When the US Federal Reserve announced the first round of Quantitative Easing about 21 months ago, we pointed out that the Fed was choosing the same path Japan chose. In a 3/18/09 note titled "It Is Official, We Are Japan" we argued that the Fed would likely be successful in holding down interest rates and that one of the possible unintended (or intended?) consequences would be a decline in the value of the US dollar.
Gary Shilling writes a column in the latest issue of Forbes that "We're Turning Japanese: Deal With It". (Forbes 12/20/10) The column is essentially a digest of his newest book in which he continues to espouse his belief that his self-titled "bond rally of a lifetime" is still intact as 30-year yields head for 3% (currently 4.45%).
The shellacking given to bond investors over the past three months has shaken the confidence of many. It would be disingenuous of us to say it has not raised a doubt or two in our minds. But that's the funny thing about investing - generally speaking, the lower the price of an asset, the greater the forward returns. Thus, our outlook for long-term bonds is today more positive than it was three months ago as they reached their most recent peak in prices.
No less a bond investor than Bill Gross is apparently in agreement. Bloomberg reported this week that Mr. Gross invested $17mm of his own money into five different bond funds.
Yeah, that's the same Bill Gross who was telling everyone last month that the end of the bond bull market might be nigh. If you thought Mr. Gross was telling you to sell all your bonds, well. . . not so much.
We continue to believe there is a reasonable level of risk that we are Japan.
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