To be honest, I’ve had a bit of a year really, so would you mind asking Donner and Blitzen not to clatter about on the roof, because my headache is killing me.
I’ve left you the usual mince pies by the fireplace, but I’m afraid the sherry is British this year because I can’t afford the real thing any more. Tinsel’s been rationed too. Normally I’d have been out shopping in New York, but events keep getting in the way. You know how it is.
About two years ago, I found myself writing an editorial for IFA Magazine about something that the experts were call The Great Rotation. My, how time flies.
The gist of the Great Rotation argument, as you’ll probably remember, was that the unbearable weight of the market’s appetite for fixed interest investments was about to overturn the logic of the 28 year bull run in bonds and send us all skittering back into equities. Or maybe into cash if our luck improved and interest rates took an upward turn. It was absolutely, definitely bound to happen. So we waited, and waited, and waited….
And now it’s a (yawn) 30 year bull run in fixed interest, and US sovereign yields are still below 2%, and in Germany they’re so low that they often disappear into negative real territory – which has shaken up our ideas of what bonds are supposed to do, because a lot of us aren’t exactly used to paying money to central banks for the privilege of parking our money with them. Not even the enormous weight of quantitative easing, which was supposed to have pushed up rates by flooding the debt markets, has really helped the ECB to boost inflation toward the 2% inflation figure that everyone seems to agree is ‘normal’. And as for boosting economic growth, it just doesn’t seem to be happening, does it Santa?
Equities on the trampoline
What’s really odd about it, though, is that yes, the equity markets have been soaring exactly as everyone thought they would under the Great Rotation. Which perhaps isn’t so very surprising when you consider the pathetic bond yields that are currently on offer. And they’re currently bouncing about like the boxer in the John Lewis ad.
But how on earth are we to explain the continued strength of the bond market? Is it really that the pensions industry needs them so much that demand can outstrip the logic and the mathematics of the issue? And what will happen if the dam finally breaks, as everyone says it will?
President Trump can hardly fulfil his electoral platform mandate unless he floods the US market with a few trillion dollars of new paper. And where are all the buyers for those going to come from? Will they really be persuaded by the call of the old reserve currency?
Could be, but we now have a US which is stepping back from the world – and that’s a whole different scenario from the 1970s when the US bond explosion started. We now have China, and the euro, and a lot of disgruntled Asian countries that just might decide not to put their faith in Washington’s economic solidity. And, on the current face of things, I might not blame them.
I was reminded of that recently by a social media discussion in which one participant got roundly thumped for trotting out the old mantra about how the percentage of equities in your portfolio should be 100 minus your age, with most of the balance in bonds or cash. Bonds, his tormentors demanded? Cash? Are you kidding?
Dear Santa, I’ll understand if you can’t manage much in the way of a present this year. I know, times are hard up in Lappland. But if you’ll just take a look in your snow crystal ball and scribble down a few numbers for me, I’d be awfully grateful.