Dear Diary,
Hey, want to screw up your life? Get rich. More on that in a minute…
In the meantime, does Bill Gross’s departure from PIMCO mark the end of an era?
Is it the end of the bull market in bonds?
We don’t know. No one does. Yesterday, there was little movement in the bond market or the stock market. But gold dropped $10 an ounce. And it now looks like it will test the $1,200 level.
Commodities are soft. The dollar is strong. If this is because global economic growth is slowing, as Chris warned yesterday, it could also mean even lower bond yields.
The 30-year US Treasury bond yields all of 3.2%. Could it fall below 3%? How about 2%? Anything is possible, isn’t it?
If so, the top of the bond market could still be scheduled for when we are deep in retirement, drooling quietly in some forgotten nursing home after having given up all care about bond yields or bodily functions.
A Brief History of Bonds
Gross has been with PIMCO – a company he cofounded – since 1971. Patton was the big film of the year. Charles Manson got the death penalty. And President Nixon severed the last direct link between the dollar and gold.
This freed credit from its earthly fetters… and it soared. Over the course of Gross’s career, total credit in the US increased 50 times.
At first, the bond market shuddered at the thought of a fiat dollar. Interest rates and inflation ran for cover. But 10 years later, incoming Fed chairman Paul Volcker brought the situation under control. Interest rates have been falling ever since.
Now Gross is 70. And he’s parted company with the firm he helped create.
Even if the top is not exactly in, it’s probably a good time for the rest of the bond players to look around them and plan for a graceful exit too. No market goes in the same direction forever.
Bonds were at their peak around the time Gross and your editor were born. They bottomed 33 years later. But it was not a sharp, simple bottom. It took place over years… with plenty of backing and filling until we could finally see a pattern.
And now, 33 years later, the bull market that began in the early 1980s looks ready to top out. Again, it may not be a sharp, clear top. Instead, it may take place over years… with investors doubting it every step of the way.
Greek Tragedy
Back to the trials and tribulations of “the 1%”…
Yes, maybe we are exaggerating. But surely the rich do not deserve the calumnies and kvetching directed toward them. They suffer enough. Wealth is power (of a sort). Even in the hands of sensible, well-meaning people it can do damage as well as good.
That was the message we took from a recent article in Forbes about the Rollins family. The Rollinses are the owners of the Atlanta-based Orkin pest control empire. It’s worth some $8 billion.
And although the Rollinses seem like decent people with decent financial and business skills, their private lives sound like a train wreck. We thought we heard cockroaches laughing as Forbes told the story:
Glen has sued his father, Gary, CEO of Rollins Inc., as well as his uncle Randall, company chairman. Glen’s three siblings also joined in, claiming they were being denied their rightful cash allocations –though Randall’s five kids stuck by their dad and Gary. Ruthie apparently took her kids’ side in the money fight, filing for divorce from Gary, after 45 years, at almost precisely the same time. And then Glen and Danielle began their own ugly divorce.
The cumulative effect – father vs. sons, wives vs. husbands, cousins vs. cousins – makes this one of the nastiest intergenerational battles ever to take place among members of The Forbes 400 (Gary and Randall rank 225th on the list, at $2.7 billion each).
“It’s like a Greek tragedy,” says Danielle.
It’s like dominos,” says Glen’s ex-wife, Danielle. “My children have lost grandparents, cousins. Their heritage.”
Glen has had no further dealings with the company that bears his family name. He doesn’t speak to his father nor his uncle, now 82, who continues to work at the family business six days a week. Before evicting his ex-wife and three kids from Boxwood in July 2014, Glen was renting an Atlanta town house owned by his mom. Now he’s back at the estate, sports cars in the garage, his sister’s former nanny in his bedroom.
Meanwhile, Gary threw one last party this past spring, when he remarried. None of the children that he raised in all that luxury and splendor was in attendance.
“Money is just a way of keeping score in life,” says oilman T. Boone Pickens. People keep score in dollars because it’s easy to tote them up.
Too bad it is all nonsense. What really matters in life is not quantitative; it’s qualitative. You can’t add it. You can’t subtract it. You can’t keep score with it. The numbers are meaningless.
What Really Matters
Looking from the outside, you may as well be the family dog overhearing a family squabble. You don’t know what to make of it. For all we know Glen Rollins is as happy as any biped… or he may be the most miserable man on the planet.
Money makes things possible – good things as well as bad. Which brings us to the last part of our “Homage to Poverty” series.
Remember, what really matters is: (1) what you do, (2) where you do it, and (3) with whom you do it.
We’ve already seen how money can keep you from doing what you want where you want. But how about with whom you want? How does money come into play with that?
Readers may object that it was not wealth that wrecked the Rollins family. It was lack of family solidarity. And a lack of moral direction. Two of the boys were described as “drug addicts.” Glen, heir apparent, was said to have a “sex addiction.”
Poor people have those problems too. But they don’t end up in court over them. Money – or arguments over money – breaks up rich families, not poor ones.
That often leaves “the 1%” feeling lonely and isolated – cut off from the 99%… and from their own 1% kin.
What can they do, other than hang out with other one percenters?
They move to the rich side of town. They take up hobbies and pastimes shared by other rich people. Pretty soon, their lives are slipping away from them… measured out in sauvignon blanc and charity fundraisers.
The best of them piddle away their days in idleness, drunkenness and debauchery. The worst are full of earnest good intentions. The women they married may feel abandoned in Atlanta, but women they never met in Africa have their full support!
More to come…
Bill
5 Reasons Bond Yields Are So Low
Here’s a chart showing the yield on the 30-year US Treasury bond going back 20 years.
Source: StockCharts
Mean reversion – which means that periods of relatively good performance tend to be followed by periods of relatively bad performance – suggests that Treasury bonds could be approaching a long-term secular bear market. (Yields move in the opposite direction to bond prices.)
But there are five reasons why this may still be far off…
1) Aging demographics – Investors often look at demographic trends because they tend to be very slow-moving. But they have profound implications for economic growth and asset prices. Every month, more than a quarter-million Americans turn 65. That’s retirement age. And as boomers retire they will tend to sell their stocks and replace them with bonds. This will be a major source of new demand for the bond market.
2) Slowing global growth – As I wrote about yesterday, growth is stalling in most of the major economies – from China, to Japan, to the euro zone, to Brazil, to Russia. Slow growth implies weak corporate earnings… and makes bonds look more attractive relative to stocks.
3) Deflationary threats – Japan has been unable to achieve its inflation target of 2%. The euro zone is also battling chronic deflation. This pushes down bond yields to minuscule levels… and makes even the 2-3% yields on US long bonds look attractive by comparison.
4) The US energy revolution – One of the major inflationary pressures in the 1970s was spiking energy prices. Today, the new supply from US shale oil and gas… along with more efficient technologies… is keeping a lid on inflationary pressures in the energy sector.
5) The bubble in faith in central banks – So long as investors and consumers belief central bankers can do no wrong, inflation expectations will stay muted. The consensus today is that central banks can successfully walk the tightrope between monetary stimulus and tame inflation levels. Until that changes, deflation – not inflation – will remain the perceived threat.
This is not to say that bond yields will stay low forever. That would imply the end of the credit cycle. And we don’t buy into that idea. (Remember, everything moves in cycles.)
But if you are a bond bear, it’s worth keeping these five macro forces in mind.
For now at least, they’re working to keep the bull market in bonds intact.