In this Barron’s article from 2010, battle lines over fiscal policy are discussed:
Dylan Grice, part of the provocative strategy team at Societe Generale, sees the world split between the cognitive dissonance expressed by President Obama. On one side is what Grice terms the “Keynesian/Krugmanist” faction decrying any withdrawal of fiscal stimulus while conditions remain parlous.
On the other are those worried about government debt, represented by Axel Weber, “the hard-money Bundesbank president who voted against the [European Central Bank’s] bond purchase and has been most vocal on the need for fiscal prudence,” Grice writes in his “Popular Delusions” letter.
The fear of both is that the wrong fiscal policy is chosen and we either drown in debt or deflate in a slow growth environment. Some commentators are quoted on what might happen if the economy stagnates:
Yet even while the benchmark 10-year Treasury note yields remains solidly under 3%, at 2.91%, Gluskin-Sheff’s David Rosenberg points to the extraordinarily wide gap of nearly 1% between the 10- and 30-year maturities. Even at a sticker-shock 3.87% yield, he sees scope for further declines in the long bond’s yield.
Based on a new report from the Cleveland Fed, Rosenberg reckons the 10-year yield could “ultimately grind down” to 1.90% with inflation basically nil. Given its historical spread over inflation, the 30-year bond yield could get down to 2.30% –40% less than the current yield.
While fears of a double-dip recession in 2010 were high, the economy continued to grow slowly. Near the end of 2011, the economy actually seemed to accelerate a bit, to the point where some pundits are now worried about inflation again. And what happened to bond yields?
Source: WSJ (click to enlarge image to full size)
Oh, yeah. They went to around 2% anyway. Although we’ve had slow, steady economic growth, bond yields have just continued to fall—making both groups of forecasters notable in getting it wrong, or right for the wrong reasons.
No one’s fears were ever realized. The economy has not imploded nor have we yet drowned in debt. Maybe one or both of these things will eventually come to pass, but forecasters aren’t likely to get that right either!
Investors could have let either bad scenario freeze their investment policy, worried that outcomes A or B would have a negative effect on the market. Instead, we got outcome C and, by the way, the S&P; 500 has gone up more than 30%. Ignore the hopes and fears of forecasters and stick to what market prices are telling you. Relative strength is almost always your most reliable guide.
