As always, the imminent release of the monthly employment report form the Bureau of Labor Statistics has gained the market's attention. What is new in these uncharted Covid-19 waters, though, is that the stock market seems to have zero idea how to accurately asses this -- or any other -- government release. According to the Wall Street Journal, the consensus for tomorrow's BLS employment report calls for a gain of 1.7 million jobs, down sharply from the 4.8 million new jobs registered in July. The stock market has been in an up-up-up pattern of late, as traders who have zero understanding of the economic impacts of government programs -- which would include nearly every stock trader I have met in 30 years of working on Wall Street -- get ready to pull the "buy" trigger again tomorrow.
While stock traders are living down to their perma-bull reputations during the Brave New World of Covid-19 and its economic impact, there is one group that will seemingly never change: bond traders. This crew, collectively speaking, has the keenest sense for the source of its collective happiness. Yes, it's the government.
As the stock market begs for more stimulus to get back to the pre-Covid highs (we are within 2% in Thursday trading), the bond market has already priced in an extended slowdown for the U.S. economy. The bond market has done this, mind you, by rising in value, and I believe that move will continue.
I can't believe my Bloomberg bonds page is showing a reading of 0.54% for the yield on the U.S. 10-year note and 1.21% for the 30-year, Treasury bond, but that is because I am old. As I head toward my sixth decade on this planet, I am constantly amused by the never ending rally among U.S. government bonds, which are, of course, the basis through which so many fixed-income securities are priced.
I used to watch this guy on CNBC yelling about "bond market vigilantes" while his sidekick kept reminding him about the relative attractiveness of the U.S. stock market. Well, this guy is Larry Kudlow, possibly the most important single person on earth in terms of setting fiscal policy, and his sidekick was Jim Cramer, the founder of this website. So, Larry is how in a position as Director of the U.S. National Economic Council, in which the bond market vigilantes could hurt his career. Fortunately for him and fixed-income managers like myself, however, those vigilantes appear to have left the room. Permanently.
It would seem that today nobody really cares about what Larry used to write about when he was Chief Economist at Bear Stearns. I always enjoyed reading his research on the most important topic, the cost of money. That is the economist's job, to figure out that cost.
The bond markets are telling us that the bond market vigilantes are gone for good and that monetary vigilance is a lost art. But the stock market has a way of twisting the uber-logical conclusions drawn by the bond market.
If the conclusion that should be drawn is that it is impossible to accurately divine the cost of money in the Covid-19 environment, watch for stock market bulls to instead draw the false conclusion that money is, in fact, free.
With the bond markets having priced out virtually all the yield, now it is the stock market's turn to deliver real returns. Companies that produce capital and have to return it to maintain a tax-free corporate structure -- REITs as well as BDCs and other types of registered investment companies -- are darn near priceless in the current economy.
While some have to dust off an old textbook from b-school to research such "pass-through"securities, so-called because they pass through their earnings in the form of dividends -- for me analyzing those sectors is a large part of my daily existence.
Stay tuned for more from me -- including in tomorrow's RM column -- on income generating names. Covid-19 has not eliminated the power of compounding, it has just made certain people forget about it. Those of us who remember are locking in yields in our current investments -- real returns if you will -- that will allow us to build wealth for decades.
