LEON COOPERMAN: Here's Why I Said I Would Never Be Caught Dead Owning A Government Bond

Leon Cooperman

Photo: CNBC

Billionaire hedge fund manager Leon Cooperman, who runs $6.6 billion Omega Advisors, gave a presentation to some students at Roger Williams University’s Mario J. Gabelli School of Business. During his talk about life, hedge funds and investing, Cooperman said maintained that stocks are the best place to be “in the financial asset neighbourhood.”  

Cooperman also went on to clarify a comment he made earlier this year on TV about why he would never be caught dead owning a U.S. government bond.    

Here’s what we transcribed from his lecture: (emphasis ours)

“I was probably somewhat inappropriately quoted.  I should elaborate.  I was correctly quoted, but probably an inappropriate statement.  But I made a comment about six months on TV saying I would never be caught dead owning a U.S. government bond.  

“And that’s kind of outlandish yeah not an outlandish statement.  It’s a correct statement.  Too strong.  What I meant by that was not that I questioned the U.S. government’s ability to pay us back.  They’ll be fine.  They’ll pay you back.  You’re just not being compensated for the risk.  

“So I felt incumbent upon me to explain my position.  Historically, if you look at the 10-year U.S. government bond, its yielded in line with nominal GDP.  Nominal GDP is the summation of real growth and inflation.

“So if you say to yourself, that the world we live in be something like 2 to 3 per cent real growth and 2 to 3 per cent inflation, that means nominal, or top line GDP, which is the same thing as looking at a company’s sales, that would be growing at 4 to 6 per cent per annum.  Keep in mind that 4 per cent, we’re not going to absorb more unemployed people, so there will be social policy tilted toward trying to generate more economic growth.  

“Well if history repeats itself and the 10-year government bond goes back to where nominal GDP is that means in a few years time when we get out of this soup in the economy that the 10-year government bond will be 4 or 5 or 6 per cent.  

(Here he shows a second slide)

“Well, this is bond arithmetic.  I printed this to get it up here in time when the 10-year was 1.5 per cent.  I think it’s now 1.7.  If we go 1.5 to 4% in three years, including you coupon, you’ve lost 11% of your money….  

“Now the maxim marginal tax rate is 35%.  So if you buy a bond at 1.5%, you keep 65%, leaving out state taxes at the moment, you really get an after tax return of about 1%.  It doesn’t wash.  I think your capital is being confiscated, so I have no particular interest in being in government bonds as an alternative to common stocks.” 

These are the slides he posted to go along with his argument. 

Leon Cooperman presentation

Photo: YouTube screengrab via RWUEDU

Leon Cooperman presenation

Photo: YouTube screengrab via RWUEDU


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