Treasury Secretary Mnuchin is Totally Clueless About How Markets Function

Mike Mish Shedlock

Treasury Secretary Mnuchin says investors will now move from bonds into stocks. Excuse me, but's that's impossible!

If you want to know just how clueless our Treasury secretary is then please consider Treasury Chief Calls Market Reaction to Fed 'Overblown'.

Steven Mnuchin, in an interview with Fox Business Network, said he believes U.S. equities are a “tremendous value,” and that investors would now move from bonds into stocks.

“The market reaction is completely overblown,” he said. “I think you’re going see rebalancing out of bonds (and) into equities at these levels.

Opinions vs. Errors

I strongly disagree with Mnuchin on valuations. But he is entitled to his own opinion, no matter how silly it seems.

His opinion is not the problem. His comments prove he is clueless how markets even work.

Mathematical Impossibility

It is mathematically impossible for investors, in aggregate, to "rebalance out of bonds into equities."

The explanation is easy. For every buyer of a stock or bond there is a seller. For every seller there is a buyer.

Someone much hold every stock or bond issued, 100% of the time.

Individual investors may take action, but rebalancing cannot and will not occur in aggregate because it is mathematically impossible.

Repricing

Don't expect rebalancing (because it's impossible). Instead, expect repricing.

Equities are not cheap. Expect them to get hammered and junk bonds right along with them.

Buy gold, that's what's cheap (obviously my opinion).

Mike "Mish" Shedlock

Comments (18)
No. 1-14
Sechel
Sechel

What's the duration risk of bonds here? Is anyone forecasting a 300 bps rise in the 10 year? That said stock valuations are high. Lots of anecdotal evidence to suggest GDP growth will decrease and earnings too.

Roger_Ramjet
Roger_Ramjet

Interesting comment (and mindset) from the guy who is responsible for issuing over $2 trillion in treasury debt next year (new issuance plus maturities).

Hey Steve, shouldn't you be talkin' up your book?

Amigo
Amigo

Mish,

You are confused by the way Mnuchin refers to the exchange rate between bonds and stocks. Yes, all bonds and stocks are held by someone at any moment in time. But that is not the point. The rate of exchange between the perceived future cash flows created from bonds versus those from equities is what cause massive swings in the value of one investment compared to the other at times.

That is why in the crash of '87, as I remember, the total dollar value of stocks and bonds remained very close to the same at the end of the day. However, The total valuation between the two investments changed dramatically.

In fact, rate of exchange is why you believe gold is a good investment. You believe the rate of exchange between stocks and gold will change in the near future. You are not saying all gold and stocks won't be held by someone.

Thanks for your blog posts. I read them nearly everyday.

Tom

shamrock
shamrock

It's only impossible if the value of stocks and bonds never change. If the value of stocks go up and the value of bonds go down then that's a rebalancing of wealth from bonds to stocks.

Sechel
Sechel

Mnuchin is no economist. He was a bond salesman and a banker which at goldman is just a fancy term for rain maker and salesman again

CautiousObserver
CautiousObserver

Yikes! The Treasury Secretary’s comment is amusing and a little alarming when the Treasury is issuing record debt and the Fed is unwinding its balance sheet (increasing the supply of government bonds in the market) concurrent with public companies engaging in buybacks (increasing the supply of corporate bonds and decreasing the supply of stock shares in the market). Holy cow.

2banana
2banana

Also "cheap" off the top of my head:

Miner stocks

Tobacco stocks

Beer stocks

Uranium stocks

Driller stocks

Pipeline stocks

Some Pharma Stocks

Some casino/gambling stocks

Some bank stocks

Bam_Man
Bam_Man

But...but...His magazine-centerfold wife says she loves him "because he understands the economy." This is what our government has come to. You cannot make this stuff up.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

"It's only impossible if the value of stocks and bonds never change." Totally absurd. and wrong for reasons explained - It is mathematically impossible - period

SMF
SMF

I'll be more surprised by an economist with a clue.

Blacklisted
Blacklisted

Mnuchin is a trader, an establishment trader, but he is still a trader, which means he knows more about capital flows than all of the bureaucrats and ivory tower theoreticians put together. He gave you a freebee, and you scoff. This reality has been pointed out to you for free for over a year, and you still never answer the basic question – when the bond bubble pops, where else can the big money go? Sure, gold will get it’s share, but that is just for retail. There is only one market deep and broad enough to absorb the flows. Your conventional thinking is getting in your way. What happens when assets with real collateral serve as the safe haven? Govt’s default all the time.

Casual_Observer
Casual_Observer

Even if people rotate out of bonds into stocks then it will cause a bond crisis which will force investors to sell equities to cover losses in bonds. I believe that cycle has started now.

Not_Wagner
Not_Wagner

Buy gold, that's what's cheap (obviously my opinion).

Yet another gold pump.

Not_Wagner
Not_Wagner

Mish, it seems you are trying to find a definition of what "investors move from asset A to asset B" means so that you could make Mnuchin appear as illiterate.

There is:

  1. hard asset pie chart denominated in number of securities
  2. hard asset pie chart denominated in mark to market dollars
  3. long asset right pie chart denominated in number of securities
  4. long asset right pie chart denominated in mark to market dollars

You are right that #1 looks the same when investors move from bonds to stocks, because for each buyer there is a seller.

However, when investors move from bonds to stocks then pie chart #2, #3 and #4 will have different allocations for bonds and stocks.

If you are wondering what is the difference between "hard asset" and "long asset", then think of short sellers creating extra "long position" in process of shorting while not creating a new "hard asset".

P.S. What I said above does not have anything to do with whether I agree or disagree with Mnuchin's hypothesis.


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