How to Confront the End of the Bond Bull Market
What does the title of Simon Lack’s latest book, Bonds Are Not Forever, mean? It’s a question that Lack clarifies and then answers – by proposing a creative way to construct portfolios that have many of the beneficial characteristics of bonds but without much downside interest-rate exposure.
On his way to that recommendation, Lack’s new book takes the reader through a tour of some of the most controversial aspects of the financial-services industry: Is a big financial-services industry a good idea? Do stock and bond buyers get fair prices when they trade? Are governments and households financially irresponsible? Should we worry about inflation? Are equities a better long-run investment than bonds?
In what amounts to a combined memoir and critique of the finance sector, Lack, a hedge-fund manager whose previous book, The Hedge Fund Mirage, critiqued the hedge-fund industry for delivering little value, ties all these issues together. Bonds Are Not Forever is quirky and wide-ranging. Despite having too many different focal points, it is an informative and lively read.
Most of today’s readers regard bonds as a strategic and trading vehicle like any other security. Few readers would naively buy and hold bonds forever as their default strategy. What Lack seems to mean by his title is that “the bull market in bonds that started in 1981 will not last forever.”
Most likely, he argues, it’s already over.
Since one of Lack’s goals is to warn investors about a new bond bear market, it’s wise to recall the last one. It ran from 1940 to 1981 and was really a bear. The bear market in British Treasury bonds (gilts) caused £1.00 invested in a constant 30-year maturity, 2.5% coupon, portfolio to shrink to £0.17 in nominal, price-return-only terms, before adjustment for inflation. And there was plenty of inflation. In the U.S., bond prices fell only a little less.
Lack is also testy about the social function of finance. Having shown (not quite to my satisfaction) in his previous book, The Hedge Fund Mirage, that hedge-fund managers keep for themselves, through exorbitant fees, all of the economic profits they generate, he now wonders whether the whole financial-services industry is playing that game. Like many economic writers, he is too exercised about the economic progress of the top 1% versus everyone else. (In my opinion, the real problem is low-skilled workers, whom technology has forced over the line from positive to negative marginal productivity. The top 15% or 20% as ranked by income are doing fine.) He’s too dismissive of activities such as high-frequency trading (“perfectly useless”1) and municipal-bond brokerages (“individuals…are receiving a terrible deal”2). Middlemen such as these are considered bad guys until you need to buy or sell something and then you’re banging on their door in the middle of the night.
Lack’s personal story and the financial and social history that he weaves into it are the best part of the book. I already know quite a bit about bonds, but I benefited from his refresher on the British class system circa 1980. Highborn traders, he reminds us, belong to the champagne-and-polo circuit, while those from the working class constitute the gin-and-tonic-and-squash crowd – all along I thought it was beer! I wonder how many Americans know the depth of depression reached by the British economy in the 1970s, the pernicious role played by the trade unions or the vigor with which the depression ended in the Thatcher years. It’s a cautionary tale that applies quite directly to us now, and Lack tells it well. The perspective of an Englishman who moved to the U.S. and became a patriotic American is enlightening, and Lack’s depth of knowledge, combined with an easy writing style, make the book a pleasure to read.
1. p. 20.
2. p. 88.