Most economists have articulated their responses to USD interest rates based on rising fiscal deficits, loose monetary policy and rise of China and emerging markets. All of these lead to cogent reasoning to state that interest rates have nowhere to go but up. Reality proved otherwise. Rates are at historical lows. How do we explain this? Has our understanding of interest rates is flawed. Were these experts looking at wrong side of their crystal balls when making these predictions?
There are 21 experts who said Rates have nowhere to go but up.
http://www.businessinsider.com/21-rates-have-nowhere-to-go-but-up-2012-7?op=1
Let’s look at some parables that helped people to arrive at this conclusion
We hear from John Mauldin with regards to his profound analysis on state of economy, fiscal affairs, investment philosophy and strategies. Like many of his peers he also joined the bandwagon of bond bears.
April 2004: John Mauldin, Bull's Eye Investing
"In this book, I hope to give you an idea of the broad trends that will be evident for the remainder of the decade and help you target your investments to take advantage of these trends. Successful investing for the period 2004 through 2010 will require you to do things differently than you did in the 1980s and 1990s. We started the last bull market with high interest rates, very high inflation, and low stock market valuations. All the elements were in place to launch the greatest bull market in history.
Now we’re in the opposite environment. The stock market has high valuations, interest rates have nowhere to go but up, the dollar is dropping, and the twin deficits of trade imbalance and government debt stare us in the face."
10 year yield in April, 2004: 4.197
Nassim Taleb needs no introduction. He got his fame by bringing Black Swans to the world of Finance and risk. This oracle also joined the party with Bond Bears.
BONUS: February 2010: Nassim Taleb
It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”
10 year yield in February, 2010: 3.546
Jim Rogers famed hedge fund manager well known for his bets on commodities has eschewed US dollar and treasures.
BONUS: May 2011: Jim Rogers
"In my view that's coming to an end...the bond bull market is coming to an end. If any of you have bonds I would urge you to go home and sell them. If any of you are bond portfolio managers I would get another job,"
10 year yield in January, 2012: 3.157
These three folks are among numerous investors who have made fortunes. They all have one thing in common apart from investment success. It is they are all bond bears. All of these bears got it wrong. I can think of one thing is their analysis is sound but missed some important facts. What are they?
Housing Crisis in USA triggered a chain reaction of recession in the interconnected and globalized world. Most of them underestimated the degree of globalization and hence the transmission effects of financial crisis in USA. In response to financial market crisis central banks got into action of coordinated monetary policies. China and USA jolted their economies with huge Stimulus money. Euro region and emerging market economies have injected a gush of liquidity into their economies. Alarmed by the degree of easing in monetary policy and deepening fiscal deficits dollar bears emerged from hibernation expecting treasuries will drop in their values. At this time, US economy is suffering with unemployment at 8.2%, Euro zone witnessed new solvency issues and export dependent emerging market economies started seeing their fortunes disappearing in front of their eyes. In my opinion these events worked against bond bears. Ironically, improvements in these three factors are bearish for treasuries. So for bond bears battle is not over yet.
Metaphorically: Snowman made up of treasuries was expected to melt due to rise of sun (fiscal imbalances and loose monetary policy) but averted by the cold snap (Euro Crisis).
