Blain’s Morning Porridge 8th June 2026 – Bonds vs Stocks. It’s really quite simple.
“In bonds there is truth. In stocks there are dreams. Together they set the economy.”
Western economies succeed because bond and stock markets work together. Bond markets enable governments to finance the optimal conditions for invention and innovation, enabling growth and prosperity. Sometimes Markets fall out of line, while Politics are ruled by votes rather than experience – and that’s where the wobbles start to multiply.
Just back from holiday. What have I missed?
10 days sailing around the Ionian, re-reading the Odyssey, time spent on sea-girt Ithica with my sketch pad and a paintbrush… I spent days lapping up the Greek Myths! But where once the Gods did tread and toy with us, today its tourists. We truly are in the Age of Men – so we must try to make sense of it rather than accept what was once divine.
As I scrabble to pick up the subtleties of the market flows, the overall picture isn’t that complex – it’s the details that matter for where markets are headed. The big picture remains one of challenge – the implications and consequences of:
- An oil shock (Iran) on the global economy,
- The threat of higher interest rates to contain inflation,
- The sustainability of national debt burdens,
- Social stability, and
- Geopolitical tensions…
For markets, it’s the little things that matter – like why has the AI bubble apparently popped just ahead of this weeks SpaceX IPO, why are bond yields rising, what did the US Employment data really mean, will rising yields trigger credit and stock meltdowns, and what chance of resolution in the Gulf or Ukraine?
Relax.
Remember Blain’s Market Mantra no 2: “Things are never as bad as we fear, but seldom as good as we hope”, and then add in the 4th Mantra: “In bonds there is truth, in stocks there are stories, hopes and dreams.”
To understand the future, understand how the present works. Stocks and bonds work together. The success of Western Economies has been due to the success of their capital markets being able to finance the conditions for growth. The capacity of democratic, capitalist leaning governments to enable their economies to thrive through government debt (Treasuries, Gilts, Bunds or JGBs) to build the hard and soft infrastructures that enabled growth by encouraging stock market risk-taking to fund technical invention and innovation has been the basis the success of the West.
It’s a delicate balance between government debt and taxation, but generally the trade-off between Government debt and growth has worked well. Today the balance is under pressure on multiple political fronts as populists seek to exploit rising inequality to seize power. Sometimes markets get a bit out of kilter – which is why bond markets fear over-exuberant stocks and watch the vagaries of politics and the structure of the economy so closely.
In bonds the truth is going to be tested in coming months. The markets are concerned about political stability and common sense. Already its clear President Trump and his new man at the Fed, Kevin Warsh, on collision course. Trump wants zero rates. Warsh is not that stupid. Friction between them will create waves in foreign demand for Treasuries.
In the UK the prospect of a new Labour leader’s potential effect on the bond market is yet another “Project Fear” – the right wing would have us believe a lefty like Andy Burnham will break current market consensus by ignoring the power of bonds, leading to a Truss-like collapse in Gilts.
If it happens, a global bond crash would put credit markets under enormous strain, potentially undermining the AI infrastructure build out the stock market is currently being driven by, triggering a massive outbreak of market wobbles if AI then looks oversold (on the back of competition and the lack of clear adoption and routes to monetisation), and consumers stop consuming because they’re out of money.
Doh!
But the reality of bond markets is that practical bond traders and investors care much more about prompt repayment of interest and principal, and the avoidance of inflation undermining their investments. While stock markets famously have no memory (which is why their history is one of repeated bursting bubbles,) the bond market has the memory of an elephant, favouring policies that keep nations stable and debt sustainable.
Traders and investors are acutely aware of the macro-economic basis of the debt-enabled western economies. (How deep any potential market crises triggered by credit wobbles could go will be a function of just how frothy the top is – which is why I’m watching the SpaceX IPO so carefully.)
It’s more likely bond markets simply adapt to higher interest rates, and stock markets will set themselves accordingly – which is what has always happened in the past. After some reset pain, (like we saw in the 2000 Dot.Com bubble), higher interest rates may ultimately even prove a commercial positive – disciplining corporate investment decisions, and therefore investment opportunities. (Retail investors beware…)
“Whom the gods wish to destroy, they first make mad.”
And speaking of madness, let’s use the UK as an example of where we are in bonds.
