. Some of the team are
circulating a PowerPoint presentation that he did almost eight months ago to a
CFA group in Michigan. He was spot on with every one of his main points.)
Jawad
has shown me how macro thinking and money management can be gracefully and
profitably intertwined. He likes to approach the world of global macro
investing like a poet contemplating an epic in progress – conjuring up battles
in his imagination, inventing and discarding subplots, balancing reason and
rhyme. His guiding principle is to help investors understand and navigate
through all the complexities of an unstable, inflation-prone world.
Today
his bullish macroeconomic forecasts launch from a surprising source: Pink
Floyd’s epic album The Wall.
He finds similarities between the torturous journey of the album’s protagonist
and today’s battle-scarred (or maybe I should say bear market-scarred)
investor. Taking license with some of the lyrics, he even weaves Dick Fuld and
Lehman Brothers into Pink Floyd’s writings.
In this analogy, the more an investor blocks out the world
and retreats into his own ideological biases, the worse off he becomes.
And
on that point both Jawad and I agree. Anytime we let our emotions and biases
become the driving force behind our investment selections, we are setting
ourselves up for true problems. Logic, reason, and an open mind are much better
drivers of the investment process. I think you will find Jawad’s work both
challenging and thought-provoking.
I
find myself between meetings here in New York as I write this note. The team at
Mauldin Economics went down to the Jersey Shore yesterday to meet with Charlie
Stroller and his team at the Financial Advisor family of publications. They are
a well-run operation, and I look forward to our respective firms being more
involved with one another in the future. I went down an evening early to spend
a day by the ocean, but someone turned the thermostat down and dialed up the
wind; so we stayed inside, looking out wistfully at the beach.
On
a personal note, I’ve been doing a lot of research but am really deeply behind
on my emails. There are some 500 in my inbox that I need to deal with in one
form or another, and I’m just going to have to stop the world and handle them
over the next two days before moving on to the next project. If there is
something you’ve been expecting for me, I will hopefully get around to it
sooner rather than later.
Have
a great week and enjoy Jawad’s insights.
Your
running hard just to stay in place analyst,
John Mauldin, Editor
Outside the Box
The Wall
By Jawad Mian
Pink Floyd’s The Wall is a musical milestone unlike any
other. The album’s highly acclaimed release in 1979 was followed by an
imaginative tour in 1980-81 and a visually intriguing movie in 1982 of the same
name.
The songs trace the tortured life of Pink, a
fictional protagonist modeled on band members Syd Barrett and Roger Waters. The
storyline begins with his fatherless childhood, domineering mother, and abusive
school teachers. Events lead him to become a rock star, only to feel jaded by
the superficiality of stardom.
To live free from life’s emotional pain,
Pink begins to build a mental wall between himself and the world. Every personal wound is
another brick in his wall of exile. As his wall nears completion, spurred by
the revelation of his wife’s infidelity, he convinces himself that his
self-imposed isolation is a desirable thing.
At first, the gathering of bricks seemed fairly
innocent. Now, all that’s left is a giant wall that encloses him from all
sides. Pink, unable to arrest his frenzied mind, spirals into insanity.
Tell me,
Is there anybody out there?
Is there anybody out there?
Never thought that I
would end up all alone,
Everyday I’m feeling further away from home,
I can’t catch my breath,
But I’m holding on.
Everyday I’m feeling further away from home,
I can’t catch my breath,
But I’m holding on.
In the wake of emotional destruction, the
gravity of his life’s choices sets in.
Source: Pink Floyd
This has been a tremendous bull market in
stocks.
Yet, people still remember what happened during
the early 2000s and 2008.
Having lived through that period, most of us fear a
repeat and will do everything possible to avoid it. In this “avoidance
process,” we built a wall of mental detachment to cope with bear
market-inflicted wounds.
While the wall helped temper our emotions
to the market’s gyrations, it further severed our understanding of the rapidly
changing investment environment. In the last six years, the common investor
(let’s also call him “Pink”) has missed a lot of opportunities as a result.
With the self-deluding rationale that
this time is different, the metaphor of “the wall” makes its first appearance
after the spectacular tech crash in 2000. The wall is a defense
mechanism that renders Pink comfortably numb to his own mistakes. With bitter
satisfaction, he continues his hopeful journey.
