Given the results of the Greek election this past weekend, it seemed that bond vigilantes were on the run. And after greater consideration, I started to imagine what the King of Bond Vigilantes would say to his faithful followers…
To My Fellow Bond Vigilantes:
Father’s Day 2012 will be recorded in history as a day of ignominy, for it was on that day that the Greeks undid our plot to take over the world.
Until that day, things were going quite well in 2012. After a brief scare for us in March, when the 10-Year Treasury was at 2.38%, we took total control of the markets. Taking advantage of concerns about U.S. growth and a potential breakup of the Eurozone, we scared the living daylights out of stock investors and took the 10-Year to an all-time low of 1.45%. But we had our eyes on a bigger prize! If only the Greeks had voted for the anti-austerity Syriza party, we could have shot for the magical number of 1% on the 10-Year.
Alas, it was not to be. The Greeks performed two miracles on Sunday: Their soccer team advanced in the Euro Cup AND they voted in the New Democracy party. With a New Democracy-led coalition in power, the news we had hoped for—that Greece would drop the euro for the drachma—probably won’t happen in the near term, and as U.S. growth stabilizes, we’ll just have to wait for that grand prize.
Believe me, I understand your frustration. But even though the Greeks have voted in the conservatives, I do not see this as the endgame by any measure. In the coming weeks, the Greeks will have to negotiate with the Germans (both on and off the soccer field). The Germans may throw the new Greek government a small bone, but austerity will still be the order of the day.
So you see, although the Eurozone may not break up today, or even in the next quarter, mark my words, that prospect still exists! In this respect, always remember the Germans are our best allies. Not only are they helping us by implementing Europe-wide austerity forever, they are keeping the European Central Bank —the only entity with the ability to contend with us—at bay.
Today’s market is only a respite. We must consider the Greek elections as a tactical retreat, but we have not given up! We will pull back, resupply and come back with added vigor! With able allies like Angela Merkel, we can’t lose.
Your Fearless Leader, The King of Bond Vigilantes
… but even though the King does his best to make a persuasive argument, for me, it comes down to two things that can inevitably prove him wrong:
- Pro-growth policies are gaining traction in Europe. The recent ascent of pro-growth leaders (i.e., France) has meaningfully changed the policy outlook. I believe more pro-growth policies will be implemented and that they will move the European crisis towards a conclusion
- Growth in the United States is stabilizing. There have been material changes in housing, manufacturing and energy. The recent softening of economic data may even spur additional Fed stimulus in the U.S., which would help the situation further
Though I am sure the King of Bond Vigilantes would not enjoy what I have to say, I believe that once these two things occur, his “grand prize” will fall further and further away from his grasp.