Episode Summary
Executive Summary: Mike Green and Bob Elliott argued the bond selloff is mostly a supply-and-demand repricing, not a clean inflation or growth signal, while also warning the economy is late-cycle and weakening. They favored longer-duration TIPS and, to a lesser extent, gold as real-rate hedges, were skeptical of Bitcoin as a proven hedge, and thought equities remain priced for an overly optimistic soft landing.
Main Topics: Bond selloff and higher-for-longer rates: They said the move in long Treasuries reflects both fading Fed-cut expectations and a large increase in duration supply from Treasury issuance. Late-cycle macro outlook: Both speakers argued the economy is in a late-cycle phase, with tightening, slowing growth, and fiscal supports fading rather than a soft landing being assured. Stocks vs. bonds valuation gap: They stressed that equities remain expensive relative to bonds because passive flows and earnings optimism are keeping stocks elevated even as bond yields reset higher. Passive flows and inelastic demand: Mike emphasized retirement-plan and systematic flows as a major reason prices can stay disconnected from fundamentals, especially in both stocks and bonds. TIPS and gold as preferred hedges: Both speakers viewed TIPS as especially attractive at current real yields, with gold also appealing as a real-rate/financial repression hedge. Bitcoin skepticism as a hedge: They contrasted gold’s long historical record with Bitcoin’s limited sample and argued recent stress tests did not support the bullish hedge narrative. Private credit and credit-cycle risks: Bob warned private credit and private equity are hiding leverage and losses through illiquidity, NAV loans, and mark smoothing, which can amplify future downside.
Key Arguments: The bond selloff is driven by higher-for-longer Fed expectations plus a surge in long-duration supply, especially from Treasury financing needs. The pain in shorting bonds may be largely behind the market now; future returns will increasingly depend on yield-sensitive buyers responding to higher rates. The U.S. economy is late cycle, with weakening labor force growth, slowing credit creation, and fading 2023 fiscal boosts. Equity markets are priced for a very optimistic soft landing: elevated earnings growth, low inflation, and limited recession risk that speakers see as too aggressive. Passive retirement and systematic flows create inelastic demand, allowing large-cap stocks to stay richly valued regardless of fundamentals. TIPS at roughly 2.5%-2.6% real yields are unusually attractive for long-term savers and institutions needing inflation-protected duration. Gold remains a viable hedge because it is a non-yielding asset linked to real rates and financial repression. Bitcoin is not yet established as a dependable inflation or geopolitical hedge; recent conflict-related trading did not convincingly support the thesis. Private credit/PE may be masking real losses; when the credit cycle turns, the lack of mark-to-market transparency can worsen eventual drawdowns. Both speakers expect a recession is more likely than the consensus soft-landing narrative implies, even if unemployment peaks lower than past cycles due to slower labor-force growth.
Data Points: 30-year Treasury yield: close to 5% - Used as evidence that bonds are much cheaper than when yields were near 3%. Long bond total decline: down 50%+ - Mike said many long-bond investors are down more than half, yet few are willing to add. Federal Reserve tightening: 500 basis points - Mike cited this as proof the economy is late cycle, not early cycle. Expected Fed cuts by Dec. 2024: close to 100 basis points - Jack referenced CME futures pricing for roughly four cuts over the next year. Real yield on 30-year TIPS: about 2.5%-2.6% - Mike and Bob highlighted this as highly attractive for long-term real returns. Social Security COLA increase: 8.7% - Mike used this as an example of fiscal support boosting household income. Household cash yield: about 5% - Mike noted savers with cash benefited from money-market yields after rates rose. Unemployment rate: 3.8% - Discussed as low, but not necessarily signaling a strong labor-force backdrop. GDP nowcast referenced: Atlanta Fed GDPNow at 6% - Bob cited this as an example of overly optimistic soft-landing expectations earlier in the cycle. Inflation assumptions priced by markets: 2% forever - Bob argued markets are embedding a very benign inflation outlook. Earnings growth priced by markets: 12% in 2024 and 2025 - Bob said this is much too optimistic versus recession-risk outcomes. Typical recession earnings move: -20% to -25% - Bob contrasted market pricing with historical recessionary earnings declines. Bond market annualized household/mutual fund/ETF flow: about $1 trillion - Bob said yield-sensitive flows are starting to return to bonds. High-yield average maturity: inside 5 years - Mike viewed the shrinking maturity wall as a meaningful credit stress signal. Stocks in down years vs. gold: 60% of 12-month periods - Bob said gold outperforms bonds or TIPS in most down-stock periods. Private equity marks: smoother than market value - Bob criticized mark smoothing and illiquidity as hiding real risk.
