We know the bond bears are a frustrated lot and recall fondly the Grant’s conference in the spring of 2010 when the prevalent view was that the 10- year U.S. note yield was going to be heading to 5%. Here we are, nearly two years down the road, and the yield is sub-2% and below 3% at the long end. Long-dated zero coupon bonds have been stellar performers. Income- generating assets in general have been great investments. The reason is because we are still caught in a post-bubble period of consumer frugality that has unleashed powerful secular deflationary forces in the U.S. consumer space. For real life evidence, just go to the front page of USA Today and have a look at the article titled It’s Black Friday No More: Now it’s Freebie Friday. We know that there are still many people out there who “only see inflation” — maybe they should spend less time at the spa and the high-end jewellery stores and more time where the masses spend their money, like J.C. Penney, Sears and Old Navy.
In a deflationary environment, it is critical to focus on the segments of the economy that do have pricing power. Food remains a bullish secular theme in this respect — and we highly recommend a read of Turkey Prices Are Taking Flight. Supplies are very tight and as a result, wholesale turkey prices have soared 26% this year on the East Coast. There is little doubt that globally, food demand is outstripping supply. This is not just due to population growth but also to shifting dietary patterns abroad, and this is happening in real time. This also explains why it is that fertilizer, grains and farm incomes remain in a full-fledged secular bull market.