Long bonds or stocks?

If you asked that question following the election in November, most PMs probably would’ve insisted stocks were the better bet, particularly if you specified that bonds meant 30-year Treasurys.

After all, Donald Trump loves to boast about rising stock prices when he’s president, and his fiscal program was generally viewed as bond unfriendly, just ask the term premium, which widened sharply in the weeks leading up to the vote. Well, guess what?

As the figure shows, the US long-end’s outperforming the S&P since the election, a reflection of acute growth concerns fanned by Elon Musk’s federal payrolls purge and Trump’s exceedingly mercurial approach to “trade war 2.0.”

If you ask BofA’s Michael Hartnett, long the long bond’s likely to remain a good trade, and the curve’s likely to bull flatten in the months ahead. Why? Well, it’s simple, really: Trump and Musk are going to engineer a recession. Because nothing says “golden age” like mass layoffs and wealth destruction at scale.

Hartnett didn’t put it that way, of course. I don’t know whether it’s intentional or not, but ol’ Mike often sounds, to me, like someone who’s buying the Bessent narrative, although he (Hartnett) would surely say he’s just stating facts.

Anyway, Hartnett has an acronym for his long the long bond thesis: “GIC.” “G” is for government spending, the growth rate of which is about to slow, part and parcel of Musk’s “government recession” (that’s Hartnett’s term). When you ogle the figure on the left, remember two things. First, there’s a reason government spending exploded in 2020: There was a plague. Second, the plague (and the explosion in government spending) happened under (began with) Trump. I’m just stating facts, like Mike.

The figure on the right shows the NFIB’s measure of small business uncertainty. It’s elevated, and that points to a slowdown in investment, the “I” in Hartnett’s “GIC.” Policy uncertainty, he noted, is “driving the number of small businesses intending to raise capital spending to the lowest level since April 2020.”

Finally, there’s spending, or consumption. That’s the “C” in “GIC.” “Government plus quasi-government” hiring comprise nearly three quarters of US jobs growth, Hartnett wrote. “Quasi-government” always feels pejorative, and to the extent that’s accurate, it’s not obvious why it’s a bad thing to have more teachers and caregivers (in the context of payrolls, “quasi-government” is education and health care).

DOGE, Hartnett went on, will likely mean weaker payrolls and consumption, and it should also push up the savings rate for “poor” people, who can no longer count on “fiscal bailouts,” while the rich may partially retrench given the fading wealth effect as stock prices fall.

The Fed’s handcuffed by sticky core inflation which, to Hartnett, means lower bond yields will serve as “an automatic stabilizer for growth.” The read-through for the curve’s a bull flattener up to and until the Fed “capitulates to big cuts.”

I don’t disagree with all of that, and if he’d worded some of it differently, I’d probably agree with most of it.

The problem, from my perspective anyway, is what often feels like a deliberately credulous cadence from Wall Street strategists regarding the plausibility of the administration’s narrative. In the simplest possible terms: You’re not going to go from a point A (i.e., the economy and the government pre-“Trump 2.0”) to point B (Scott Bessent’s privatized capitalist utopia; never mind the litany of market-distorting policies Trump favors) and limit the fallout to a “little disruption,” as Trump puts it.

Bessent prefers the “detox” analogy, which is at least more accurate, but people die from cold turkey detox. In fact, depending on the nature of the addiction problem, no responsible physician would ever recommend a cold turkey detox. For serious drug addiction, detox is managed with other drugs, and in a highly controlled setting. And since we’re on the subject, I’d be remiss not to note that the key player here other than Trump (i.e., Musk) is, or at least was, using Ketamine regularly.

Finally, Hartnett described the zeitgeist around the stock correction as follows: “Turns out he cares more about the base than the bros and billionaires.”

That’s completely ridiculous and should be dismissed as unfathomably naive and ludicrously tone deaf, until you realize it’s sequestered away in the executive summary of a Wall Street strategy note, where all things ludicrously tone deaf are right at home.