The Great Reset and the End to the Bond Bull Run

The quarter-century bull market for bonds is coming to an end, bond king Bill Gross said.

However, Gross, who usually puts his money where his mouth is, later qualified his comment by saying the bear will be a moderate one.

As the US Federal Reserve is shrinking its balance sheet, it is a no-brainer that there must be sufficient demand for government treasuries or prices will fall.

There are also rumors that the Chinese government will slow down its accumulation of US treasuries.  Therefore, in principle, there is a case for Gross to be bearish.

But only time will tell if he made the right call.

Morgan Stanley strategists Matthew Hornbach and Guneet Dhingra disagreed with his call, reassuring investors that bonds would continue to offer value.

The question is whether there is any upside to be had from investing in treasuries.  Frankly speaking, I do not see any.

In the worst-case scenario, credit will see a contraction, hence leading to a general price deflation for all kinds of assets.  It means the only asset that one should hold is cash.

General price deflation is an abnormality and usually lasts for no more than a few months. It is, therefore, a reset.

History does not repeat itself, but it does rhyme.  When the market crashes and asset prices fall, central banks come to the rescue.

The re-inflation of central banks’ balance sheets means credit will once again flow into the market and some assets will gain momentum.

In the past few years, the US stock market, as well as Hong Kong’s property market, benefited from quantitative easing.

Although no one can tell when the long-overdue correction will take place, it will undoubtedly happen.

If we are talking about the end of a quarter-century bull market, it will be spectacular in an unprecedented way.

Every cloud has its silver lining.  Even if the bull market for bonds comes to an end, there will always be a need for investment assets.  If the new normal tells us anything, low single-digit returns can be appealing as long as inflation expectations remain.

In the next cycle, I will bet my money on US property, and Hong Kong’s stock market, which will likely benefit from the credit created.

Originally published in The Standard, 5 January 2018 as Any end to bond bull run will help fuel stocks


Also published on Medium.

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