Ron Surz's Big Bond Market Short

The infrastructure spending that [President Joe] Biden has [recently signed] is another $3 trillion. So let’s call the total $15 trillion.

The expense of World War II in today’s dollars was $4.5 trillion!

Secondly, we have never had 78 million people in what I call “the risk zone” — the five to 10 years before and after retirement — all at the same time. They’re baby boomers, ages 65 to 75. In this decade, most will be in the risk zone.

You told me in an interview, published on Dec. 20, 2021, that this is “the worst time to be retiring.” Do you still think that?

Yes. You can’t invest safely and make any money. So you’re, sort of, forced to take some risk. That’s the primary reason that the stock market has been going up.

That’s bad news for people who have been planning to retire around now, isn’t it?

There’s a retirement crisis. Seventy percent of the 78 million baby boomers have savings of less than $300,000. That’s 55 million people. It’s a real problem.

Indeed. You’ve said that those who “suffer most” from a market correction are those who are transitioning from working life to retirement. Please elaborate.

Their options are limited. They can go back into the work force, but that, maybe, isn’t in the cards for most people.

They can double down and try to take more risk in the stock market. That’s probably not a good bet.

But you can’t make much money being safe [in your investments].

What they’re going to find themselves doing is changing their standard of living.

Why aren’t you in favor of the 60/40 portfolio for retirees?

Any one-size-fits-all solution isn’t going to be right for everybody, and it’s certainly not right for people who are baby boomers. It’s very risky, especially now with bonds being volatile.

You’ve said that target date funds can be risky. Please explain why.

The typical target date fund is around 50% equities — that’s already pretty risky. But most of the balance of the assets are in long-term bonds, which are risky.

However, last year the typical 2020 target date fund [marketed by the industry] was down 13%. Surveys of people near retirement, and others, said they lost more than 10%.

[In contrast], my target date fund is mostly in cash, Treasury bills, and then TIPS, about 70%. My 2020 target date fund was down 2% last year, not 13%.

We’ve taken a totally different approach to target date funds. We’re really aimed at protecting people in their retirement.

You describe what you call the “vicious cycle” of stocks, the Fed and interest rates. Please explain.

It begins with a zero interest-rate policy. If the Fed takes its foot off that brake and basically stops buying bonds to keep interest rates low, those bonds will increase in yield — they’ll get cheaper.

As the yields increase, the debt service increases, and we’ve got $30 trillion in debt that we’re paying interest on. The tax revenues from last year were $3 trillion!

So, hypothetically, if interest rates go as high as 10%, every single tax dollar would go to pay the debt. The Fed won’t be able to just let interest rates go to their natural level. They have to stop.

And they’re continuing to get pressure because the stock market is hurt by rising interest rates in two ways.

What are they?

One is that corporations pay more for borrowing. And most importantly, a lot of the justification for the superbubble is that future earnings will be worth a lot more because they’re being discounted at zero.

Once you start discounting that at a realistic interest rate, those earnings are going to be much, much smaller. The value of the companies will go down.

In 2013, when the Fed started to taper, the stock market started to go down, and they backed off.

What has the Fed’s manipulation of the economy and markets accomplished?

It probably at least postponed a recession that we would have had in 2009.

But we had the Great Recession of 2007-2009. Was another one threatening?

Yes. It would have been much worse. The Fed buoyed up bond prices. Bonds would have tanked, and that would have definitely spilled over to stock prices.

We had inflation, but it was in asset prices. So we got through with just a mild recession. Then we had 13 years of rising stock and bond markets.

What are your thoughts about whether there’ll be a recession this year?

I think we’re going to see one. A declining market would cause it. Even though the common belief is that the stock market is the leading indicator — I think it could be a cause.

Because if we have a serious decline in the stock market, people will be poorer, and that will generate a recession. They’ll stop spending: They’ll pull in their belts and spend less.

What about all-important inflation?

The Fed had said that the rising rate of inflation we saw [manifesting] was “transitory”! The flavor of the inflation we’re seeing now is supply-driven.

We’re seeing inflation coming down, which is good. But I don’t think it’s going to last. Spending trillions of dollars over the last decade is very inflationary.

You write that “the investment management community” is “gaslighting” — brainwashing — people into “believing the future is bright … that there are no bubbles in stock and bond prices, that the Fed is our savior, and securities markets will always go up.”

You continue: “Wall Street wants to control the $50 trillion in baby boomer hands.” Please explain.

Characteristically they’ll say with trepidation that [for example] the stock market is going to go up “only” by 5%.

That’s the typical Wall Street gaslighting: They tell everybody everything is going to be, maybe, not as good as we’ve seen in the past and that a 5%-10% return in 2023 isn’t that terrible.

Presumably they’re saying that to encourage people to invest in the market?

Yeah! They get paid on assets under management. Incentives modify behavior.

But somehow I think they really want to believe the bull—- they’re serving up.

Right now, analysts have reduced their corporate earnings expectations for this year. Correct?

I’m surprised to find that analysts are forecasting stock market losses for 2023. But my view is that we’re being gaslighted with optimistic losses. We’ll be lucky if losses are as low as analysts’ forecasts.

Pictured: Ronald Surz, president of Target Date Solutions