The Financial Times recently carried a piece by John Plender, “The Trump bear market for bonds is fast approaching,” that argued that the period currently unfolding in the bond market looks a lot like the latter half of the 1960s, with a low unemployment rate, little economic slack and a “complacency” around low inflation. The upshot was higher inflation, 6.4 percent in early 1970, and bond investors losing 36 percent in real terms. With the tax plan soon to be signed, Plender believes, “it seems almost certain that the President will be definitively putting an end to the 36-year bull market in (Treasuries).”
To be fair, he does make note of differences, such as the fact that many Treasurys are held by rate-insensitive buyers, like pensions and central banks, and that the Fed is quite different now than it was then, including targeting inflation and being more open about its goals. Fiscal policy too, he notes, is more transparent compared to the ease with which President Johnson expanded spending for the Vietnam war. Still, Plender raises concern with the current tax package as fiscal stimulus when the economy is hot along with a grossly (my term) expanding deficit.
Let me offer some counterpoints. First, my theme is that while the bond bull market is probably over, i.e., thinking about 1.37 percent 10s, I’m not sure that the bear market has started or has far to go. There are some striking differences between now and then that warrant visual evidence.
Looking at the far-left side of the above chart, it strikes me that the grand bond rally went hand-in-hand with the grand equity rally. Recession-driven corrections aside, the trends are evident. This begs the question that if bonds were to enter a severe bear market then surely stocks would follow suit, which would put a brake on the bond retreat, hit the economy and compel an easier monetary policy.
Some 50 years ago, the 1960s, about 1/3 of the U.S. workforce belonged to unions; today that figure is just over 10 percent. Bear in mind that the high percentage of union workers were getting those cost-of-living adjustments, propelling wage growth even as we entered a period of stagflation. COLAs are not a factor anymore meaning that higher inflation, if we were to get it, would not automatically cause wage inflation.
The median age of the U.S. was 28.1 years at the end of the 60s. Today, it is 37.9 and rising to an estimated 39.3 in 10 years. Meanwhile, the percent of the population over 55 was 26 percent in the early 80s and today it’s 35 percent. I’ve written a good deal about how workers experience decreasing income gains once they cross 50 (less productive, made their wage gains when moving up the ladder, less mobile) and also are more conservative in both spending and investing habits. In short, I think the demographics will dominate economics and keep inflation, growth and rates down for years to come. It may not be a bull market any longer for bonds, but it sure is for geriatrics!
A part of that idea is labor participation, which has been shrinking, though not exclusively due to retiring baby boomers. Indeed, their participation has held up rather well. My sense is that it will continue to do so. But here’s the thing: these older folks want more flexible time, medical benefits and are less mobile, especially if there are two people working or have aging parents around.
The point is that the aging working population demands less in terms of wages and more in terms of other benefits. Another aspect to this could be the difference between real median household income and real mean household income. There you see the mean is up a bit from 1999, but the median is a tad less. This shows a skew between a group at the very top who’ve done well and everyone else. Older workers have less of the tech skills that pay well and so fall into a category where they’re less likely to see significant income gains that would prove inflationary.
There are ample reasons to think the coming bear market in bonds will be more teddy bear than grizzly.
David Ader is Chief Macro Strategist for Informa Financial Intelligence.