Do you remember back in the early 80s when interest rates peaked at 15.25% and most everyone felt rates were moving higher, certainly not lower? The fact is, it was the single best time in history to get bullish on bonds.
Solomon Brothers’ head of research Henry Kaufman went from bond bear to bond bull and that call, unpopular as it was, later earned him “guru” status. The thing is, at that time, most people thought he was nuts.
Recall too that inflation was in the mid-teens and both stocks and bonds had burned investors over the prior decade. Fed Chairman Paul Volcker stood tall in his fight to rein in inflation. Kaufman’s bullish call went on deaf ears. Few seized the opportunity.
I remember my mentor, John Ray (then a portfolio manager at Delaware Funds) telling me a story about an investment committee meeting where he stood before his colleagues and said we should put 100% of our money in long-term Treasury bonds and call it a day (or maybe call it 32 years as that investment beat stocks by a large margin). John’s bullish call went on deaf ears.
Let’s pause and look at the current situation from 35,000 feet. Back then we were trying to defeat inflation by driving ultra-high interest rates even higher. Today, we are trying to create inflation by driving ultra-low interest rates even lower. Who wanted to buy bonds in the early 80s? The past 1, 3, 5 and 10 years of performance were abysmal. It was the right thing to do. Everyone wants to buy bonds today. Just look at the fund flows.
Investors look at recent performance and project it forward. This has to stop!
It’s a fine mess we find ourselves in. So here is the skinny. The bond market has little juice left to provide your portfolio with the help it provided you in the past. The same is true for the equity market as you can see next in GMO’s 7-Year Real Asset Return Forecast:
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.