The Death of a 40-year-old Bond Market
Read this Periscope for historical perspective on bonds—but it won’t be boring!
Macroeconomic Investment Strategies
We lean on our research partners at Athena Invest and Litman Gregory to make our investment decisions. Athena’s patented investment process identifies 10 themes, or 10 general ways that all investment managers make their decisions. One of the most popular ways to manage money is to look at the major economic themes in the world today. Macroeconomics is the study of how governments make money, interact with each other, and how the private sector creates jobs, products and services.
Recently, one of our award-winning investment managers wrote a lengthy but easy (for me at least) to digest white paper on what she believes is the single biggest economic theme of our times: low interest rates. Katie Kaminski, PhD, manages money in one of the investments that appears in many of our portfolios. So her opinion matters. I thought you might be interested!
Glory Days (Decades) for Bonds
We have been living in world of declining interest rates for almost 40 years. The long-term average rate for US Treasuries is something like four times as high as it is today. And in the past 10 years, rates have gone down fast. Every year that rates stay low, the average declines. When rates decline, bond prices increase. So it has been a good time to be an investor, by and large, in spite of what you might read elsewhere.
These four decades have been halcyon for bonds and equities both. With low borrowing costs, companies can increase their leverage and grow their company with other people’s money. With rates declining, the price of the bonds increasing, lenders are largely happy with their past performance. As we discussed in recent Periscopes, this makes it difficult to be a buyer of bonds today. Instead, we have equities taking an increasing role in our retirement portfolios. TINA: there is no alternative.
40 Years in the Desert?
Katie Kaminski runs a trend following investment house. She says things are different now. She asks, could we finally see the demise of the 40-year long bond trend?
If you were to look back at Periscopes I wrote 10 years ago, you would find out that we thought rates would bottom out back then. And then I was wrong again when I thought rates would never go negative. So I approach any forecast of interest rates with a great deal of skepticism. Ms. Kaminski offers no predictions, just insightful commentary on the current trends.
If we have rates rising, then bond prices will be declining. This will be a headwind to investors looking for steady fixed-income in retirement. You might fear 40 years of rising rates like spending 40 years in the desert. There is no reason, of course, that it would take that long. We had rates rise crazy fast in the 1970’s and then they have been cooling slowly ever since. Certainly Ms. Kaminski sees reasons for pause, and reasons for optimism as well.
Modern Monetary Theory
We were never taught Modern Monetary Theory in college, and neither was Ms. Kaminski. However, she offers a nice summary of this decade’s en vogue economic theory. In essence, MMT argues that our worries are misplaced. Interest rates are tempered by inflation, and inflation is the natural byproduct of government spending. Katie calls it the great fiscal experiment. She is sanguine about whether all this spending from the US government, and others, will work. She is confident, however, that investment managers can weather the storm and make money regardless.
Are we looking at a major trend change that predicts 40 years of dire rising interest rates? Probably, eventually, and only time will tell is the answer. But because of active management, we believe we are well positioned to manage the change. Talk to your investment manager about your portfolio and see if you agree!
Source: The Great Fiscal Experiment by Katie Kaminski, PhD.