by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The National Weather Service makes 76 billion meteorological observations a year and mobilizes computing power 10,000 times greater than the Dell on your desk, but its basic forecasting horizon is a week to 10 days. Yet economists, who deal not with rain drops but human beings and who make many fewer than 76 billion annual empirical observations, pretend to know what the 10-year Treasury will yield next year.
In fairness, they pretend because they are asked to pretend. And in fairness to the investors who ask, the future is what matters to investing. But because the future doesn’t exist, we must strive to imagine it, and because imagination usually falls short, the future we conceive as likely as not bears an uncanny resemblance to the present. …
… The post-2008 yield famine leads hungry people to take extreme measures to earn negligible returns. Take the new (or, rather, newly reopened) Austrian 100-year bonds. … Quoted at 160 cents on the euro, a price to yield 1.09%, the Republic of Austria 2.1s will mature in September 2117.
In 2117, I will turn 171, the fates willing, but I will almost certainly be in better shape than the holders of the Austrian centuries. Nothing against the creditworthiness of today’s blue-chip-grade Austrian government, or against the currently low measured rate of Austrian inflation (still, it’s 1.7%), but a lot can go wrong in 100 years. …
… It’s a funny old world, all right. History always has a trick up her sleeve, some bullish, others not. The trouble with bonds, as an asset class, is that they offer no real participation in the upside—you receive principal and interest, as contracted, that and no more, if all goes according to plan. You do, however, participate liberally in the downside—in default, repudiation, inflation.