The Mother of All Secular Rotations

This will be a long post but I think it will be worth your time.  Here is the chase to which I am cutting: we are on the cusp of a massive multi-year bull market in stocks.  Now the caveats.  I don't know when, but it is within a couple of years.It could be underway now for all I know.

Why do I think this?  Well, let's revert to some foundational ideas I have laid out here.  First is the paradigm shift.  Throw out the CorpFin textbooks - developed Western government bonds are no longer "risk free".  In fact they are some of the riskiest assets out there.  Most Western governments are more or less insolvent, but on top of that they are unwieldy, sclerotic and grow more so by the day.  They are unadaptive in the extreme.  The Europeans have been staring an existential crisis in the face for years and can't seem to do anything but talk, stall and deny.  We here in the US are on the precipice of the greatest fiscal abyss to ever befall humanity and our two branches of government relevant to fiscal matters are debating whether to go into hyper-drive or to continue at mere warp speed into the abyss.  I don't know when or how, but I am certain that investors in US Treasuries will lose their shirts and have said as much.  At this point I need to digress to relate a story from my travels.

The other day at an event I sat next to a gentleman, who, upon hearing that I am an investment professional, regaled me with his journey to retirement comfort.  The guy called himself a "poor kid from the Bronx made good" as they say.  And not in the Goodfellas kinda way, the guy was a dentist and had a good practice cleaning teeth for 40 years.  He told me that he had a financial advisor - he knew nothing about stocks and bonds - that he trusted who came to him one day and said that "the curve was in a once in a lifetime position".  The advisor was referring to the yield curve and recommended a big bet on laddered zero coupon bonds.  This was sometime in the 1980s.  Well, if you know a little history, you know this was a homerun, a single call that eventually rendered this man's retirement 110% secure.  Let's not underplay smart habits, this man was a saver and a lived modestly, but the bond call was the trade of a lifetime for him.  Why do I bring this up?  Because we are at the other side of the world now.  Whereas the yield curve was set for epic gains back then, the curve today is poised for epic losses.  All manner of retirement kitties, from huge pensions to small nest eggs, are facing both negative real returns from income (inflation greater than interest income) and the prospect of monstrous capital losses.  Just today, Bank of America is noted to be bullish on stocks for no other reason than bonds are such a terrible prospect.

"What's the best thing about equities? Bonds,"

This is not just an investment bank making one of a thousand otherwise ignorable "allocation calls".  Hundreds of billions of dollars are in this pickle noted above because of decades of conventional wisdom that the retirement of the Baby Boomers would precipitate a massive secular shift from stocks to bonds, that all these wealthy, healthy, active children of the 1950s would sock their wealth into fixed income so they could live in retirement bliss with all the Viagara, Prilosec, sushi dinners and Third World travel they could handle, all funded by ample, reliable streams of regular income.  This was conventional wisdom for decades - boomers will drive down stocks in favor of bonds.  And it has been happening - the mutual fund flows tell the story - but something bad happened on the way to Boomer Retirement Bliss.  They don't have enough bonds paying them enough interest to afford the retirements they expected.  The generation just before them - the WW2 generation - sucked up the last of the sweet-paying bonds, they're keeping them and nothing like them will be issued again in time for the Boomers.  In other words, the Boomers are stuck.  I even fell for this.  My own mother at 72 was 60% in stocks and I took her financial advisor to the woodshed for having a 72 year old widow 60% in stocks.  I was operating on decades old conventional wisdom and I demanded more fixed income for her portfolio.  I got lucky and I got her out of stocks before the 2008 financial crisis, so I saved her a bunch, but that was dumb luck.  But that created another problem, what to do then?  She doesn't have enough money to accept 2% in ultra safe (my ass) Treasuries.  A couple years removed from the crash, she is forced by necessity to go back into equities to earn enough to live via the dividend yields and to simply shelter from the highly probable capital losses coming down the pike for Treasury investors.  We've had to go back on decades of conventional wisdom on investing for retirement for her, and she is just barely older than the oldest of the Baby Boomers.  Millions of these Boomers are going to confront this dilemma and realized that decades of conventional wisdom has led them down a dead end road, and many will conclude to reverse course like my mother.  The conventional wisdom of decades will need to be reversed, creating the Mother of All Secular Rotations.  BofA calls it the Great Rotation, and I think that is right.  Stocks are cheap, bonds are expensive, governments are dysfunctional, corporations are nimble, and 2% just won't pay for the retirement dreams of an entire generation, especially a generation not used to getting less than they feel they deserve.  The tsunami is coming.

UPDATE:  Don't just take it from me.