Where To Turn in a Bear Bond Market

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• U.S. Treasury bonds show signs of a secular bear market that could last for decades. The reallocation of fixed-income capital will have ripple effects on the global economy.
• Rising geopolitical tensions are fueling de-dollarization, a movement to dethrone the U.S. dollar as the world’s primary reserve currency. Falling international demand for U.S. dollars contributes to global inflation.
• The clean energy movement and growing power demands of emerging economies are factors likely to drive up commodity prices. Investors can find long-term opportunities in an undervalued commodities market.

So far the 2020s have been characterized by economic volatility, geopolitical uncertainty and an overuse of the word “unprecedented.” But are there enough structural clues to give a strategic framework for investing over the next ten years? Clean energy, technology adoption and deglobalization are among the forces likely to steer macroeconomics in the coming decade, and, according to renowned strategist Kiril Sokoloff, all signs will point to inflation.

Kiril is the Chairman and founder of 13D Research & Strategy, a preeminent economic research firm that’s advised some of the largest investment funds in the world since its inception in 1983. 13D’s weekly newsletters, “What I Learned This Week” and “What Are the Markets Telling Us,” are among the most widely read financial publications for fund managers.

13D is particularly well-known for its contrarian perspectives, and Kiril’s articles often challenge mainstream assumptions about broad market trends. Notably, Kiril was an early prognosticator of the disinflationary forces and the U.S. bull market of the mid-1980s. Many analysts have compared our present era of inflation to the 1970s, so does Kiril once again see an economic boom around the corner?

To answer this, host Alan Dunne recently met with Kiril on a Global Macro edition of Top Traders Unplugged to discuss his insights and predictions for the world economy into the 2030s. Although Kiril agrees that the 1970s is the closest historical example to the present financial climate, tight monetary policy is unlikely to curb inflation as neatly as it did four decades ago. Instead, Kiril sees tremendous opportunity with undervalued commodities and the end of the long bond bull market. From climate change to politics, here are Kiril’s top trends worth watching.

Death to the bond bull market

It’s been a good run. For 40 years, the U.S. bond market boomed. Because bond prices move inversely to yields, decades of low interest rates and sinking Treasury yields kept buyers in the bond market. Then, in 2022, when interest rates spiked, bond prices went into freefall, creating the worst bond market year ever.

In that light, 2023 offered some reassurance. Although the fixed-income market remained volatile, expectations of Fed rate cuts created enough of a rally for some commentators to declare that bonds were back. Kiril, however, disagrees.

“If you look at bond markets long-term, they go in 20-, 30-, or 40-year moves,” Kiril says. Treasury yields last peaked in 1981 after a 40-year upward trend since World War II. Should this macro pattern continue, a bond bear market is overdue.

What’s driving the directional shift? For one, if interest rates stay elevated to combat sustained inflation, bond prices could face headwinds for years. A more systemic problem is weakening demand — a two-headed beast as the Treasury increases supply to cover deficit spending and long-time foreign buyers, particularly Japan and China, pull back from the U.S. market. When demand drops, yields rise and prices fall.

After decades of heavy global investment into U.S. Treasury bills, a lagging bond market creates a hard reset. “The implications of a long-term secular bear market in bonds are massive because of the huge amount of capital that’s tied up in fixed income all over the world,” Kiril observes. “Where’s that money going to go?”

No matter where fund managers take their investments, it’ll have a similar result: Wealth distribution is inflationary. While some of the former bond investments pour into the U.S. equities market, many foreign investors are transferring assets back home. This comes as part of a larger global trend to step back from the U.S. dollar.

De-dollarization sweeps the world

Since World War II, the United States dollar has dominated as the world’s primary reserve currency. According to the International Monetary Fund, in 2023, 59% of global foreign exchange reserves were in U.S. dollars. By comparison, however, that figure was more than 80% in the 1970s. As euros, the Japanese yen and the Chinese renminbi have chipped away at the dollar’s market share, the U.S. is losing some of its economic advantage.

“The medium of exchange is shifting dramatically,” Kiril explains. “Countries are trading in their own currency [rather than in U.S. dollars].”

In some respects, taking reliance off the dollar is about risk management. Currency diversification distributes the exposure to economic downturns or exchange rate fluctuations in different parts of the world. The U.S. no longer has the disproportionate economic superiority it held following WWII. As the gap between developed and emerging markets shrinks, more trade channels open that don’t require dollars.

Politics have factored in, too. Many countries see de-dollarization as a natural shield from the economic ramifications of U.S. sanctions. This desire drove China’s RMB-settled oil deal with Saudi Arabia. More recently, Iran and Russia agreed to trade in their local currencies as a means to avoid U.S. sanctions.

Fundamentally, falling international demand for dollars is an inflationary force. A weakened dollar makes U.S. imports more expensive, and, as mentioned, falling bond prices lead to wealth redistribution and alternative investments.

Kiril correlates de-dollarization with a potential commodities boom, and one material stands out immediately. When major currencies tumble in value, investors have historically turned to one of the oldest tangible monetary assets known to man: gold.

