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.
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.
That should have been what we were all looking at and going “this is scary.” It wasn’t a 5% or 6% correction. The type of correction we just went through was something that we normally get at least once every 12 to 18 months. You get a 5% correction every 90 days, every quarter. So that was the normal, if you will. The not normal was no corrections and just almost straight up.
And we’re going to see probably more corrections. We’re going to see more volatility. But I would argue that any correction we see now, absent indications for a potential recession, are buying opportunities. If you’re a trader you, you know, see things – when they get to the top you raise a little cash, and when they go down some it gets into your buying session. You buy some, you go back in.
Indeed, the market is probably only going to move higher, Mauldin said. Though the US economy is on the cusp of notching the second-longest growth period in its history, few people see a recession in the offing - a view shared by, among others, bond guru Jeff Gundlach.
The US market may in fact be getting a little long in the tooth. I think that’s fair to say. I think sometime this next month, or very shortly, we become the second-longest growth period in history. And it has to go for another year after that to be the longest. And it very well could.
If you’re looking for recession indicators, there just aren’t any. Several of my friends who really track this stuff – I mean they’re obsessed – and one of them has 18 recession indicators. And 17 of them are saying No. Another one has 11 recession indicators. By the way, they’re different. I found it fascinating. And the large preponderance of those are saying No.
These are nine months out – one of the interesting things is there’s only one really good longer-term recession indicator. And that’s the inverted yield curve. And we are nowhere close to an inverted yield curve in the US markets. That means when short-term rates go above long-term rates. And short-term rates have got to go up again, and again, and again. And the Fed is telling us they’re going to do that.
But that would still mean that long-term rates would have to drop an awful lot. There’s no
reason to think that we’re going to have a recession, absent something happening in Europe – Europe blowing up because of what’s happening in Italy or other places. Or China having some nasty, unexpected event. Which I don’t expect to happen. I think Xi’s got the world pretty much going the way he wants it.
However, Maudlin sees one possible catalyst that could sink the US economy into the next depression - not just a recession, Maudlin emphasizes, but a prolonged period of contraction similar to the Great Depression.
And that, Maudlin argues, is runaway protectionism that leads to a global trade war.
After all, Maudlin explains, the Great Depression was - despite all that talk about buying on margin and the Black Monday - caused by Herbert Hoover's ill-advised passage of the Smoot-Hawley tariffs.
Trade war, protectionism, if it gets out of hand, that could create a recession. And I am not unconcerned about that. I’ve said for 16–17 years in my writing, the thing that keeps me up the most at night, the thing that really worries me about the future of our economy and our kids and everything, that’s a signal for a depression, not a recession, a depression, is trade wars. Protectionism. Smoot–Hawley.
I mean, you get Herbert Hoover, who didn’t know anything, really, about a lot of the things that he was coming into, not unlike maybe some people would suggest our current president is like – he’s learning on the job. But Herbert Hoover let Smoot–Hawley get through and he signed it. And it was all over for the world. We had a depression. That worries me. In and of itself are these steel tariffs a problem? No. I mean, are some people going to lose their jobs over it because it makes their products too high? Yes.
The steel companies are already at record profits, for gosh sakes. I mean, it’s like, they don’t need any help. But it’s a little bitty market. In the grand scheme of things it’s not that big. And, by the way, under George W., he put steel tariffs in. Steel workers, now, there’s 160,000 of them.
That’s all we’ve got left. And people say, oh, my goodness, all those jobs have left. They’ve gone overseas. And I say, no they haven’t. We are producing more steel today than we have ever produced. It wasn’t the jobs that went to China or Mexico or whatever. It was technology. It’s just silly to think that you can make those jobs come back with tariffs. 80% of the manufacturing jobs that have been lost in the United States have been lost to technology.
The problem, Mauldin explains, is that manufacturing jobs in the US aren't disappearing because of free trade - they're disappearing because of technological advancements. So, the irony of the situation is that, by enforcing protectionism, the steel workers whom President Trump is trying to help will instead suffer - just like they did when George W Bush experimented with steel tariffs nearly 20 years ago.
Listen to the rest of the interview below: