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Let me start with two predictions. Firstly that the title “2020 Vision” will be irresistible to all year-ahead outlooks, no matter what publication or industry you work in. This is why I trademarked the idea many months ago, and now expect to retire on the proceeds of all the copyright breaches. My second prediction is that in my industry, bond fortune telling, virtually all of those 2020 outlook pieces will declare that it will be the year that the “bond bubble” bursts. Maybe they’ll be right this year, after a 30-year streak of “sell bonds” predictions. But their track record doesn’t suggest they have an edge in the bubble popping business.
If you do believe that 2020 is the year for bond bears finally to triumph, I think you have to believe that a lot of very long term, established trends are about to come to an end simultaneously. These trends are the Secular Seven. If you think that their powers are at an end, or significantly diminished, then you should join the January anti-bond mob with their pitchforks and flaming torches. Otherwise you’ll probably want to wait to see a conclusive break in the 30-year downtrend in bond yields and inflation before saying goodbye to fixed income.
The Secular Seven
1 – Demographics. OK Boomers. The post-World War 2 baby boom impact on the economics of the developed economies can’t be overstated. In the 1970s and onwards as the Boomers left education and came to dominate the workforce, the labour scarcity that had been a feature of the western economies for a couple of decades started to come to an end. Trade Unions lost their membership and their power, and wage inflation dropped. Economies became more productive, and wealthier. With largely young and healthy populations, pressures on the welfare state (for example pension burdens, and care and healthcare costs for the elderly) were relatively subdued. As the demographic basketball (the Boomers) passed through the snake and reached peak earnings, their desire to save and invest those savings also hit new highs. Demand for income and safe assets grew dramatically – driving bond yields down.
2 – Technology’s impact on inflation. Why can’t we generate consumer or producer price inflation in developed economies despite zero or negative interest rates, “money printing” and periods of growth and low unemployment in the past decade which historically might have generated CPI of at least twice the current common inflation targets of 2%? The dramatic deflation in consumer goods is one answer, and a good part of that has been driven by the collapse in the price of technology. The 1996 Motorola StarTAC mobile phone cost $1000 then; a similar level phone today is about $200. 1996 was probably also the year I stopped hiring a TV (paying monthly) from Radio Rentals and bought one, as they’d become affordable. And it’s not just the cost of the hardware: I used to spend at least £50 a month on music on compact discs (and cassettes before that, which I note are now fashionable with youngsters). Now I pay £12.99 a month for all the music in the world on Spotify. Think also of all the free stuff that the internet provides, from maps to encyclopaedias and news, and perhaps the impact of low inflation is actually understated. The transparency of the internet also allows me to find the cheapest thing in the world whenever I buy something. Awful news for high street retailers, but the deliverer of a huge consumer surplus and disinflation. Finally, we haven’t even discussed the Rise of the Robots yet: what if AI and robotics are finally deployed in the workforce on a massive scale? What does that do to wages? To employment and disposable income? It certainly sounds like a further technological leg down in price inflation is possible........MUCH MORE