It was just before dawn,
One miserable morning in black September ‘08.
Dick Fuld was told to sit tight,
When he asked that his bank be bailed out.
The Fed gave thanks, as the other banks,
Held back the enemy tanks for a while.
And Lehman Brothers was held for the price,
Of a few thousand ordinary lives.
One miserable morning in black September ‘08.
Dick Fuld was told to sit tight,
When he asked that his bank be bailed out.
The Fed gave thanks, as the other banks,
Held back the enemy tanks for a while.
And Lehman Brothers was held for the price,
Of a few thousand ordinary lives.
It was dark all around,
There was frost in the ground,
When the tigers broke free,
And no one survived.
There was frost in the ground,
When the tigers broke free,
And no one survived.
The 2008 meltdown etches an indelible mark on
Pink. He resigns from the cruel investment world, watching with skepticism and
disdain as the market is rescued by the central bankers’ dirty tricks. You can
hear him yell out from a lonely bend, “Hey! Central Banker! Leave the markets
alone!”
All in all, it just leads to another
brick in the wall.
The US housing bust, European sovereign debt
crisis, Japan’s deflation demon, China’s hard landing, the commodity crash, and
currency wars are all bricks in his ever-growing wall. Every financial wound
leads him to drift farther from reality. The
more he blocks out the world and retreats into his own ideological biases, the
worse off he becomes.
Years of oppression lead to full revolt against
manipulated markets. He rebukes central bankers, who he blames for molding
freethinking investors into mindless followers. He is eventually typecast in
the role of the fear mongerer.
His wall looms so high that it blocks sight of
the macro landscape. He can
only see the ominous writing on the wall, because the bricks are constant
reminders of the kind of pain that markets can inflict.
Pink is left desolate, still waiting for
retribution, and completely cut off from the investment world. He feels
abandoned by the stock market (too little, too late)…
People keep thinking that we are stuck in a
secular bear market and that another lurch down into the abyss is just around
the corner. This
“availability heuristic” helps explain the abnormally large “wall of worry”
that still persists.
The lesson here: we can’t run our portfolio as
if a repeat of 2008 is all but certain. Those who did missed this wonderful
bull market.
And investors who remain fixated on the
ghosts of the deflationary past can’t embrace the possibility of a major
secular change.
Tear down the wall!
Tear down the wall!
Tear down the wall!
Tear down the wall!
Tear down the wall!
Investment
Observations
It has been my experience that a standard
obstacle to maintaining an objective investment stance occurs when we
inflexibly adopt a preconceived idea of where the market is headed. This
happens all the time. People are slow to change an established view. Everywhere
we see signs of confirmation bias – investors overweighting evidence that
confirms their prior notions and underweighting evidence that contradicts it.
With Stray
Reflections, my trick is simple. I try not to take my eye off the
bigger picture and take advantage of the fact that others have. With eyes wide shut, most investors
simply don’t expect to see what they are not looking for. I want so much to
open your eyes. As per Helen Keller, the only thing worse than
being blind is having sight but no vision.
In this Outside
The Box, I present my investment outlook and key asset allocation
recommendations. I sense a wave of skepticism about the global macro landscape,
leading people to underestimate the gains and overestimate the risks.
Riding Out The
Deflation Scare
The recent market volatility has been
disconcerting, but it does not impact the big picture or my pro-growth
investment stance on a 6- to 12-month horizon. It is important to stay focused on the macro themes that are
likely to prove durable.
There are compelling signs that we are
nearing the end of a valuation-driven correction rather than morphing into
a prolonged bear market. While the technical damage has been severe,
most markets have maintained uptrends and are still holding above key support
levels. I am encouraged by the market’s basing action since the August 24th
volatility spike, and suspect the correction lows are already in place.
The late-September decline had all the
hallmarks of a successful retest, which is defined by positive divergences (new
lows in some benchmarks not confirmed by others) and less selling pressure
(lower volume and volatility during the retest). Even if we were to see more
downside near-term, I feel confident that the worst of the correction is behind
us. The NYSE short interest is at the 2nd highest level ever, which
implies that any further selling will be contained.
