30 BARRON’S September 2, 2019
CURRENT YIELD n By James Grant
A Wish List for the Next 50 Years
Today’s investors want results right now. That’s a tall order in a world of negative rates
“I HAVE BEEN INVOLVED
in the investment busi-
ness for over 50 years,”
reader Dave Goebel of
Damascus, Ore., led off
his letter in last week’s
Mailbag, “and I can
make absolutely no sense out of what is
goingonintoday’smarkets.Havinglived
throughtheyearsofdouble-digitinflation
and interest rates in the early 1980s, it
makes no sense to me how we can have
over $16 trillion in worldwide bonds with
negative yields, and 2) how the Federal
Reserve can be concerned with pushing
inflation up to 2%.”
That makes two of us. A 50-year man
myself, I wonder what impulse leads the
samehumanbrainthatspurneda15%bond
yieldin1981tochaseasubzerobondyield
in 2019.
Ofcourse,itprobablyisn’ttheidentical
brain. If you got a job on Wall Street in
1981atage25,youare63bynow.Youhave
beenwitnesstoastupendous38-yearbond
bull market. You see nothing incongruous
aboutground-huggingbondyields—it’sthe
treetopratesofyesteryearthatmakeyou
scratch your head. You can explain away
eventoday’ssubterraneanyields,asaLon-
don investment strategist took a crack at
doing in Tuesday’s Financial Times.
“A lot of commentators have dismissed
thedramaticfallinbondyieldsandrisein
negative-yielding debt as evidence of a
bondbubble,”theauthorsaid.“Butthisis
notareflectionofinvestors’irrationalexu-
berance. It is a call for politicians to act
now to prevent a deflationary global eco-
nomic downturn.”
Ifyouhaveyourdoubtsaboutthat,you
aren’talone.Didyieldsracecrazilyhigher
in 1979-81 because of a cry for help from
the inflation-fearing patriots on the Salo-
mon Brothers trading desk? Or were the
boys and girls just selling bonds because
themarketwasgoingdown?Asyieldshad
been persistently rising since 1946, it was
not an outlandish strategy.
DonRegan,PresidentRonaldReagan’s
first secretary of the Treasury, was asked
tointerpretthemessageoftheragingbond
bearmarket.“Thereisnone,”heapproxi-
matelyanswered.Hesaidhewassureofit
because, as the former CEO of Merrill
Lynch, he knew so many bond traders.
Times have changed, and thank good-
ness. A half-century ago, analysts carried
slide rules, computers worked with punch
cards, and New York Stock Exchange
memberfirmsstoppedtradingonWednes-
dayafternoonstosortouttradesthattheir
analog back offices couldn’t process. The
macroeconomic backdrop to those years
featured the coming of age of the baby
boomers,theVietnamWar,theformidable
bargaining power of organized labor, and
downward pressure on the dollar against
gold.Sensitiveearscoulddetectthedistant
thunderoftheGreatInflationofthe1970s.
Much is different today, what with Jeff
Bezos,theone-manscourgeofinflation,all
grownup(hewasfivein1969),population
growthdwindling,organizedlaborneeding
ahug,andadifferentkindofforcepressing
onthedollar.Somethinktheyhearadefla-
tionary rumble.
Then,again,muchabouttheworldisthe
same—humanimpatience,mostimportantly
for the purposes of this bond-market dis-
cussion.Whenwewantsomething,wewant
itnow.ObserveAmazonPrime’sinroadson
thePostOfficeand4Gtechnology’ssuccess
versus the dial-up modem.
Because we’re impatient, we value in-
come today more highly than income to-
morrow.Amongthewordsleastfrequently
spoken are these: “No, thanks, boss, I’d
prefertohavethatraiselater,notsooner—
how about the year after next?” The gen-
eralpreferenceforpresentenjoymentover
deferredgratificationisthereasonsavers
got paid for saving, the explanation for
normal—i.e., positive—interest rates.
Still,negativeyieldsareafact.It’sasif,
to borrow a line from the investor Paul
Isaac,theownersofsubzero-yieldingbonds
have contracted a case of Stockholm syn-
drome. The once hard-hearted creditor
class begs its debtors, “Please take this
moneywelendalongwithasmallgratuity
for relieving us of it. Repay the principal,
but forget the interest. We’ll pay you.”
No such deviation from normal human
desiresexistswithoutcause.Fortheforce
behindtheonce-in-4,000-yearphenomenon
of negative nominal bond yields, this col-
umnnominatesthetirelessmanipulationsof
the world’s central banks.
NothingispermanentonWallStreet,as
any senior citizen can attest. For decades
priorto1958,stockdividendyieldstopped
high-gradebondyieldsforthereasonthat
junior securities are riskier than senior
ones;inbankruptcy,thebondholdersstand
atthefrontofthelineforrepayment.The
relationship seemed self-explanatory and
irreversible.
Itreversedin1958.Inafast-growingin-
flationary world, the new thinking had it,
fixed-incomesecuritiespresentthegreater
risk of capital depreciation, never mind
theirprivilegedpositioninthecorporateli-
abilities structure. And so matters per-
sisted, with time out for the Great Reces-
sion,untiljusttheotherday,whenthe30-
yearTreasuryyield(astoundinglypitched
at 1.99%) traded lower than the S&P 500
dividend yield.
Youhearitsaidthatpeopleofacertain
agearestuckintheinflationarypast.They
haven’tkeptup.Cripplingdebtandadverse
demographicspointtoadeflationaryfuture.
Thecentralbankerscan’tlifttherateofin-
flationpast2%,tryastheymight,because
they’re up against forces stronger than
quantitativeeasing.Ifthevalueofmoneyis
destinedtoappreciate,notdepreciate,the
priceofthebondwillrise,notfall.The$16
trillionofnegative-yieldingbondsonwhich
Goebel remarked has turned into $17 tril-
lionatthiswriting.It’samassivebetonthe
death of inflation.
Fiftyyearsago,whenourreaderandI
weregettingourWallStreetbearings,the
priceof Barron’s was35centsandthedol-
lar was defined as 1/35th of an ounce of
gold. You see what has happened to the
Barron’s coverprice(wortheverypenny—
ed.)andlikewisewhathashappenedtothe
goldprice.Andyouseewhathashappened
to the dollar. Undefined since 1971, it has
beenfreetofinditsownlevelagainstother
national monetary brands, themselves
undefined and more or less free-floating.
Our eloquent Mailbag correspondent
concludes with a plug for common stocks,
their volatility notwithstanding, with a
swipe at the Fed for even trying to engi-
neer a 2% inflation rate and with a plaint:
“What am I missing?”
WhatamImissing?Something,proba-
bly.Iprefergoldtodollarbills,dollarbills
to most stocks, and stocks to just about
everybond.(SeeAlexandraScaggsonthe
facingpageforaconstructiveapproachto
incomeinvesting.)Ipreferinvestmentvalue
tononvalue,pricediscoverytocentral-bank
manipulation,andpositivenominalinterest
ratestonegativeones.Callitawishlistfor
the next 50 years.
JAMESGRANT,founderandeditorofGrant’sIn-
terestRateObserver, istheauthorof Bagehot:
The Life and Times of the Greatest Victorian,
which was published in July.