How the Biggest Bull Market Could Go on for a Whole Lot Longer

Joe Weisenthal (0:09)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:13)

And I'm Tracy Alloway.

Joe Weisenthal (0:15)

So Tracy, remember a few weeks ago or a few months ago when we had that episode about how the bond bull market might come to a disastrous halt, and people might lose billions all over the world?

Tracy Alloway (0:28)

A few months ago. I know it's been a long year so far, at least it feels like a long time, but it was only just in January, right?

Joe Weisenthal (0:38)

Oh man, has it really been that recently? It has been a long year, that's my excuse. So we talked on that episode to Paul Schmelzing. He's at Harvard University and a researcher at the Bank of England, and he had a very interesting sort of theory about how this incredible bond bull market that we've seen could come to a disastrous halt via some combination of inflation and banks having to liquidate their bond holdings, and it was all pretty gloomy.

Tracy Alloway (1:10)

Yeah, well, you know I'm a sucker for financial market history, so the thing I really liked about that conversation was that he went back over 800 years of bond market history to draw an analogy with the current situation today and basically made a big call saying that we could have a bond market massacre that's probably one of the worst we've ever seen, right?

Joe Weisenthal (1:34)

Absolutely. So here's the good news, though.

Not everyone agrees with Paul. And in fact, today we're going to do a follow-up episode, and we're going to talk to someone who takes the opposite view that there is no bond market disaster in the offing.

Tracy Alloway (1:54)

Great. Let it never be said that we don't present both sides of the story, right, Joe?

Joe Weisenthal (1:59)

Exactly. Even if someone has to wait several months, or maybe in this case just a few weeks, even if you have to wait a while, we always like to have the opposite argument on the Odd Lots podcast.

Tracy Alloway (2:09)

Excellent.

Joe Weisenthal (2:10)

So with us today to discuss this is Srinivas Tiruvadantai of the Jerome Levy Forecasting Center.

And recently he wrote a piece of research arguing directly against Paul Schmelzing's argument, and he explains why the bond market is not in some massively precarious state and ready for a sell off. So I say we get to his argument.

Tracy Alloway (2:34)

Yeah, I'm intrigued. Let's get him on.

Joe Weisenthal (2:46)

All right, Srinivas, thank you very much for joining us on the Odd Lots Podcast.

Srinivas Thiruvadanthai (2:49)

Thank you, Joe.

Joe Weisenthal (2:51)

So first of all, let's talk about the Paul's piece. So he argued he, in this blog post that got shared quite widely from the Bank of England, he looked at historical bond market sell-offs, and he noted that there are a few different kinds of bond market sell-offs. Some have to do with the credit worthiness of the issuer, the sovereign. Some have to do with inflation. Some are more technical.

And he sort of zeroed in on this idea that in the 60s, we had this episode of an intent bond market sell-off due to inflation, and that there were also similarities to the early 2000s in Japan, what he called a value at risk shock.

You don't really find the analogies helpful. So tell us about your work.

Srinivas Thiruvadanthai (3:45)

So I am also a sucker for long history. But in the case of the bond market, the problem with long history is that we are in a world of fiat currency, which has really existed for 40 years. And even if you include the history entirely from the end of the gold standard era in 34, you could say 70 years.

But the problem with the pre-gold standard, the pre-World War era, is that most of the time there was a credit risk for sovereigns because they had to convert it into gold.

Joe Weisenthal (4:17)

So this is a really key point that I just want to make sure people understand, which is that when governments were on the gold standard, there was actually a risk that they could just run out of money, so that they were kind of like a company in that regards. You lend money to a company, the company might go bankrupt.

Now with governments mostly on fiat currency, there are still risks, but they're not about running out of money, because fiat money can just be sort of created massively. And so in other words, you look back 800 years back when we were on the gold standard, those just aren't really comparable.