Source: Barchart.com
Much ink has been spilled over the merits and
impact of a Fed rate hike on global markets and the world economy. To my great
chagrin, the warnings by some luminaries have bordered on fear mongering, with
a chorus among them even calling for QE4.
I find myself in vehement disagreement with this
policy prescription. I firmly believe economic conditions in the US, as well as
globally, necessitate a December rate hike. The world doesn’t need further stimulus. It needs
leadership.
We have reached the point in the investment
cycle where the Fed must inspire investor confidence by normalizing policy.
Growth conditions are becoming increasingly self-reinforcing, and do not
require ultra-accommodative monetary policy.
The household debt-to-income ratio is back to
its 2002 level; business confidence has healed; credit is growing at a healthy
pace; auto sales are at 10-year highs; construction spending is rising at the
fastest pace since 2006; and unemployment claims recently hit a 42-year low.
A Fed rate hike should reinforce the signal that
the US economy is in a durable expansion and that macro risks are diminishing
rather than intensifying. If
Yellen keeps delaying the rate hiking cycle, the equity correction will worsen.
Fed dovishness is no longer a reason to be bullish on stocks.
Historically, US stocks have corrected about 10%
around the start of the last three Fed-tightening cycles (1994, 1999, and
2004). In our current experience, the correction looks front-loaded, with the
S&P 500 down 13% ahead of the Fed’s lift-off.
I am convinced the much-anticipated Fed rate
hiking cycle will prove to be bullish for global stocks. The most-discussed
risks are often not the ones that end up being influential.
Once the US leads the global policy rate cycle,
the discussion and pressure to dial back central bank aggression will emerge in
even more countries. That said, major central banks would lag behind the growth
curve and maintain a reflationary bias, which is ultimately beneficial for
stocks, to the detriment of government bonds in general. The global
stock-to-bond ratio should rise as a result.
A Whole New
World
There is no shortage of things to worry about,
but global growth conditions are currently improving rather than deteriorating.
While the manufacturing sector has been uninspiring, it is worth noting that
global services PMIs are still expanding. The services industry is far more
important to the health of the world economy as it represents around 75% of GDP
in the US, Europe, and Japan. Even in China it has now become the major
driver of growth and accounts for a record half of GDP. The global economic recovery may pale by
historical standards, but it is now on a much better footing than in previous
years.
Source: J. P. Morgan
Europe’s economic turnaround is still in its
early phase. The combination of a weaker euro, increased bank lending to the
private sector, less fiscal austerity, and lower oil prices should yield a
positive growth surprise over the coming year. The improvement in the credit
cycle will also feed through to core inflation and unemployment, with a lag.
Although the euro area unemployment rate is at 11%, hiring growth has been
strong and employment posted the largest rise in four years during the second
quarter.
German unemployment is around post-reunification
lows, and real wages are growing at the fastest pace in more than 20 years.
This is an essential part of euro area rebalancing that should support growth
in neighboring countries by way of a competitive boost. The Spanish labor
market has enjoyed its best year since 2007.
A spate of recent economic data has once again
raised the specter of Japan falling through the deflationary trapdoor. Missed
in the reporting is that core inflation (which excludes both food and energy)
is still accelerating, reaching 0.8% in August. The broadest measure of
inflation, the GDP deflator, has been positive for the past five quarters. This
has not happened for 20 years. I believe deflation is in the process of ending
in Japan.
For Abenomics to deliver on its promise in the
long run, there must also be a sustainable transfer of wealth from the
corporate sector to the household sector.
There are some indications this may
happen. The 3.4% jobless rate is the lowest since 1996, while the job offers to
applicants ratio is at its highest since 1992.
Although recent wage gains have
slowed, such labor market tightness suggests this will only be temporary.
The consensus view that Chinese growth has
cratered, which set off the surprise currency “devaluation,” is wide of the
mark. Although China’s manufacturing PMI has steadily worsened, hard data from
industry does not point to a deeper crisis.
In fact, Chinese economic activity
should strengthen in response to past easing and growth-friendly initiatives.
The property market is already rebounding and fiscal stimulus is picking up.
Despite the prevailing market narrative – with Chinese hard landing fears at an
all- time high – consumer confidence in China continues to rise.
