Bonds To Keep Weakening Until Stocks Tank | Bill Fleckenstein
Jan 9, 2025
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Bill Fleckenstein, an analyst at Fleckenstein Capital, discusses the looming bond market revolt against the Federal Reserve as yields rise despite rate cuts. He predicts bonds will continue to weaken, impacting stocks significantly. John Lodra and Mike Preston from New Harbor Financial share insights on market trends, evaluating the growing disconnect between stock valuations and economic realities. The trio explores active versus passive investing strategies, the shifting dynamics of gold vs. Bitcoin, and the psychological effects of inflation on consumer sentiment.
The bond market is demonstrating a lack of confidence in the Federal Reserve as yields continue to rise despite rate cuts.
Economic stagnation and political challenges contribute to a precarious environment where both inflation and growth are problematic.
Investor psychology plays a crucial role in perpetuating inflationary pressures, making it harder to return to a lower inflation mindset.
Deep dives
Assessment of the Global Economy
The speaker evaluates the current state of the global economy as relatively stagnant, noting that while conditions are not dire, there isn't much to be optimistic about either. With a significant fiscal deficit in the U.S., he believes the economy is experiencing stagflation, characterized by high inflation and slow growth. He points out that there are no strong economic growth drivers, and other regions like Europe and China also seem to be struggling economically. The overall inference is that political turmoil and policy challenges could further complicate the economic landscape.
Impact of Bonds and Inflation
The ongoing bond market trends appear to signal a lack of confidence in Federal Reserve policies, as bond yields rise even when the Fed reduces rates. This suggests that bond investors are losing faith in the Fed's ability to manage inflation without significant economic fallout. The speaker warns of a potential disconnect between the bond market and the Fed, indicating a scenario where higher bond yields could lead to increased borrowing costs for consumers and businesses. This creates a precarious balance where persistent inflation and rising interest rates could exacerbate economic challenges.
Expectations for Trump Administration Policies
Discussion revolves around whether the promises of the new administration, particularly regarding pro-capitalist policies, can deliver substantial economic benefits. The speaker suggests that while there may be initial enthusiasm, the complexities of legislative processes could lead to disappointment. He emphasizes the difficulties that the Trump administration may face in implementing its agenda, reflecting on past experiences where lofty expectations did not pan out. This sentiment indicates a cautious approach toward the administration's ability to influence the economy positively.
Market Behavior and Passive Investing
The conversation identifies the influence of passive investing in the stock market, which has led to a distorted understanding of market signals and valuations. This kind of investment behavior can create bubbles and prolong economic inefficiencies. The speaker notes that market sentiment and stock prices might not reflect underlying economic realities, as passive flows can mask real market risks. Thus, the necessity of a shift towards more active investment strategies becomes evident amid concerns about the sustainability of current market conditions.
Future Prospects for Stock Market Corrections
The speaker predicts that a correction in the stock market is likely, especially if the current rising yield and inflation trends persist. He implies that the pressures from the bond market will eventually spill over to equities, causing substantial volatility. The expectation is that investors should prepare for downward adjustments as the market responds to rising rates and potential policy missteps. This creates an environment where tactical asset allocation and risk management will be pivotal for preserving capital.
Investor Sentiment and Psychological Factors
The conversation highlights the significant psychological components that influence investor behavior regarding inflation and market conditions. The speaker argues that once consumer perception assumes inflation will persist, it becomes difficult to revert to a lower inflation mindset. This psychological shift affects spending habits and investment decisions, resulting in a reinforcement of inflationary pressures. Understanding these dynamics is crucial for investors as they navigate potential economic turbulence and shifts in market sentiment.
Today's guest has long warned that the bond market will one day take the printing press away from the Federal Reserve.
Well, the Fed has now CUT its policy rate by 100 basis points since
September, but the yield on the 10 year US Treasury note is now 100 basis point HIGHER since then.
This has flummoxed many investors and mortgage holders. Yet it begs the question: is this the start of a bond market revolt against the Fed?
To find out, we're fortunate to welcome back to the program analyst Bill Fleckenstein of Fleckenstein Capital.
Bill predicts the bond market will keep falling until stocks tank.
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