Why 2012 Is EXACTLY Like 2009, and the 'Spring Switch'
The end of the world is back, but this time it's the bond market sending the message about the future.
Ladies and gentlemen, it's time for a dosage of reality about the negative narrative that has been so easy to believe for investors when it comes to risk assets.
Let's go back in time to the first quarter of 2009, in the heat of the volatility post-Lehman and before the March 9 low. I remember a very knowledgeable friend and investor calling me one day as the Dow Jones Industrial Average (DIA) was crossing under 7,000. We were talking about a number of things, and at some point I was asked the question on everyone's mind: Is now the time to buy stocks? I mean, things looked so bleak and many were betting on an end-of-the-world scenario for global assets, which in turn meant investors kept wanting to buy at lower levels. Dow 6,000? Why do that when I can buy at Dow 5,000?
My response to this question was simple: If the stock market were going to continue to collapse, and was right about the state of the economy, we're all in trouble anyway. In a highly levered society, a further collapse at that time in collateral values would have turned an economic problem into a social crisis. In other words, if you believed back then that stocks would keep going down, then your money is worthless anyway, and you might as well learn how to farm and fend for yourself. My ultimate response was that you might as well take the bet that that would not happen since there's no way to win otherwise.
I believe the exact same thing is underway now, but with the bond market in terms of the message about the future. Treasury yields are at crisis lows, with bond yields in Germany at levels pretty much never before seen in history. If the bond market is right about the economy, it means we are all in a heap of serious trouble. It sends the same message about the future that collapsing stocks sent in early 2009 before the March low – that the entire system is on the verge of collapse. I am not saying that can't happen, but if it is, then you and I have much bigger things to worry about than falling stocks. You basically can't win if the bond market is right from a societal standpoint.
At some point, money will realize this, and sooner than most may think. At some point, the "Spring Switch" out of bonds and into stocks will happen. At some point, scared money will be scared that it's wrong about the future. Take a look below at the price ratio of the iShares 20+ Year Treasury Bond ETF (TLT) relative to the Dow Jones Industrial Average. As a reminder, a rising price ratio means the numerator/TLT is outperforming (up more/down less) the denominator/DIA.
There remains immense potential for stocks to continue to outperform low yielding bonds. And again, low yielding bonds are signaling things are horrific in the global economy. Is that really the way to bet? If the negative narrative truly is too easily believed, isn't the payout highest on betting on a massive move up in risk assets? Many didn't think so in the lead-up to the March 9 low. And yet...
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