Barron\'s - 16.09.2019

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42 BARRON’S September 16, 2019


PRESIDENT TRUMP’S TUES-


day morning ultimatum


that the “boneheads” at


the Federal Reserve do


something to materialize


negativenominalinterest


rates again prompts the


question,“Wheredoesitallend?”Inmone-


tary debasement, a bond shakeout, and


higher gold prices, of course.


Yourcolumnisthasbeensayingthisfor


years.Butit’samuchmorestrikinglineof


argument when it runs out under the by-


lineofRickRieder,BlackRock’sfull-time


bond investor and part-time blogger.


InaSept.5post,Riederspeculateson


the “monetary endgame.” Inasmuch as a


bondisapromisetopaymoney,themone-


tary topic could hardly be weightier.


PhilippHildebrand,formerheadofthe


Swiss National Bank and a colleague of


Rieder’satBlackRock,scoopedtheRieder


messageinaSept.3op-edintheFinancial


Times. Come the next recession, Hilde-


brandproposes,letthemonetaryauthori-


ties directly infuse citizens with money,


rather than futilely continuing to whack


away at the stubble of the world’s bond


yields. Anyway, whatever the economic


merits of the Hildebrand plan, it sounds


like a vote-getter.


TakinguptheargumentonSept.5,Rie-


der,too,makesacasefortheefficacyofhe-


licopter money, the kind that enters the


paymentsstreamwithoutpassingthrough


thebanks.Figurativelyspeaking,itflutters


to earth from the doors of low-flying air-


craft—an image that Milton Friedman


dreamt up and that Ben S. Bernanke


alarminglyinvokedwhilehewasaFederal


Reserve governor. Competitive currency


devaluations, too, stand to figure in the


monetary grand finale, Rieder speculates.


Howtoinvestforthisendgame?“Asis


probablyevident,”theBlackRockchiefin-


vestment officer for global fixed income


leadsoff,“anynominalinstrumentwillbe


devaluedinrealterms,sothesolutionisto


hold an asset that maintains its real


value—anassetthatcannotbeprinted.We


would include stocks (dividend yields are


setonpayoutratios,companieshavesome


degree of pricing power, and shares out-


standing are limited in number), real es-


tate(itisdifficultandexpensivetoexpand


the stock of real estate), and even com-


moditycurrencieslikegold(again,limited


supply and expensive to extract).”


The worst asset to hold in this hypo-


theticalbonfireofthecurrencies?A“sov-


ereignbondwithanegativeyield,closely


followed by paper money at zero yield,


both with a theoretically infinite supply.”


Sosaysthemannearthetopofafirm


that,attheendofthesecondquarter,held


$2.19 trillion of fixed-income securities.


Have the clients heard?


You’ve heard allthe reasons put for-


wardtobuybonds,eventheonesyielding


less than zero. Plunging birth rates, bur-


densomedebts,dwindlingunionmember-


ship, perpetually subdued inflation, and


the price-chopping works of Jeff Bezos


constitute only the preface to the sales


pitch.It’sabullishnarrativeasdeeplyin-


grainedinthemarkettodayasthebearish


one was a generation ago.


Iholdinmyhandsarelicfromafateful


yearininterestrates.It’sananalysisbyJ.


ParkerHallIIIpublishedintheMay-June


1981 issue of the Financial Analysts Jour-


nal:“Shouldn’tYouOwnFewerLong-Term


Bonds?” is the wry, beckoning headline.


As every schoolgirl knows, 1981 was


the culmination of the post-World War II


bear bond market. Long-dated Treasury


yields peaked at 15%, up from the long-


forgotten 1946 low of slightly over 2%.


Inretrospect,youcanseethat1981was


to bonds what 1849 was to gold, but with


this difference: Whereas any California


forty-niner could comprehend a gold nug-


get, it took the likes of Hall to spot the


value in bonds. A longtime trustee of the


UniversityofChicagoandpresidentofLin-


coln Capital Management, Hall was Mid-


westerninvestmentroyalty.Hespokewith


authority,butittookallhispowersofper-


suasion to make the case for bonds, the


long-datedkind,noless,inthewakeofthe


inflation-seared 1970s.


“The1979-80bonddebacle,”Hallwrote


near the summit of the yield mountain,


“appearstohaverepresentedafinalcata-


clysmic adjustment, as 15 years of tradi-


tional hopes about future lower inflation


weredemolishedandreplacedbypresent


untraditionalfearsaboutfuturehigherin-


flation. For the first time in our history,


bond investors have given up.”


Hard-won investment experience had


taught them that, whatever they might


have learned in school, bonds made poor


portfolio diversifiers and were even more


susceptible than stocks to extreme price


volatility.Then,too,therewasnoreasonto


beartheriskoflong-durationassetswhen


theyyieldedlessthanTreasurybills.And


ifallthatweren’tenough,Hallhadtoadmit


that “owning bonds is embarrassing.”


Or had been embarrassing.Ininvest-


ing, the author wisely continued, “price is


nearlyeverything.”Compareandcontrast


the15%yieldtomaturityonseniorsecuri-


ties with the 4.5% dividend yield on com-


mon stocks.


Priceisnearlyeverything—andnearly


every financial phenomenon is cyclical.


Hallinvitedhisreaderstorecallthestock-


marketcollapseof1974,onlysevenyears


in the past. “But stocks still provided re-


turns of 18% compounded from 1975 to


’80,” he reminded them. In the previous


six years, bonds provided a compounded


annualrateofreturnofjust4%.“Isadif-


ferentialaslargeasthisagoodindication


of future normal comparative returns?”


Perhaps not even Hall envisioned the


fixed-incomefutureinallitssplendor.Bond


yields made their high around September



  1. In the 30 years until its maturity in


2011,thelong-datedTreasurygenerateda


compoundannualreturnof11%,edgingthe


S&P500totalreturn(includingreinvested


dividends) of 10.8% per annum.


Hall died in 2011, but I wonder what


theChicagograndee(anaccomplishedjazz


pianistandtennisplayer,ontopofevery-


thing else) would say now? I expect he


might warn against drawing a too facile


comparison between 1981 and 2019—be-


tweenaprovenhistoricalupsiderecordin


yields and what may or may not turn out


to be a reciprocal downside limit.


But his contrarian turn of mind might


leadhimtoobservethatthecentralbank-


ers might yet succeed in their quest to


stoke inflation, that the politicians are


promising the voters the sun, the moon,


andthestars,thatbondyieldstendtorise


and fall over multidecade intervals and


that$14.7trillionofbondsnowadaysyield


less than nothing. “Shouldn’t you own


fewerlongbonds”hemightask,thistime


really meaning it.


JAMESGRANT,founderandeditorofGrant’sIn-


terestRateObserver,istheauthorofBagehot:


The Life and Times of the Greatest Victorian,


which was published in July.


The 38-Year Case for Bonds


Yields on long and short-term bonds have steadily fallen after peaking in 1981.


Source: Bloomberg

Yields on long and short-term bonds have steadily fallen after peaking in 1981.


-2


0


2


4


6


8


10


12


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16%


1985 ’90 ’95 2000 ’05 ’10 ’15 ’20


30-Year


3-Month


CURRENT YIELD n by James Grant


The Endgame for Bonds


Still-shrinking rates augur disaster for long Treasuries. Is 2019 Really 1981 in reverse?

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