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Peter Brimelow and Ed Rubenstein's Charticles Archives | Email alerts
Oct. 18, 2011, 2:31 a.m. EDT
By Peter Brimelow, MarketWatch , Edwin S. Rubenstein
NEW YORK (MarketWatch) "” Bonds have been showing unexpected strength in the last month.
Which must have been particularly annoying to the celebrated Bill Gross of Pimco Total Return Fund, who was recently forced to abandon a major bearish play at some cost. ( See "Pimco & Bill Gross apologize for poor performance," by Kurt Brouwer, Oct. 14.)
It was pretty annoying to us too. We've been saying for some time that the total cumulative real return of bonds has mounted into uncharted territory, way above the long-run trend. Unless a hundred years of financial history are meaningless, bonds must go down "” and yields, and interest rates, up.
It's just a question of when.
But, unlike Gross, we can take the long view. (In return, we're paid somewhat less.)
As usual, our conclusion, although our own, is based on our interpretation of research by Jeremy Siegel of the University of Pennsylvania's Wharton School of Business, obtainable from his website . Siegel also is the author of the classic book "Stocks For the Long Run." ( See book site. )
Siegel has compiled data on total cumulative real return "” that is, counting capital gains and interest or dividends, plus adjusting for inflation "” for stocks, bonds, Treasury bills, and cash going back to 1801. ( See April 18, 2003, charticle. )
Siegel's most famous conclusion: The underlying growth of cumulative total return in stocks has been remarkably consistent "” averaging about 7% annually for two centuries.
We looked again at Siegel's stock data recently, and concluded that stocks are, roughly speaking, already in the range of historic lows. ( See Aug. 17 charticle. )
We last looked at Siegel's bond data over two years ago. We noted then that total cumulative real returns were already historically high. In fact, they've been historically high for most of the decade.
Deflation, the then-fashionable fear, would have increased the real value of bonds still further, pushing their real value of even further off the chart.
We concluded deflation was unlikely, although of course not impossible. ( See Sept. 24, 2009, charticle. )
Well, deflation didn't happen, by conventional measures. But bond prices haven't broken either. The 30-year bond bull market that began in 1980 still seems to be intact. For the moment.
This is how our chart looks right now:
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