THE BOND AND EQUITY PUZZLE!

Buy stocks, Blok says so!! #1560492... (also, look at this guy's _name_!)

The longstanding negative correlation between bonds and equities, the logic that underlies the 60/40 portfolio, has broken down. #1557712

The two most striking moves in markets this year are the extent of the rise in bond yields and the strength and breadth of the equity rally. The biggest puzzle is why the first has not destabilised the second.

pro case: corporate profits are surging, hashtag AI trade/investment boom

If earnings can remain above historical norms, equities are therefore inexpensive. The more optimistic go further still, expecting the growth to reduce future government deficits.

3 reasons against:

• does not account for FINANCING PROBLEMS in the AI trade
• does not explain why debasement trade is back
• ...or how spending has been paid for ("by overlooking how the spending has been paid for, it grants permanence to an arrangement that is anything but." -- I confess, I don't understand this part of the argument, WTH is author smoking?)

"Real yields, and their slower-moving cousin the natural rate of interest, do loosely follow growth."

....uh-hu, and we know this how? WHAT exactly is a real yield (if not the residual of nominal yield minus some inflation measure)?

it would be more accurate to say they are driven by the private sector’s desire to borrow — and on that front the changes over the past three years have been enormous. There are three ways to pay for a data centre. You can spend your own cash. You can lend your credibility so that someone else can borrow. Or you can borrow yourself.

Being able to finance an investment boom through your own balance sheet — say, $200bn of spare cash that the four biggest spenders of Microsoft, Alphabet, Amazon and Meta had accumulated by 2020 plus the $650bn a year they now generate from operations — has two enormous advantages.

...yeah, it was pretty much JUST government profligacy all along. Boring.

Even now, despite individual bumper bond deals, the scale of tech issuance remains dwarfed by that of government borrowing — leading some to conclude that it is unimportant for interest rates.
Normally corporate issuance falls away as yields rise, but tech issuance has been doing the opposite. Borrowing on this scale, which is indifferent to the cost it pays, drives up yields for everyone else — homeowners and even governments — and is likely to continue doing so for as long as the equity market keeps validating it.

Did somebody say debasement?!

inferring that rising yields reflect a stronger economy that will in due course pay for the deficit is to get the causation backwards. Deficits are aggravated by higher interest rates — even when the rate rises stem as much from the private sector’s price-insensitive borrowing as from the governments’ profligacy. This cannot be fixed by buying back the long end and funding even shorter.

"Every bubble is explained twice. In the build-up, the emphasis is on what investors have been buying. Only afterwards do people come to recognise that the more important point is how it was all being financed."

https://archive.md/o3J7X