Stocks vs. Bonds

Bloomberg.comCooperman ‘Wouldn’t Be Caught Dead’ Owning U.S. Treasuries
Leon Cooperman, the chairman of hedge fund Omega Advisors Inc., said investors should avoid Treasuries after yields dropped to record lows. Rates on 10-year Treasuries fell to 1.67 percent on Sept. 23. Cooperman said that given tax rates and inflation, he’s unwilling to accept the negative real rates investors are effectively getting from the securities. “I wouldn’t be caught dead owning a U.S. government bond,” he said today during a presentation at the Value Investing Congress in New York. “Not because I have a problem with the credit. I have a problem with paying 35 percent on the 2 percent to Uncle Sam, and then have a 2 to 3 percent rate of inflation,” he said. “It’s confiscation of my capital. I think I’m too smart to play that game.”


Cooperman’s comment reminded us of a Nassim Taleb comment from February 5, 2010:

Nassim Nicholas Taleb, author of “The Black Swan,” said “every single human being” should bet U.S. Treasury bonds will decline, citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration. It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.” Taleb said investors should bet on a rise in long-term U.S. Treasury yields

So how has Taleb’s “no brainer” call performed?  From February 5, 2010 to October 18, 2011:

S&P 500 total return = 18.91%
BofA/Merrill 20+ Treasury Index total return = 34.72%

What is Cooperman missing?  As we said yesterday:

In an August post we asked Who Is Buying Treasuries?  In it, we noted that bonds have had a series of “price insensitive” buyers.  This began with the Bank of Japan  from the late 1990s to 2003.  Then it was the Bank of China from 2003 to 2008.  Finally the Federal Reserve stepped in with its QE “money printing” from 2008 to present.  Those arguing that bonds have little value (an argument we are sympathetic with) assume that the bond market is bought by investors who care about value.  Since the dominant player has been central banks, this has not been the case.  Add to this the fact that bonds offer a place to hide in the midst of great volatility and the poor returns of “risk-on” markets.  Add this all up and the standard bearish bond market forecast has not worked.

These bearish forecasts will only prove to be correct once the dominant buyer of bonds is someone who cares about value.  That means no Federal Reserve printing money, no Bank of China and no scared money hiding from a potential loss in risky markets.  That is not happening anytime soon.  So while we agree that bonds offer little value relative to stocks, we do not look for the markets to correct this anytime soon.

To borrow a phrase from John Meynard Keynes, the Federal Reserve’s printing press can run longer than most can remain solvent in waiting for yields to go up.

Bianco Research, October 19, 2011

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