China’s slowdown is nothing new and should be
taken as a sign of success, not angst. China’s per capita income (at around
$12,000) has reached a level similar to Japan’s in the 1970s and Korea’s in the
1990s, after which both countries saw their growth rates gradually but steadily
come down. As China gets richer and the economy rebalances toward services and
consumption, its growth will also keep slowing. That said, even at a much slower growth rate, China’s
contribution to global growth (at around 1%) will remain the same as during its heady days in the
early 2000s because
it’s own economy is so much bigger.
The Fed is also not a real threat to emerging
markets (EM). EM risk assets have typically faced a major setback when the Fed
is actually cutting rates, not hiking.
Rather than Fed policy, it is shifting
domestic fundamentals that largely explain the fluctuations in EM stocks,
bonds, and currencies in the medium and long term.
As there is little indication that policymakers
are prepared to introduce the pro-market reforms necessary to reverse the
secular decline in productivity and potential GDP growth, EM economies will
continue to suffer and defaults will inevitably rise. That said, I don’t expect financial
stress in the emerging world to snowball and threaten the global economy and
financial system as it did in the past.
EM currencies have been in a downtrend for over
four years, investors have shunned EM stocks since 2013, and global banks that
have made loans face far tougher regulations and are generally better
capitalized. A Fed rate hike will not lead to a disorderly carry trade unwind,
an EM debt crisis, and another global recession. Although EM external debt is
back to mid-1990 levels, it has declined as a share of GDP, and EMs are less
exposed to currency mismatch risks than they were in the 1990s.
Previous Fed rate-hike cycles (1994, 1999, and
2004) have also coincided with an improvement in global trade flows. As the
trade cycle regains strength, EM risk assets should recover.
Why So Bearish?
Many investors and commentators view the sharp
decline in commodity prices, particularly copper and oil, as evidence that the
global economy is about to enter a recession. I disagree with this simplistic
analysis and lean firmly on the side of better global growth conditions in the
year ahead. The latest deflation scare does not endanger what I consider to be
a more durable economic expansion.
According to Anatole Kaletsky, falling oil
prices have never correctly
predicted an economic downturn. On
all recent occasions when the oil price was cut in half (1982-1983, 1985-1986,
1992-1993, 1997-1998, and 2001-2002), faster global growth followed. Conversely,
every global recession in the past 50 years was preceded by a sharp increase in oil prices.
The maximum reflationary impact for the global
economy from the collapse in oil prices is yet to be felt. IMF estimates
suggest that the level of global real GDP rises by about 0.4-0.8% for every 20%
decline in oil prices. As oil prices have fallen over 60% in the last 12
months, this implies they could add at least 1% to global growth in each of the
next two years.
The US dollar strength in the past year
makes the world economy look much worse than it actually is. As the drag from the
energy sector diminishes and the base effects from the strong dollar wear off,
I expect stocks will be bailed out by a robust recovery in a variety of
economic and market-based indicators, including corporate profits. Contrary to widespread
speculation, the earnings backdrop will improve markedly in the coming year.
Source: Bank of America
Merrill Lynch
Investing in a
Post-Apocalyptic World
While risks to my forecast have risen, I
remain optimistic that the path of least resistance for stocks will continue to
be higher.
Two vicious bear markets in under a decade has effectively created a cult of
bears, which makes the bullish case even more resolute.
Despite double-digit annual returns in the last
six years, investors are filled with pessimism, unwilling to accept that
economic growth is attainable or that margins and earnings are sustainable. They
seem to have lost faith in the global macro landscape and believe stocks are
rising for only one reason: central bankers have artificially induced the
rally.
It is amazing how many investors cling to
falsehoods even when so many truthful arguments are within our reach. The truth is that the equity bull market
is built on profits – not QE. Despite the severity of the 2008
crisis, US corporate profits rose back to record levels just three years after
the recession ended.
Unmoved by this impressive development, most
investors usually follow up the QE lament by saying that profits are juiced by
record share buybacks. Before you buy into this dogma, I encourage you to look
at the chart below, which shows total US corporate profits as a share of GDP
and the S&P 500. There is no manipulation or financial engineering going on
here.
