The Economic World Today

The world today seems increas­ingly focused on the legislated approach to economic prosperity, and as a result it is suffering from lower growth—relative to much of the post-World War II era—even in leading countries like the U.S., Japan, Germany and the U.K.  (There are additional factors, such as aging populations, that are contrib­uting to slower growth.)  One can hope for something less than 1,000 years of disappointing growth, but for now the growth outlook is muted.  That’s one reason why interest rates are as low as they are throughout much of the world.  Indeed, the yield on 10-year U.S. Treasury bonds recently hit an all-time low.  Moreover, the yields on 10-year German and Japanese bonds are actually negative.  That’s not a misprint.  While we can’t predict near-term moves in interest rates, we will make this prediction: Investors’ after-inflation and after-tax returns on most so-called high-quality bonds over the next 10 years are apt to be (1) the lowest in a long time and (2) negative.  Investors who use historical bond returns to justify the inclusion of bonds in their long-term, growth-oriented portfolios are deluding themselves.