We need the consumer to transfer from cash to leverage, says BCA Research's Marko Papic

Key Concepts

• Geopolitical risk and its potential impact on growth and asset returns
• The relationship between bond yields and equity markets
• The impact of fiscal policy and tariff revenue on bond yields
• The importance of the long end of the yield curve for economic growth
• The role of consumer leverage in avoiding a recession
• The US as an investment destination compared to other global markets

Market Worries and Bond Yields

The market doesn't seem overly concerned about potential government shutdowns or trade issues because bond yields have been decreasing since the passage of "one big, beautiful bill." Marco Papich argues that this bill, when accounting for tariff revenue, isn't as fiscally irresponsible as perceived, which has calmed the bond market. The key relationship to watch is between bond yields and equities. If yields continue to decline towards 4% or even 3.75%, equity markets are likely to perform well.

The Critical Role of Tariffs

The conversation surrounding tariffs is crucial. If tariffs are deemed illegal and President Trump can't find alternative justifications for them, the bond market will need to reassess the "one big, beautiful bill," potentially viewing it as more profligate. This could lead to rising yields, negatively impacting the US economy and equity markets.

Bonds, Equities, and Fiscal Policy

Bonds and equities have been positively correlated since 2020. Fiscal policy and inflation have disrupted the correlations from the secular stagnation era. To avoid a recession, the US needs consumers to transition from a cash-driven economy to one reliant on leverage. This requires lower borrowing costs, which the Federal Reserve can't achieve alone. A "sane fiscal policy" is needed to satiate the long end of the yield curve.

The Importance of the Long End of the Yield Curve

A lowering of the long end of the yield curve is crucial for equity market performance. Ironically, tariff revenue is now essential for the US. Without it, the bond market might penalize the US, similar to how it's currently reacting to France.

US Investment Outlook

The US is potentially the "worst place to invest" currently. While US equities can still increase, especially in countries where central bank independence is compromised (like Argentina or Turkey), the currency is likely to suffer. US-based investors should consider external, non-US equity markets for better relative returns.