Will the bond bubble burst?
The people said no, but both sides landed blows as Mercer heavyweights slugged it out during the great bond bubble bout at the group’s NZ conference last week.
Philip Houghton-Brown, Mercer NZ chief investment officer, emerged victorious from the grueling 45-minute debate with his anti-bubble stance earning him an overwhelming points decision from the possibly-biased crowd.
Up against Mercer Australian chief strategist, Dave Stuart, Houghton-Brown hit home with a novel ‘4 Ds’ move.
Citing demographics, disruption, debt and demand, he side-stepped Stuart’s contention that rapidly-rising interest rates were coming – and with them, a nasty end for the bond bubble.
“The question is not if there is a bond bubble but when it would burst,” Stuart said.
His position rested on data showing a cyclical shift to a ‘dis-savings’ era as retirees globally spent up large, removing the demand that has underpinned low rates.
“The savings glut will become a deficit,” Stuart said.
Meanwhile, he said inflation was turning upwards along with global growth as very low unemployment signaled imminent pressure on wages.
Stuart claimed deflationary pressures of technology and globalisation had run their course while the “end of the banking crisis” had freed central banks from the need for maintaining ‘unconventional’ monetary policies.
Houghton-Brown, however, noted inflation itself was historically a weird phenomenon and had, anyhow, been effectively snuffed out by central bank actions.
The Phillips Curve – the inverse relationship between unemployment and inflation made famous by NZ economist, William Phillips – was now merely an irrelevant squiggle, he said.
Demand for fixed income investments would hold up, he said, as most people continued to work past age 65 – some by choice, others out of necessity – and kept saving.
“Pension funds, insurance companies, banks, corporates and emerging market buyers will all still need stable income,” Houghton-Brown said.
Technological disruption, too, would constrain wage inflation in the winner-takes-all digital age, he said. And even if they wanted to, eye-watering levels of global debt would prevent central banks from launching aggressive rate hikes.
“Rates may go up but it will be at a glacial pace,” Houghton-Brown said.
Stuart, though, was not done. He argued one of the sure signs of a bubble was the ‘this time it’s different’ catch-cry in the market.
Flocking behaviour, he said, was best avoided in bubble territory.
“You don’t want to be one of these,” Stuart said, flashing up an image of a sheep on the big screen to the captive audience of New Zealanders.
The herd swung against him.