Pivotal Quotes: "the easy money being short bonds has been made" — Bob Elliott: Bob’s view that the bond trade has already moved a long way and is less obvious now. "there is no actual conviction behind any of this stuff" — Mike Green: Mike’s critique of stock-market pricing being driven more by flows and narratives than fundamentals. "we owe it to people to speak plainly and literally and truthfully about how things perform" — Bob Elliott: Bob’s closing defense of empirical honesty, especially regarding Bitcoin and hedge narratives.
Implications: Listeners should expect continued volatility as bond supply, passive flows, and late-cycle slowing collide. TIPS and gold look better as real-rate hedges, while equities may be vulnerable if earnings disappoint and soft-landing optimism fades.
From the Episode
You know, the dynamics of the bond market and the complexion of it are going to be a little different than what we've seen over the last couple of months. The pain in the bond market has been tremendous. Do you think the pain is over? I mean, what gives you confidence that it is over if your answer is yes? And then, Mike, same question: Is the pain in the bond market over? Well, I think what I've said before recently is: you know, the easy money being short bonds has been made. And the reason why that is. You have to go to the ordering of how this market is playing out, which is, and I think a lot of people may have for, like, you may have not recognized this ordering, which is first bond yields rise. That then hits asset prices and the economy combined with time, interest rates being elevated for longer, you know, for a longer period of time. That hits asset prices in the economy. That then creates a forward-looking weakening in the economy, which then reduces.
We're trying to actually assign rational narratives to, right? People look at the earnings and they say, oh, they must be better, right? The earnings must be higher for the largest companies that don't pay dividends. That's actually not what's built into the analyst forecast. The actual expectations are for faster growth in the Russell 2000, faster growth in many of the cyclical areas of the economy that actually do pay dividends. It's just not showing up, right? And so, like, there is no actual conviction behind any of. This stuff is kind of my overall assessment. I think we are largely trapped in, you know, to steal from Rick Bookstaber, a demon of our own design, in which we keep trying to say, you know, what's priced in, or how do we arbitrage it? And I would just highlight for Bob: how do you arbitrage something like earnings? The only mechanisms that are actually available for arbitraging the fundamentals themselves are actually through things like dividend swaps, and they show no sign of the growth expectations. When we use the term arbitrage, we have to be really
As respected commentators. Giving perspective on how financial assets work. We owe it to people to speak plainly and literally and truthfully about how things perform in different market environments, right? To recognize when there's uncertainty, but also to highlight when things are playing out in a certain way, because it is critical as fiduciaries, and I mean that sort of in a way. Broad sense of fiduciaries that we don't, that we, that we represent the reality to people, whether you like, you know, whether we like the reality or not, whether we're right or wrong on our trades, right? And so I think it's this is a good example where there is a lot of uncertainty, and where I think we can, there's a lot of uncertainty, and frankly, there's a lot of misinformation. Critically wrong misinformation in the market that's being presented to people, where we have a responsibility to be very clear about how things are working, and to, and particularly when we see these stress tests, and to call balls and strikes, whether we like it or not, right? Whether it's consistent, you know, whether it helps our pocketbook or not, call the balls and strikes on how, for instance, this asset is.
About Forward Guidance
The laws of macro investing are being re-written, and investors who fail to adapt to the rapidly changing monetary environment will struggle to keep pace. Felix Jauvin interviews the brightest minds in finance about which asset classes they think will thrive in the financial future that they envision. Follow Felix: https://twitter.com/fejau_inc Follow Forward Guidance: https://twitter.com/ForwardGuidance Subscribe on YouTube: https://www.youtube.com/@ForwardGuidanceBW Follow Blockworks: https...