Investment gold mines

“I think the gold mining stocks are the cheapest asset on the planet. And the next cheapest asset is gold itself,” Kiril says.

Gold had a strong finish in 2023, largely in reaction to the weakening U.S. dollar. Gold is historically a hedge against currency devaluation and a barometer of inflation. As fiat currencies — those not backed by physical commodities — rapidly lose their relative purchasing power in periods of high inflation and economic uncertainty, precious metals are more likely to hold on to their value. Yet Kiril points out that gold prices often react in anticipation of inflation or deflation, before any significant currency movement.

“Gold bottomed in December of 2015,” Kiril explains, “but gold peaked in August of 2020, just before the inflation arrived.” Following the heavy economic stimulus packages and supply chain disruptions during the COVID-19 pandemic, gold prices anticipated the global 2021 inflation surge. Then, prices turned again in anticipation of Fed tightening and interest rates going up.

An added dynamic is the potential return of gold-backed currencies. In 2022, Russia’s central bank announced the ruble would be backed by gold, and now China is leading a conversation to create a gold-backed currency that would reduce international reliance on the dollar. The BRICS nations — originally Brazil, Russia, India, China and South Africa, and now with five other North African and Middle Eastern members — have long advocated for an alternative to the dollar, and, despite the plan’s many logistical challenges, the idea is gaining momentum.

Undoubtedly, a successful BRICS currency would be bullish for gold prices, perhaps doubly so if it succeeds in undercutting the dollar’s international trade dominance.

Kiril notes that a breakout in gold prices will likely accompany a severe shortage of physical gold. “Another way you can get exposure to gold is going to be miners,” he says. Gold mining stocks have outperformed bullion in recent bull market periods, and they could be positioned to do so again.

Other undervalued commodities

Gold isn’t the only commodity lacking love from investors. While Kiril describes the entire commodity sector as underinvested, two opportunities stand out as the world undergoes an energy transition.

The first is copper. A key material in clean energy technologies — including wind turbines, solar panels and batteries to store electric power — copper will likely be at the center of a green revolution. You wouldn’t know from current production, however.

“Copper exploration budgets are one-third below their 2012 highs in nominal terms when we’re going to have an increased demand of 30 million metric tons a year by 2030,” Kiril says. “The logical assumption is that the copper price is going to go up dramatically.”

Likewise, uranium is well positioned for a breakout. Incidents such as the 2011 Fukushima nuclear accident have colored the public perception of nuclear power, but governments are signaling new investments into this source of electricity. At the recent COP28 summit, more than 20 nations launched a declaration to triple global nuclear power capacity by 2050.

“Because of underinvestment, there’s a [uranium] shortage of probably 40 million pounds a year,” Kiril estimates, “and the price has to be significantly higher to stimulate exploration.”

The success of the COP28 declaration will require significant new investments into uranium mining, which could take the price higher for decades.

Emerging markets to watch

The increasing global electricity demand is largely due to growing energy needs in emerging markets. China’s economy has had a slow few years — weighted by a real estate crisis, increasing debt and declining exports — but it’s well positioned to benefit from a clean energy transition.

“China is definitely leading the green energy revolution,” Kiril says, referring to the country’s embrace of solar power and electric vehicles (EV). Analysts widely consider China to be the global leader in EV production, and U.S. and European automakers aren’t able to compete.

Accordingly, we’re likely to see increased tariffs on Chinese vehicles in the U.S. and Europe, which could negate China’s EV advantage. Alan asks, “How do you grapple with [China’s] cheap valuation versus the potential geopolitical risks?”

For Kiril, the upside is in China’s policy-making ability and government intervention to push for profitability in state-owned enterprises, actions that can offset the nation’s growing debt. More importantly, after a long slump in Hong Kong, there’s a grand opportunity to buy the dip. “All the surprises are going to be on the upside,” he reasons.

Meanwhile, despite the global focus on electrification, oil-rich nations will still benefit from the rapidly increasing energy needs of emerging economies. “These are big countries,” Kiril explains. “Indonesia is making a lot of money with people wanting a better standard of living, Africa is coming along and Brazil is booming again. I don’t see oil demand being curtailed.”

Although some analysts have argued that the world is nearing peak oil consumption before shifting to alternative energy sources, Kiril predicts it could easily be another 20 years before there’s a lasting decline in oil demand. For investors, oil is another commodity opportunity with a high upside.

History is inflationary

There’s a saying — “the graveyards of Wall Street are full of people who were right too early.” Perhaps the future holds the end of the U.S. dollar hegemony, a successful green revolution and global economic equality. While the exact timeline is impossible to predict, the world’s major central banks face strong headwinds to effectively curb inflation. Kiril’s ideal portfolio allocation for the next 20-30 years stays clear of bonds and invests heavily in commodities. “Secular inflation is a good way to be positioned,” Kiril says. On this front, history tells a consistent story. The byproduct of financial and geopolitical uncertainty is always inflation.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.