Source: Yardeni Research
According to S&P’s old-timer Howard
Silverblatt, buybacks do not increase the S&P 500 earnings per share (EPS). The S&P index
weighting methodology negates most of the share count change and reduces the
impact on EPS.
At the secular trough in 2009, the trailing
12-month EPS for S&P 500 fell to $40. It has now risen to $108. That’s a
gain of 170%. The S&P 500 has increased 200% over the same period. What is
so artificial about the market rally? I anticipate further earnings growth (and
multiple expansion) before we near the end of this economic cycle.
That said, it is perfectly normal to “hate” the
early stage of a secular bull market, where the economy is just emerging from a
difficult period. Not until much later – when recognition of an improving
economic outlook grows – will people feel confident in greater stock ownership.
In the coming years, I see the potential for
larger equity inflows from investors who have distrusted the secular bull
market and are likely to eventually capitulate. They will not be able to ignore
the frequency of new highs in major indices. I expect global participation to
rise and the advance into record territory to broaden further.
Perspectives on
Valuation And Strategy
According to BCA Research, stocks are far
from the bubble conditions expected at the end of a secular bull market, when
secular bear influences take over:
To test whether US
equities are in a bubble, we adopted a commonly used statistical technique of
price momentum, observing deviations from a ten-year moving average of real
prices. A more than two standard deviation divergence was identified as being
in bubble territory. The rationale is that the fundamentals might be driving a
rapid appreciation in the real price of an asset captured by the moving
average. Speculation will drive bubbles beyond the normal distribution around
the trend. On this basis,
US equities are not yet in bubble territory, and neither are any of the other
major markets. Equities were not unduly extended at an overall
index level and no sector looked extended relative to their ten- or twenty-
year real moving averages. This is in contrast to 2007, when oil and gas failed
the test and the end of the 1990s, when almost every sector was in bubble
territory.
Source:
BCA Research
I see no evidence of dangerous levels of
complacency today. Credit spreads – the difference between Moody’s Baa bond
yield and the long-term Treasury yield – remain well above the levels reached
before the important highs of 1966, 2000, and 2007, when euphoric optimism (and
excessive market speculation) was implicit in the narrow spreads. Considering the current low-yield
environment, the US equity risk premium remains fairly generous.
The only “bubble” is in the use of the word.
At present, all stock markets are under downward
pressure, but this is only a short-term problem in the course of long-term
progress. The current risk-off phase should be viewed as an exceptional
opportunity to increase exposure to stocks at the expense of government bonds.
The Bond Bull
Market Is Over
With many pundits claiming the stock bull
market is over, it is surprising how few realize that the bond bull market
already ended in Q1. The global meltdown in interest rates is over.
Government bond markets in the developed world
have enjoyed their longest and biggest bull market in history. The secular bull
cycle began in 1981, and the peak to trough decline in yields is a stunning
91%. The 34-year trend in bond prices has almost been straight up. This has
bred an entire generation of real money investors conditioned to buy any dip
(in search for yield) and remain invested for the long term.
That said, evidence mounts that we are
near the natural end of the secular bull market in bonds. We have completed the long-term journey
from one sentiment extreme to the other.
I find cultural mindsets today are exactly
opposite to those that prevailed at the end of the great inflationary spiral in
the early 1980s. Between 1977 and 1980, the Fed hiked rates from 4.75% to
17.5%, ultimately setting off the secular bull market in bonds. Just as the Fed declared war against
inflation in the 1970s, the global focus today is on fighting deflation.
Major central banks have dropped interest rates to zero and bought $15 trillion
of financial assets.
After more than three decades of disinflation,
investors today are obsessed with the potential for a deflationary spiral. They
have loaded up on government bonds with complete disregard for the consequences
to bond prices if interest rates moved higher. By March of this year,
negative-yielding bonds accounted for €1.5 trillion of debt issued by euro area
governments, equivalent to 30% of the total outstanding. Half of global
government bonds were yielding less than 1%.
Meanwhile, consider that core inflation in
Europe has been stable at 1% since late 2013. In the US, the annual core
inflation rate has held above 1.5%. What
will it take to get rid of the deflationary mindset that has taken hold among
investors?
