Lacy Hunt on the path to lower yields and Hoye warns on playing a bounce

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At INK we are striving to provide our subscribers with insider insight, both at the stock level via what executives are doing with their own money, and also in the broader context of risks and opportunities via views and insights offered by some of the world's brightest minds in finance. This week on INK, we had two really great interviews from seasoned market veterans that can help provide some guidance in terms of what might be coming next for markets.

Legendary fixed income economist Lacy Hunt paints a bleak picture for bond bears in this early February Real Vision interview with Danielle DiMartino Booth on INK Ultra Money. In a deep 53-minute interview he dismantles the case for economic re-acceleration. Preferring to look at 2-year trends rather than short-term indicators, Hunt concludes that the Fed will likely have to head back to the zero bound on interest rates.

Hunt likes long bonds (Ultra member video)

While we will probably see zero yields again, Hunt believes they will not do much good because of the large amounts of debt in the economy. 

What happens is the rates start coming down towards zero, you hit a reversal point in which the monetary conditions are actually negative. We don't really know where that is. I suspect that that reversal point occurs long before you get to zero.

Hunt points to the diminishing returns from policy intervention, including the Trump tax cuts. He makes the case that the impact from those measures which helped push up federal debt are now gone:

At the start of January 2018, we had a tax cut, which adds about $3 trillion worth of debt over 10 years. We also had a bipartisan increase in spending. It was passed later in January. It's about the same size. Then we had another bipartisan increase in spending in December of last year. Between the three of them over the current 10-year period, we're adding about $10 trillion worth of debt. The tax cut comes in, it's bolstered by this huge mammoth increase in spending. By the way, there were people that were immediately projecting higher growth, higher inflation. This is the way it's supposed to work. Okay. The employment growth is at about 1.5 year over year, we get up to about 1.6. This is on the revised data. The preliminary data showed us going back up to 1.9, that's all gone. That never happened. The BLS got that wrong. We only go back up to about 1.5, we gained two tenths of a percent in the annual growth rate in employment, and now, we're back below where we were. In other words, the tax cut and the fiscal spending comes in. It gives the economy a transitory boost. Then two years later, we're worse off. That's the pattern that we've seen in Europe, the pattern we've seen in Japan, and we're seeing it in spades in China.

While the interview was filmed before this week's market turmoil, he makes an eerie prediction that during the next crisis US rates are indeed going back to zero, maybe even lower:

I think you have to assume that the odds favor that in a crisis situation, they go back and go back to the zero bound and through it.

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We note there were rumours swirling around Friday afternoon that there could be coordinated central bank rate cuts early next week. By our count, there are only three central banks left in the G7 that have room to cut without going deeper into negative territory: Canada, the UK and US. Should the UK cut, it would end up within half a percentage point of 0%.

January can mark major tops (free interview)

Meanwhile, in another timely broadcast, market historian Bob Hoye believes we have experienced at least a cyclical change in the market with early January marking the turning point. He notes that many significant market tops have happened in or around January. He starts off in with 2017 as an example:

Early in October and rally out until the end of the year and that was then the high on the Bitcoin phenomenon. Then the big markets were hit by a 20% sell-off. But, you have had in the past very important market events conclude in the January window. You the Nikkei at the end of 1989, you had the huge gold and silver speculation that blew out in January,1980, any number of them. 1973, that was another big bull market in New York, followed by the worst bear market since the 1930s.

Eventually, he believes people will begin to look at it the coronavirus rationally. However, he also points out a big difference between the experience with SARs and the COVID 2019:

The last such scare was with the SARS threat. That began to appear in November 2002 and by June, July...of '03 the scare and the panic was quite eased by that time, but it was at the opposite end of a financial market. That was when the bear market was concluding, late 2002 and then the final washout in March 2003. In this one, it is associated with the top of a market and thereby the market was very vulnerable.

While Hoye believes in the short-term the market may be been oversold and due for a bounce, he suggests it may be too early for most investors to re-enter the market. Instead, he suggests waiting for a bounce and a subsequent test of the panic lows. Hoye's discussion about the recent sell-off takes place in the first segment of the broadcast.

A version of this post also appears on INKResearch.com.

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