Fiscal Cliff: The Great Rotation of 2013

As if Americans don’t have enough to worry about with the impending fiscal cliff; now there is a greater long-term danger laying in wait in dark financial corners for 2013. Its called the “Great Rotation”!

A ‘great rotation’ is a cyclic general swing by investors away from buying bonds into buying stocks. Sounds innocent enough, but this time will spell big trouble for long-term U.S. federal government debt.

Financial prognosticator’s from Barron’s, to Merrill-Lynch, to Marketwatch, to London’s Financial Times have been predicting its start in 2013 for months now.

There are numerous reasons investors feel the time is ripe for another great rotation.

The Dynamics of a Great Rotation

According to experts the reasoning behind a rotation are quite simple. Stocks become risky for one reason or another, lose money and so skittish investors head for safer investments to prevent losses from volitile or declining stock values.

Those investments are into lower-yield ‘safe-haven’ government bonds, like U.S. Treasuries. That happened in earnest in 2008.

That drives down bond yields, often helped by central bank monetary policies, and the return on investment in bonds dwindle over time. Once the point of diminished returns is reached then investors start pulling money out of bonds and put it back into higher-yield stocks again.

Then, over time, bond yields rise again making them more attractive when yet another recession or financial crisis comes along and the pendulum swings back into safe haven bonds once again.

It is a fundamental rotation in investment strategy with about a 30-year cycle.

What the Experts are Saying

Speaking on bond markets, here are some insider comments in recent months.

Everyone is shaking the bushes pretty hard to find yield, but there’s not much left
– Jay Mueller, Wells Fargo, Financial Times quote, 12/28/2012

Are we in the midst of a bond bubble?
– Ben Levisohn, “The Silence of the Bond Bubble“, 12/28/2012

The age of bond outperformance has ended
– Michael Hartnell, Merrill Lynch, Marketwatch, 10/11/2012

We’re in the “final inning” of the three-decade bond bull market
– Michael Aniero, Barron’s, ‘Great Rotation into Stocks in 2013‘, 11/23/2012

One of the RIC’s highest conviction investment themes expected to play out over the next few years is the Great Rotation from bonds and into stocks.
The RIC Report, 4/10/2012

The shift appears universally predicted. Among the reasons cited are:

  • Record low bond yields
  • Signs of economic recovery
  • Central bank accommodative monetary policy


The harbinger of a quiet great rotation has already appeared.

Unlike equities, bonds have a limited upside and represent only a small portion of overall daily trading. Barron’s reports in 2012 that bonds represented 0.29% of daily trades. It is down from 0.39% in 2011 and 0.5% in 2010. The Financial Times reported yesterday that bank bond sales are at a 10-year low.

It means that The Fed’s $85 billion/month Treasury purchase program to keep interest rates low is swimming against the current. The natural shift is away from Treasuries by investors and into higher-yield equities in a slowly improving economy. They’ve squeezed all the profit they can from Treasuries.

It is ironic that the monetary policies The Fed is using to strengthen the economy will naturally drive interest rates higher as the shift away from Treasuries continues.

What is different this 30-year cycle is that the federal government has a huge national debt over 100% of GDP. Servicing that debt will become more and more expensive within this natural economic cycle.

Interest costs are already $400-500 billion/year to service that debt. That’s almost half the yearly federal deficit right now. In a few years, with rising Treasury yields, it’ll grow into the entire federal deficit.

Fiscal cliff or no fiscal cliff…
When that happens drastic spending cuts and tax increases will become necessary to fix it.


About azleader

Learning to see life more clearly... one image at a time!

Posted on Dec 31, 2012, in Business, culture, Debt crisis, economics, fiscal cliff, Life, news, Opinion, Politics, Thoughts. Bookmark the permalink. 5 Comments.

  1. But Uncle Ben keeps the rates so low, below inflation [on my blog this is financial repression which always leads to some calamity for capitalism] and will do so until unemployment reaches 6.5%. That is when the Great Rotation away from the dollar will really begin. It could be this year given how expectations drive markets. I will be watching. Interest rates rising is not a good thing; another recession is then around the corner waiting for us, and we are still not out of the jobs depression [another theme of my blog].

    You cover these subjects very well–why does not CBS ABC FOX MSNBC read your posts instead of the hack pundits? I cannot stand seeing them on tv. The main stream media is way too post-modern for me believing whatever the heck they want and pumping out crap. You post facts. Keep the good work coming.

  2. The Great Rotation is not really a dollar thing. It is a bonds vs. stocks investment strategy thing.

    If “great rotation” theory is correct, then Uncle Ben’s specific efforts to keep target inflation to 2% will be what ultimately drives Treasury security yields higher.

    That is because investors will roll low-yield Treasury investments into more profitable higher-yield stocks as the economy slowly improves and equities strengthen.

    Ironic, isn’t it?

  3. So when Uncle Ben stops printing and interest rates rise, the stock market will take off. That is ironic. I hope you are right and that any interest rate rise does not further kill the economy. We really are on a tightrope. And just think we pay these policy makers only $200,000 to $400,000 per year for their circus.

  4. Uncle Ben is actually supporting both parts of The Fed’s dual mandate – price stability and full employment – at the same time.

    The $85B/mo is split between those two goals. $40B/mo or so is pure QE (so-called money printing) to maximize employment and the rest is Treasury security purchases to target the 2% price stability target.

    However, I doubt that Fed monetary policy is strong enough to overcome the great rotation when it occurs. That means Treasury yields will go up no matter what Uncle Ben does. That should surprise no one. Yields right now are already at historic lows. Up is the only direction they can go.

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