I have warned readers since February that bond
yields in much of the developed world have fallen to unjustifiably depressed
levels, and that owning government bonds carries major revaluation risk at this
stage of the investment cycle.
The US 30-year Treasury yield hit an all-time
low of 2.23% on January 30th, 2015. It is at 2.85% now. The German 10-year bund
yield reached a record low of 0.05% in April, and is 0.55% today. The US
10-year yield made a higher
low in 2015 at 1.65% (the all-time low of 1.39% was on June 1st,
2012). It is presently consolidating near 2%.
My base-case assessment is that bond
yields will not revisit the lows this year. Even after (1) a 30% plunge in oil
since May, (2) China’s surprise “devaluation,” and (3) a vicious selloff in
global stocks, the US 30-year yield is still 30% higher than its
January level.
It is notable that government bonds have
essentially produced flat returns in 2015 despite the generally risk-off
environment. The muted bond market reaction (compared to previous deflation
shocks) implies the world economy is more resilient than scary headlines or the
persistent dire warnings from pundits would suggest.
Many expect deflation pressures to persist and
believe the US economy is on the verge of a recession. We think both fears are
exaggerated. As deflation concerns fade and market expectations adjust to a
more rosy global growth scenario, yields will climb significantly higher.
On a one-year horizon, the US 10-year Treasury
yield should work back toward equilibrium, which we think is above 3%. The US
economy is growing at a 2% annualized pace, and inflation should gradually
approach the Fed’s 2% target. If Europe experiences mild price inflation next
year, say 0.5%, and the euro area economy is able to grow at 1%, the fair value
for the German 10-year bund yield is around 1.5%.
The outlook for government bonds remains
poor, with current yields pricing in an extraordinarily bearish economic and
inflation outcome.
Source: Nordea Markets
As the Fed rate hike nears, we want to be
short bonds, not equities.
Since 2009, inflows to bond funds were $1.2
trillion (despite the minimal yields) versus $573 billion to equity funds.
According to Bank of America Merrill Lynch, net inflows into bond funds over
this period represent a staggering 66% of their total assets under management
compared to just 6% for equity funds.
We expect bond outflows to gather pace in the
coming months. The inflation cycle has already turned, and it is all but certain
that the rate cycle will soon turn higher as well. Treasuries have not
done well in monetary tightening regimes, with yields rising in each of
the last nine tightening cycles.
Therefore, I see no reason to change our bearish
stance on government bonds from a cyclical vantage point.
Source: Ned Davis
Research
Bond investors continue to fight the Fed.
Round one of the bond bear market lasted from
February 2nd to June 26th, when the US 10-year yield rose
from a low of 1.65% to 2.52%. Round two of the bond bear may be upon us, with a
start date of August 24th. That day’s mini-panic sent the 10-year
yield to 1.9% intraday, before ending the session close to 2%.
Yields will now transition to a sideways range,
ahead of an eventual move higher. The Fed tightening cycle, improving global
growth conditions, and a repricing of deflation fears will drive the next
cyclical upleg in yields. The bond bull market is over.
I anticipate a sustained move in bond yields
above the 200-day moving average (currently at 2.18% on the 10-year and 2.92%
on the 30-year) as confirmation of our investment stance. Should the 10-year
yield break below 1.8% instead, I will need to reevaluate my investment thesis
and positioning. The breakdown would stoke fears of a global recession, and
lead to an acceleration in risk aversion.
In any case, the prospective return from
owning government bonds is not commensurate with the risk. Shown in the table
below, a 100-basis-point increase in yields would, on average, deliver an 8.6%
loss in 10-year bond prices. In 30-year bonds, the same increase in yields
would lead to an 18% loss.
Source: Dan Koh
(Bloomberg)
Final Word
Stocks and bonds have risen for six straight
years to all-time highs. Yet, I believe both are in dramatically different
stages of their secular lifecycles.
Stocks are recovering from their worst decade in
history and should see many more years of relatively strong returns. Meanwhile,
the era of high bond returns is over, and bond yields are likely in a secular
bottoming process that will last many years. The corollary is that the global
stock-to-bond ratio will continue to climb.
For exceptional returns in the coming year, it
is not enough to just be bullish on stocks, you must also avoid (or short)
government bonds.
Jawad Mian
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