The Bond Bear Is Here

About: iShares 20+ Year Treasury Bond ETF (TLT), IEF
by: Bill Gunderson

Monetary Policy has ran its course.

Bonds Are Now In A Bear Market.

It Is Time For Fiscal Stimulus.

Other than one symbolic gesture in December of 2015, the Fed has kept its zero interest rate policy since 2009.

I would argue that the snail-like growth that our economy has achieved since 2009 has come almost entirely from this extraordinarily loose monetary policy.

Now the whole world of interest rates has changed. This has turned the market on its head. This has huge ramifications for investors!

Below is a ten-year chart of what the Fed has done over the last ten years.

Meanwhile, the chart below shows the annual Gross Domestic Product (GDP) of the U.S. economy.

As you can see from the chart, annual growth in the U.S. economy has ranged between 1.5% and 3.0% during that same period of time. We have to go back to the year 2000 to see growth of 5% or more.

The chart below shows average annual GDP growth of the U.S. economy over the last seventy years. GDP growth has ranged between -4.1% and 13.4% during that time.

Over the last seventy years we have had nine recessions (negative growth of GDP). Coming out of each recession in the past, the economy has eventually hit growth north of 5%. Coming out of this last recession however, we never got higher than 3.3%.

You can also see from the chart above that growth in the economy is now running on fumes as monetary policy has exhausted itself. Where does the economy go from here now that the Fed has turned hawkish?

I was shocked to hear Fed Chair, Janet Yellen state the economy does not need any stimulus at the current time. What is the plan to grow the economy now Ms. Yellen? You have to look at more than just the unemployment rate to judge the current trajectory of the U.S. economy. She seemed to be more worried about wage inequality than growth of the economy.

Let's also not forget all of those underemployed or discouraged job seekers. The economy is nowhere near what a 4.6% unemployment rate would suggest. The labor participation rate is at 62.8%.

It has been falling since 2001. What are those millions of able-bodied workers doing?

Now that Monetary Policy has run its course, what about Fiscal Policy? Is it not time for a healthy dose of fiscal policy, or does that go against your politics Ms. Yellen?

After your predecessor was "replaced", here is what he had to say about the fiscal policy right before his term came to an abrupt end in December of 2013.

Bernanke takes parting shot at Congress, calls fiscal policy 'counterproductive'

"Although long-term fiscal sustainability is a critical objective, excessively tight near-term fiscal policies have likely been counterproductive."

"Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be."

"Monetary policy has less room to maneuver when interest rates are close to zero, while expansionary fiscal policy is likely both more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels."

"I would add one more significant factor--namely, fiscal policy. Federal fiscal policy was expansionary in 2009 and 2010. 18 Since that time, however, federal fiscal policy has turned quite restrictive; according to the Congressional Budget Office, tax increases and spending cuts likely lowered output growth in 2013 by as much as 1-1/2 percentage points. In addition, throughout much of the recovery, state and local government budgets have been highly contractionary, reflecting their adjustment to sharply declining tax revenues."

Maybe that is why Mr. Bernanke lost his job. His calls for some fiscal policy relief was not only falling on deaf ears, it flew in the face of political correctness and political ideology.

After all, don't tax cuts only benefit the rich and privileged?

No, they help get the economy growing faster than 2%!

What about the deficit? Does not fiscal policy help put us further in the hole?

It has been my observations over the years that the best panacea for the countries financial problems is a booming economy. Note once again, what Mr. Bernanke had to say:" throughout much of the recovery, state and local government budgets have been highly contractionary, reflecting their adjustment to sharply declining tax revenues."

A booming economy INCREASES tax revenues. When the economy grinds to a halt, tax revenues also drop as wages stagnate or decrease. At that point, the only way to increase tax revenues is to increase taxes.

Now, this is the worst of both worlds! We currently have a restrictive Fiscal Policy along with a shrinking economy, held up by a monetary policy tank that has run dry. In addition to this, we have a Fed that believed a fiscal stimulus package at this time.

Common sense would say that we need to hand off the monetary policy baton to an accommodative fiscal policy or we will run out of gas soon.

Why would Ms. Yellen be against such a plan?


An accommodative fiscal policy is just what the incoming administration is proposing and Ms. Yellen has fired a shot across the bow. She will meet stimulus with rate hikes. She is going to fight the new administration on its plans to increase growth in the economy.

So what does this mean for investors?

In the end, the new administration will win out and Ms. Yellen will be replaced. There are currently two open seats on the Fed. They will be filled by supply-siders.

In July of this year, the whole interest rate environment changed. We are now in a RISING RATE environment for the first time since the early eighties.

Look at how interest rates have been coming down since the late seventies. The bond market has now entered into a BEAR MARKET as rates are finally in the early innings of normalizing.

The Fed now longer has your back. The Fed is now in your face instead. The U.S. long bond as measured by the Exchange Trade Fund (NYSEARCA:TLT) had tripled since 2002. Bond markets are not supposed to do this. It now has a lot of excessive gains to give back.

The "unwinding" is now well underway. The U.S. long bond ETF is now down 18.2% from its July 8th high.

The ten-year U.S. treasury exchange traded fund (NYSEARCA:IEF) is now down 9% from its July 8th high. I sent out a dire warning on the bond market in my July 25th article titled "Unprecedented Risk in Bonds?" I hope that you listened to me.

I believe that the Bond Market finally turned down for good back in July of this year. There will be relief rallies along the way, but once again, I firmly believe that the Bond Market has now entered into a nasty Bear Market.

I do not know about you, but I do not like investing in Bear Markets. Yet, that is exactly what the robo-advisors are doing currently. They are buying bonds like crazy and selling stocks in order to re-balance asset allocation portfolios.

This is exactly opposite of what they should be doing.

They should be investing in assets that benefit from rising interest rates now the whole world of investing has turned upside-down.

Yet financial planners in tailored suits with matching handkerchiefs are telling their clients to stay the course.

It's your money. In the end, you are the one with the ultimate responsibility.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.