Last week on Erik Townsend’s Macrovoices podcast, Jim Grant, storied credit investor and founder of Grant’s Interest Rate Observer, explained the reasoning behind his call that the great secular bond bear market actually began in the aftermath of the UK’s Brexit vote during the summer of 2016 – when Treasury yields touched their all-time lows.
Surprisingly, Grant’s call isn’t rooted in the bold-faced absurdity of Italian junk bonds trading with a zero-handle (although that’s certainly part of it). Rather, Grant explained, a historical analysis reveals that bond yields fluctuate in broad-based multi-generation cycles of different lengths. And given the carte blanche allotted to economics PhDs to “put the cart of asset prices before the horse of enterprise”, the fundamentals are indeed worrisome.
But in this week’s interview, John Mauldin offered a much more sanguine view of the landscape for markets and the global economy.
Beginning with the stock market: The “volocaust” experienced by US markets wasn’t unusual, Mauldin explained. It was the 15 straight months without a 2% correction that was unusual, Mauldin said.
John Mauldin
More corrections will almost certainly follow during the coming months. But absent any signs of a recession, these should be treated as buying opportunities by investors.
Now let’s remember something: The last drawdowns that we had – the corrections if you will – were not the unusual part. They weren’t the odd part. The odd part was 15 months in a row without a 2% correction. Never happened, ever, ever. So that was the odd part.
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CHICAGO – Every major financial crisis leaves a unique footprint. Just as banking crises throughout the nineteenth and twentieth centuries revealed the importance of financial-sector liquidity and lenders of last resort, the Great Depression underscored the necessity of counter-cyclical fiscal and monetary policies. And, more recently, the 2008 financial crisis and subsequent Great Recession revealed the key drivers of credit-driven business cycles.
Specifically, the Great Recession showed us that we can predict a slowdown in economic activity by looking at rising household debt. In the United States and across many other countries, changes in household debt-to-GDP ratios between 2002 and 2007 correlate strongly with increases in unemployment from 2007 to 2010. For example, before the crash, household debt had increased enormously in Arizona and Nevada, as well as in Ireland and Spain; and, after the crash, all four locales experienced particularly severe recessions.
In fact, rising household debt was predictive of economic slumps long before the Great Recession. In his 1994 presidential address to the European Economic Association, Mervyn King, then the chief economist at the Bank of England, showed that countries with the largest increases in household debt-to-income ratios from 1984 to 1988 suffered the largest shortfalls in real (inflation-adjusted) GDP growth from 1989 to 1992.
Likewise, in our own work with Emil Verner of Princeton University, we have shown that US states with larger household-debt increases from 1982 to 1989 experienced larger increases in unemployment and more severe declines in real GDP growth from 1989 to 1992.
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