Is the bond market finally catching on to the "forced risk"
trade...?
AS NIALL FERGUSON never tires of reminding us, bond markets rarely react
early to bad news, no matter how plain it looks to everyone else.
"In
the years leading up to the First World War," as the Harvard historian explained
in 2006, for instance, "the London bond market - then the biggest in
the world - appears to have become markedly less sensitive to international
crises than it had been in the nineteenth century." So despite much
gnashing of teeth over the Russian/German/Yellow/Turkish threat to empire in
the ever-xenophobic British press, the catastrophe of August 1914 still
caught bond holders napping (holidaying in fact), oblivious to their imminent
risk and the decades of negative real returns that lay ahead.
Similarly,
in the 1970s, real yields - after accounting for inflation - consistently
paid less than nothing, yet the bond-market sell-off only really began after
nearly a decade of sub-zero returns. Bond holders again needed a lot of
telling, in short. Which makes this month's new Investment
Outlook from Bill Gross - head of the world's largest bond-fund
manager, Pimco - signal.
"Central
bankers have lowered the cost of money for 30 years now," writes Gross,
finally catching up with what us nutty gold bugs have long pointed out,
"legitimately following global disinflationary forces downward, but also
validating increased leverage [in the financial sector] via lower real
interest rates."
Today's
Fed promise of "low or negative real interest rate for an 'extended
period of time' is the most devilish of all policy tools," Gross goes
on. Because "to rebalance debt loads and re-equitize
financial institutions that should have known better, central banks and
policymakers are taking money from one class of asset holders [savers and
retirees] and giving it to another [bank bosses and the other finance
croupiers]."
Negative
real interest rates are nothing new, of course. As our chart shows, British
cash savers have long suffered periodic bouts of sub-inflationary yields.
Absent
the apparent noise of the first 125 years above, however - when real rates,
denominated and paid in gold bullion of course, in fact averaged 3.8% per
year - the last 140-odd years first rewarded cash savers, then whipped them
wildly as the First World War struck, and then denied them a balancing
positive return to make up for their previous losses, right up until the
start of the 1980s.
Paying
the strongest real rates since the Great Depression, but without any hope of
gold bullion to back its currency, the Bank of England - like the US Fed and
German Bundesbank - finally got the inflation
Gremlin back in the blender. Peace, general prosperity, and the "long
boom" of ever-rising equity and bond prices ensued. Right up until those
slowly declining real rates brought about a global financial bubble which
demanded (or so policymakers believe) sub-zero real rates to fix its
collapse.
What
comes next? Bill Gross advises bond buyers to seek out positive real returns
outside major-economy government bonds, basically recommending the "forced risk" trade which Japanese savers have
long had to embrace. Other observers, fearing
emerging-market volatility or default, might also want to consider hard
assets. Because - and lacking all hard-money backing for currency - the
common denominator between the last 10 years of rising gold
prices and the inflationary 1970s remains miserable returns from other
asset classes, most notably the negative real rate of interest paid to bank
savings.
Here
in the UK, for example, last month's VAT tax increase, together with the zero
returns still being offered to cash savers, have most likely taken the real
return on bank deposits to new 30-year lows. The last time cash savings were
losing value at this pace - worse than 4 pence in the Pound annualised - inflation stood at record peace-time levels,
threatening to crush the economy. But the net effect today is just the same
for retained wealth. With money under constant attack thanks to growth-at-any-cost
policy, gold and silver are becoming increasingly attractive alternatives.
And
for all the chatter about raising interest rates, seven of the nine
policy-makers at January's Bank of England meeting voted against hiking the
base rate by even just 0.25%. Chief "hawk" Andrew Sentance will leave the committee in May, and with annual
interest costs on the government's debt set to double to £63 billion between 2010 and
2014 - and with a further £154bn of outstanding debt due for repayment by then
as well - the political imperative for rates to stay low is clear, present
and overwhelming. At the start of the '80s, gross national debt was a
fraction of today's burden.
Bank
depositors, in short, look set to continue paying for both the banking
bail-out and the gently declining real rates of the last 3 decades which
required it. Little wonder a growing number are opting out of official
currency and national debt entirely, choosing industrial commodities and
precious metals instead.
Adrian Ash
Head of
Research
Bullionvault.com
You can also Receive your first gram of Gold free by opening an
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City correspondent for The Daily Reckoning in London, Adrian Ash is
head of research at BullionVault.com – giving you direct access to investment
gold, vaulted in Zurich, on $3 spreads and 0.8% dealing fees.
Please Note: This article is
to inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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