Don’t Fear the Long End: Why 30-Year Yields, Soaring Deficits, and Trade Frictions Are Bullish for Global Stocks

Mo 'the Macro Guru' Dinesh on

5/23/2025

Summary

Investor consensus has turned deeply bearish, spooked by rising 30-year yields in the US and Japan, ballooning government debt, and escalating trade tensions. The dominant narrative is that these signals portend an imminent crash. But that’s the wrong read. In reality, we are on the cusp of a global economic boom—already underway in Europe, Japan, South Korea, and China—and soon to engulf broader emerging markets. The overlooked truth? Government deficits are fuel for nominal GDP growth, and rising nominal growth is rocket fuel for corporate earnings and equity prices. While institutions cling to overweight US equity and illiquid private assets, they risk missing one of the greatest regional and asset class rotations in a generation.

Thesis

1. The Bearish Misread of Long-Term Yields Let’s start with the panic du jour—30-year yields. Investors are treating the rise in long-end rates as a harbinger of doom, a sign the bond vigilantes are back and that fiscal irresponsibility will sink the system. Wrong. The real story behind rising yields is the return of nominal growth. After years of financial repression, the bond market is finally pricing in a future of stronger growth, persistent investment, and elevated inflation—exactly what a reflationary world looks like. Higher long yields reflect improved growth expectations, not sovereign default risk. The yield curve steepening in both the US and Japan is not a crisis signal—it’s a celebration of economic vitality. And if the Fed doesn’t cut because nominal growth stays hot, the steepening continues. A 6% 10-year Treasury? That’s not a crash scenario; it’s the shape of prosperity. 2. Rising Deficits = Rising Profits There’s widespread alarm about deficit spending across the developed world. The US Congressional Budget Office projects deficits of 6–7% of GDP out to 2055. Most view this as unsustainable. I see a firehose of nominal demand. Every dollar the government spends ends up somewhere—in consumer wallets, corporate coffers, or both. Fiscal deficits are not neutral. They supercharge nominal GDP and, by extension, nominal revenues and earnings. Government spending is the most direct form of stimulus. It bypasses monetary transmission friction and lands squarely in the economy. If that creates inflationary pressure, so be it—stock prices and earnings are nominal, not real. Inflation becomes a tailwind, not a headwind, especially for equity investors positioned in the right sectors and geographies. 3. The Global Boom Nobody Sees While US investors obsess over the Fed and fret about tech earnings, the rest of the world is quietly entering a period of synchronized acceleration. Japan—long dismissed as the “wheelchair economy”—is booming. So is South Korea. Europe, often derided as an open-air museum, is experiencing one of its strongest growth periods in over a decade. And China, after a wobbly 2023, is pivoting back to stimulus and infrastructure investment. This is the first real global boom since the early 2000s, and markets haven’t caught on. Hedge fund exposure is at one of the lowest 3% percentile levels in five years. Institutional sentiment is deeply cautious, anchored in narratives of recession and financial fragility. But economic indicators are saying the opposite—and some investors are starting to connect the dots. 4. Everyone’s in the Wrong Trade Despite signs of global vitality, institutional portfolios remain glued to the same tired playbook: US equities and private assets. But that trade is exhausted. US equity earnings are increasingly concentrated in tech giants, whose growth is now tied more to AI narratives than broad economic acceleration. Meanwhile, private equity is in a valuation bind—dependent on ever-lower discount rates to justify high entry multiples. Even if institutions wanted to pivot toward the global boom, many are stuck. Their liquidity is locked in 10-year private equity funds. But that creates opportunity. The reallocation to global equities will be slow, grinding, and structurally delayed—creating a multi-year runway for early movers. By the time endowments claw their way out of the PE trap, international equities will already be halfway to re-rating. 5. Retail Is the New Smart Money Retail investors, often caricatured as late to the party, are actually early this time. EPFR flow data shows European equities are finally seeing positive inflows after a decade of neglect. Flows into China and broader EM haven’t even started, offering enormous upside. Meanwhile, the institutional crowd is cowering in short-duration Treasuries, waiting for the next shoe to drop. The current setup is a classic contrarian opportunity. Bearish consensus. Under-ownership. Policy tailwinds. Early signs of nominal reacceleration. All pointing to an explosive risk-on environment. But only for those positioned to benefit. Conclusion: The financial world is shadow-boxing ghosts—fretting over deficits, long-term yields, and tariffs—while missing the real story. This is a boom. A big one. And it’s not in Silicon Valley or the Nasdaq-100. It’s in Osaka, Berlin, Seoul, and Shanghai. The asset classes that thrive in nominal reflation—industrials, cyclicals, value stocks, EM credit—are not where the money is today, but they are where it will go next. Position accordingly.

Risks

1. Inflation Overshoot While inflation can be a tailwind for nominal growth and equities, a disorderly surge—particularly if driven by supply-side shocks—could spook central banks and force aggressive tightening. That could interrupt the boom, especially if rate hikes are poorly communicated or synchronized globally. 2. Policy Missteps The boom thesis assumes continued fiscal support and policy coordination. A premature pivot to austerity—especially in Europe—or a significant political disruption in the US (e.g., a debt ceiling crisis or anti-deficit populism) could undermine the growth impulse. 3. Trade Fragmentation Trade frictions are part of the boom narrative (as they drive domestic investment and fiscal stimulus), but an outright trade war or severe decoupling could create bottlenecks, undermine supply chains, and generate volatility in emerging markets and export-heavy economies. 4. Private Asset Illiquidity Spillovers The risk of a markdown wave in private assets remains non-trivial. If PE or VC portfolios begin to reprice sharply, institutions may be forced to raise liquidity elsewhere, triggering sales in public markets—even high-quality international equities—just as they are starting to re-rate.

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