By Michael Ashton
Whither Bonds? Arnott Answers
I really enjoy reading, and listening to, Rob Arnott of Research Affiliates. He is one of those few people – Cliff Asness is another – who is both really smart, in a cutting-edge-research sense, and really connected to the real world of investing. There are only a handful of these sorts of guys, and you want to align yourself with them when you can.
Rob has written and spoken a number of times over the last few years about the investing implications of the toppling of the demographic pyramid in developed markets. He has made the rather compelling point that much of the strong growth of the last half-century in the US can be attributed to the fact that the population as a whole was moving through its peak production years. Thus, if “natural” real growth was something like 2%, then with the demographic dividend we were able to sustain a faster pace, say 3% (I am making up the numbers here for illustration). The unfortunate side of the story is that as the center of gravity of the population, age-wise, gets closer to retirement, this tailwind becomes a headwind. So, for example, he figures that Japan’s sustainable growth rate over the next few decades is probably about zero. And ours is probably considerably less than 2%.
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It’s been a while since we went around the intertubes for some market analysis…
- Mortgage Rates at 35 Week High but Purchase Applications Picking Up –GaveKal [biiwii comment: a rush to ‘get in’ before the big bond bear (interest rate rise)? but this is the public we are talking about (the same public that was convinced about $200 oil). that could be bullish for bonds (bearish for interest rates) after our target of 3.6% to 3.7% on the 30 year is registered on the ‘continuum’, though there’s a 1st time for everything, so we’ll avoid overly rigid thinking…]
By Michael Ashton
Possibly a Tactical Chance for Bonds
This week, I am participating in a school-style debate at the Global Fixed Income Institute’s conferences in Madrid where the question before the house is whether or not inflation will resurface in major world economies in the next five years. As you might imagine, I feel that my part of the debate is the easy part, especially as inflation is pointing higher in the US and core inflation just surprised higher in Europe. However, I am sure the other side feels the same way.
The Institute is interested in this discussion partly to illuminate the question of whether the substantial rise in yields over the last three months or so in all developed bond markets (see chart, source Bloomberg, showing 10y yields in US, UK, Germany and Japan) is indicative of a return of fears of inflation.
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