Stephanie Pomboy: Cautious on Broader Economy But Also on Bonds
Stephanie Pomboy, president of Macromavens LLC (and a college classmate of mine), talked to Pimm Fox on Bloomberg TV’s "Taking Stock" about the Federal Reserve’s efforts to boost the U.S. economy by lowering interest rates and engaging in quantitative easing . Below is the clip. First, I want to make a few remarks.
Here are the main points:
- Corporate bonds: When talking about the so-called bond bubble, most commentators focus on US government debt because of the extraordinary low yields and because corporate debt spreads to treasuries are not unusually low. However while not talking about a bubble, Pomboy believes that caution is warranted in fixed income all around. I would add that we have had a record year in high yield issuance where yields are at pre-crisis levels, we have seen 100-year Mexican paper issued at 6% yields and IBM is borrowing $1.5 billion of money for 1%. Retail investors have awoken to this outperformance and are loading up on bonds. From a contrarian’s perspective, none of this speaks to corporate bonds as a good risk/reward play.
- Treasurys: Stephanie has been arguing the bullish case for Treasuries because she is concerned about downside risk in the economy going forward. Moreover, the Federal Reserve has telegraphed its intention to put a floor under Treasurys and they have "unlimited" means to do so. Pomboy says you wouldn’t want to "aggressively bet against that." Watch the part of the segment in which she talks about her comparison of post-bubble JGBs (Japanese Government Bonds) to US Treasurys. Good stuff. My read here is that bonds were a much better call last year after stocks had lifted 60% from their lows and everyone was bullish. From a purely contrarian perspective, that’s a buying opportunity if you expect economic weakness (which we got). Now Treasuries have rallied 160 basis points as people discuss double dip. They may rally more (as I think they will). However, that doesn’t warrant an overweight position. As Stephanie says "I don’t need to be a hero on the next 25 basis points."
- QE2: There has not been the "Weimar Republic -style inflation" you heard inflationistas anticipating early in the year due to the Fed’s inability to reduce its balance sheet size. Remember, the Fed has already tripled the size of its balance sheet. But core inflation is dropping to the point where we get the talk about renewed quantitative easing. Pomboy talks about the "illusion of recovery," what I have called the "Fake Recovery" that is an outgrowth of stimulus, easy year-on-year comparisons, and what Stephanie calls squatter savings. Point of fact: I wrote a few posts about the contribution to strategic defaults to consumption demand in April (see here). My conclusion was that this only a minor factor in consumption growth.
That’s it for now. Great interview. Here is the clip:
Also see my post “Macro Maven: Expect a long difficult recession” covering Stephanie Pomboy’s views from December 2008