Quote:
Originally Posted by GGG
One question I have is do you see the counter cyclical nature of bonds and the stock market continuing to be effective hedges against eachother.
I see a rapid inflation interest rate rise destroying both the value of stocks and bonds at the same time.
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To me, bonds are going to produce a lower return over the coming decade as opposed to the past couple of decades. That’s not purely based on inflation though. It will create problems for people who are looking for income and people who rely on these instruments for balanced mandates. It’s common for people to look toward a balanced fund and basically slot that in for ~7% a year over the long term and it’s medium risk, generally 60% equities and 40% bonds. That kind of thing has worked so far because the bond return has been high enough.
In looking at depressed fixed income returns going forward though, you need an equity return of over 9% to get to 7%. Thats going to be dicey (at best) for a pure medium risk mandate.
I guess to more directly talk about inflation, I’m not as concerned as maybe some others. A lot of the things I hear today aren’t that different from what was said after 2008-09; “there’s so much money in the system, they’ll never be able to get it out and it will lead to huge inflation.” But, they did get it out (only to put it back in), and inflation was never a concern. I also think that if inflation looks to be a factor, the central banks are going to act. Powell has already brought that up in the US and he was adamant that they’re not going to let it rise too much.