Taps Coogan – February 11th, 2022

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David Roche, Independent Strategy President, recently spoke to CNBC to express his bearish outlook on sovereign bonds in Europe and the US essentially saying he would be short all of them.

 

David Roche on sovereign bonds:

“In terms of bonds alone, my stance is that I’d be short the whole lot of them. short Bunds, short BTPs in Italy, short US Treasuries, and… most certainly be short Gilds because we are most certainly going to see an inflationary spiral in the UK.” 

On inflation:

“I think it’s pretty different (from the 1970s). The inflation that we are looking at today is due to two factors… Number one is supply side disruptions which are much deeper and more ingrained in the economy than anybody ever thought and it involves everything from energy to labor markets… The other side is due to governments and central banks, and frankly they’re the same thing now, pumping mega amounts of money and demand into the economies and financing consumers… You’re dealing with the demand side of that inflation and you’re dealing with the supply side of that inflation and you’re dealing with them at the same time…”

On the punitive nature of inflation:

“Behind all of this is the fact that government support for households is, certainly in the case of the US and most other countries, being withdrawn. So actually, disposable income is, in real terms, shrinking… The legacy in terms of inflation and punishment is a lagging variable and a far way from being solved…”

Of course, the best argument that inflation will be peaking in the coming months is the fact that household income is falling behind inflation and thus the excessive goods demand created by trillions of dollars of helicopter money is likely to moderate. That doesn’t mean that inflation is getting back to 2% – or even 5% – anytime soon, but accelerating year-over-year increases will get harder when compared against the ramp up of inflation that started last Spring.

It was the high working age population growth rates, low debt levels, and low market-cap-to-GDP that allowed the economy to continue to produce high levels of inflation throughout the 1970s despite repeated recessions, bear markets, and high intetest rates. We are now at the opposite end of the pendulum on each of those measures. 

So, while it is reasonable to be bearish on bonds, the biggest risk from here is not that inflation rises a bit further – likely as that is to happen, but that the Fed slams on the breaks,killis the market, and sinks the economy.  

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