I guess the Torygraph editor gets a bonus every time he/she/it prints a headline combining UK and IMF Bailout. Yesterday’s story on the front page was no exception – stringing together the quantum of UK debt about to hit £3 trillion and ex-World Bank economist Ken Rogoff saying it’s a 50/50 call on a UK debt crisis; to conclude its 100% likely the UK will need to go to Washington cap-in-hand. Blah, Blah… blah.
The UK has substantial problems – but they were not suddenly been created after the Labour landslide on the July 4th, 2024, election. The UK’s legacy of disappointing politics, burdensome bureaucracy, squandered opportunities, and increased energy vulnerabilities stem from decisions made over the past 40-50 years, including the consequences of the 21st Century’s debt binge during QE and Covid.
I’ve long argued there are solutions. Some of these call for better and joined up political decisions. Others are matters of liability management.
For instance, when the UK’s national debt is £3 trillion, I really can’t understand why the UK Treasury hasn’t addressed the issue of the Bank of England’s Asset Purchase Facility which still holds about £525 bln of Gilts – 17.5% of the outstanding national debt. Why is the Bank trying to sell that quantum of bonds? (Because… because?)
Why not simply accept the bonds are an asset of the Bank and a liability of the Treasury. Then balance them off on the National Balance Sheet.
I call it Zonk Theory.
The Treasury will give the Bank a coin (the zonk) with the King’s head on one side, and £525 bln stamped on the other in return for the bonds (which Treasury will write down to zero). The debt these Gilts represented becomes accountingly a zero-coupon perpetual on the Bank’s balance sheet. But the UK would see its debt quantum significantly reduced, with no need to muddy the supply of new Gilts while the Bank tries to sell its old ones. It will have zero effect on inflation – although it will upset the accountants who will argue the coin is still a liability. In reality it is not. It would be a historical artifact.
The Zonk will become an exhibit in the Bank’s museum. Had Zonk theory been done when the Bank held £900 bln of Gilts (close to it), it would have reduced the UK’s outstanding notional debt by 43% (or thereabouts).
Why has it not happened?
Probably because the Treasury and the Bank see each other as mortal enemies in a Greek Myth kind of a way. Historically they have agreed on little – each too proud to work with the other (except in times of extreme crisis.) Time to bang some heads together – but can you just imagine how Rachel Reeves trying to frown them into agreement would go.
To get the UK’s debt burden down and refocus the Gilts market let go back to basics, but balancing borrowing and taxation to build a stronger, sustainable economy:
- Gilts exist to finance the state and reduce the burden of tax upon production and consumption.
- Gilt buyers care only about being repaid.
- Policies enabled by Gilts finance should be economically additive – increasing growth so that the tax burden remains modest, but tax receipts rise through growth.
For the economy to succeed the Government needs to spend wisely and convince the markets its spending on the right things, and taxing fairly. The problem is that markets and voters want different things. Voters want welfare. Markets want growth. And the rich and successful corporates don’t like paying taxes.
A really, really smart government (and when did we last have that?) would be spending carefully on public goods like defence, health, education and housing that create jobs and growth, while dictating polices to reduce non-growth spending.
And that’s where the problem becomes apparent – mature western nations apparently aren’t about growth anymore. They are about fairness, kindness, inclusion and such like – the welfare state and (in the case of the UK) worship of the NHS.
Fine. Voters can have all these things… when we can afford them.
The problem for Government is to convince voters that spending less today on welfare is not austerity – but luxury we can have in a prosperous. They could balance that with proper progressive taxation. I challenge any government to get the promise of Jam Tomorrow and Growth today policies right!
Out of time, back to the day job…
Bill Blain
Author of the Morning Porridge
CEO Windshift Capital
Advisor – Spitfire Strategic Capital
Meanwhile, don’t forget about my new book:
The Battle For Hamble is a proper grown-up examination of how bureaucracy has failed: a tale of Greedy Corporates, Bad Planning and Economic Illiteracy. It explains how a wholly unnecessary Gravel Quarry will be dug in middle of a prosperous village – putting 6000 jobs at risk. The truth is no one wants gravel, and the quarry company understands it’s not what you dig out, but what you stuff back into a hole in the ground that matters. Gravel sells for £30 a tonne – Landfill earns £150 a tonne to bury. Go figure.
Leave a comment