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Bond expert: 2017 will be Ďgreat unknowní for markets

McClatchy-Tribune Information Services

January 2, 2017


CHICAGO ó Since Donald Trump won the presidential election, the stock market has been on a tear and bond investors have been losing money.

In less than two months, stocks have surged 6 percent in whatís being called the "Trump rally." With people losing money in typically safe U.S. Treasury bonds and hoping to hold onto their unusually large 14 percent gains in the Dow Jones Industrial Average this year, individuals are on edge. They want to know if itís time to be careful of stocks, and whether bonds will continue to inflict loses.

James Bianco, president of Bianco Research, is telling professionals who invest money for clients to expect a nerve-wracking early 2017. He thinks both stocks and bonds will be tough to stomach amid significant volatility next year as "we go into the great unknown," he said.

Bianco, 54, is known for his outspoken voice and independent views on the economy and markets ó especially the bond market. His research, written at the firm he began in 1998 in Chicago, is followed by professional investors throughout the world ó from hedge fund to endowment fund managers.

"As an independent voice, I can say things others canít," he said, contrasting his style with Wall Street firms that must sometimes tone down their messages to appease business interests. The interview has been edited for length and clarity.

Q: The economy has been stuck in a very slow-growth period for years. Now the stock market rally suggests there are high hopes ó expectations that we are finally going to have stronger growth. Are those expectations justified?

A: There is an expectation that with Trump as president, wages will go up, that there will be more hiring and a better economy. People expect infrastructure spending, lower taxes and less regulation, but the devil is in the details. Trump will have to be sworn into office. Congress will have to take action. The impact on the economy isnít likely until 2018.

Q: In 2017, will the economy grow any more than the sluggish 2 percent growth weíve had?

A: GDP growth will be 2 to 2.5 percent and maybe push 3 percent. If you were to give it a grade, it would be C-minus.

Q: Longer-term, do you think Trump voters will get what they want?

A: I donít know how Trump can deliver unskilled jobs in an economy of robotics. The future of manufacturing will go to Purdue college graduates programming robots. If the hope is to get a good-paying eight-hours-a-day job in a factory, you might get it for a while before it goes to Mexico. But even the $3-an-hour jobs in Mexico will only be temporary until they are replaced by robots. Cashier jobs will be replaced by kiosks and drivers will be replaced by driverless cars and trucks. We are in the midst of great social upheaval. But at least Trump is acknowledging the problem and those afflicted. I think heíll try, but I donít see how.

Q: Does the Trump rally have staying power?

A: The market rally is based on the assumption that you have a businessman president who will be more focused on business and move the economy forward that way. That doesnít mean it will happen. What happens if Congress doesnít want to give Trump $1 trillion for infrastructure spending? Or what happens if the Chinese donít need us more than we need them? At this point we donít know who Trump is or how it will turn out. There is a risk for stock investors if Trump doesnít deliver. As long as we think heís moving toward the goal, it will be OK. But the moment he seems to be stalling the rally could be in trouble.

Q: What about the near term for stocks?

A: I could see a 10 to 15 percent correction. There are a lot of expectations in this market. We have priced in expectations for stronger growth, less regulation and lower taxes. So if Trump delivers we could get sideways action in the stock market. He would have to over-deliver in order for the markets to keep going.

Q: Do you see a bear market or recession?

A: Economies donít die from old age. Something breaks it ó either a financial crisis like 2008, or high oil like $147 oil in 2008, a political crisis like 1974, high interest rates like 1980. So I donít perceive weíre going to be walking into a recession unless it looks like something will break.

Q: Weíve had an amazing bull market in bonds, with people making money for years in simple U.S. Treasury bonds, typically the investment people buy when they donít want to take risks. Do you think itís over?

A: Thereís a very good chance that it is. If youíd been holding bonds up to July of this year, you experienced the greatest bull market in 200 years. In July, yields fell to 1.31 percent when everyone thought that the Brexit was going to cause a recession. That didnít happen. Now the expectation is for growth. So yields were at 1.7 percent on election night. Now theyíre at 2.55 percent. That is a lot for three months ó a big, big move.

Q: When yields rise like that people lose money in bonds. Theyíve been dumping bonds. Whatís ahead?

A: The big issue is whether there is real growth in the economy. If we get growth, bonds are going to be the worst place to be. If we get inflation, bonds will lose you money, but not as much as stocks.

Q: People hold on to bonds for protection in the bad times. But in good times there are losses. Do losses continue?

A: Everyone is bearish on rates now. They are all making a one-sided bet on growth, stocks, copper and the dollar. All of those bets are vulnerable because everyone is betting the same. If there is uncertainty about Trump, everyone will run the other direction. Then we will see a pullback on rates.

Q: Is there a place to go in bonds that will be more secure? Treasury Inflation Protected Securities?

A: They might be a better place to be if you are a bond investor looking for a better relative investment. But if you are a retail investor and you want something thatís going to go up, TIPS might not provide you with what you want. You might be better off in the stock market. You might be better off in real estate as well.

Q: What about municipal bonds, or munis?

A: If tax rates are falling, thatís negative for munis because it reduces the incentive to invest in munis to save on taxes. So I think munis are going to be problematic if we are really in a tax-cutting environment.

 

 


McClatchy-Tribune Information Services