Bonds, bubbles and toast
Some reflections on journalism, the current state of markets and credentialism
We published out first podcast, here, on Sunday. Chris also wrote his weekly column for the Irish times, here, about bond markets, a subject also touched on in the podcast.
First, a big thank you to all those who offered constructive comments on our first effort. For once, social media positivity was in evidence. No doubt that will soon change. We give daily thanks we are not female political journalists: the disgraceful abuse they suffer is orders of magnitude worse than the brickbats often hurled at our musings.
The podcast was a litte rough around the edges. We are huge fans of ‘learning by doing’ and aspire to better sound quality and all of the other things that make for great podcasts. Watch this space.
The first thing that we often notice when reading or listening to comments about our writing/podcasts is that people sometimes ask ‘whatabout x?’, where x is hidden in plain sight within the piece. Reading or listening does help.
Another common comment can be described as ‘credentialism’. Many commenters start by having a go at our qualifications to speak about a given topic: ‘What could he possible know about bonds?’. If the comment begins in this vein we often move on. Speech is free; everyone has the freedom not to read.
Credentialism often takes the form, ‘I’m a lecturer in basket weaving at the University of Craggy Island and this journalist doesn’t know what he is talking about’. Again, we ususally stop reading at that point. But if the professor does engage with what we are saying, we pay attention, no matter what his/her qualifications are.
Too often, responses to our journalism take the form of attacks on who we are, our right to express our views, rather than engaging with the words that we use, the questions we ask, the points we raise. A surpising number of academics have taken this route when we say anything at all about Covid, for example.
If the commenter engages with what we said, rather than our freedom to say it, we take notice. This kind of blog allows us to be more expansive than ususal in responding. Or just to expand on what we originally said. Perhaps even to acknowledge our errors and ommissions and/or changes of mind in light of what someone has said.
Bonds are important. The article explained why. Not unexpectedly, one or two commenters suggested that the author was unqualified to say things like this.
Quite a few responses took the form ‘but bonds are unlikely to be a problem because….’. Which was exactly the conclusion reached (tentatively) in the column.
Bonds have been misbehaving, globally, for a little while now. That means their prices have been volatile and, generally, falling. That could be a lot of sound and fury signifying nothing. It could be that markets are getting worried about massive increases in government borrowing and/or inflation.
It could mean that the free and easy money available to governments to support pandemic afflicted economies could be about to dry up. The headline above the Irish Times article asked precisely that question - but the headline is often not the conclusion. A little known aspect of newspaper journalism is that the author never gets to choose his headline.
We can guess - with some precision but not precisely - why bonds do what they do. Sometimes those guesses will be precisely wrong. The same comments can be made about equities or any other asset. We construct stories about price movements. Taleb has called this the ‘narrative fallacy’, a term that explains itself. Nevertheless, there is an industry of story tellers, comprised of people who call themsleves analysts and stategists. That’s not to denigrate what they do (which is very important) but to emphasise the uncertainties.
The article merely stated that if bonds are signalling that inflation is coming our way, we have a problem. And if it’s a big inflation we have a big problem. It will affect everything from house prices to the ability of finance ministers to support the unemployed. Nobel prize winning economists are sparring with each other, with Harvard professors, with current and ex-chief economists of the IMF, about whether or not inflation lies in our future.
The guess expressed in the article was that bonds are merely signalling that the end of the pandemic might be in sight: prices and yields are roughly back to where they were just before Covid hit. If so, wouldn’t that be wonderful?
If so, there isn’t much to worry about. But any or all of this might be a narrative fallacy. But whichever way it goes, establishing the right narrative will be of vital importance for everyone.
One reason for thinking that bond market misbehaviour might be temporary is that central banks can exert of lot of control. They are buying a lot of the bonds issued by governments. A number of commenters made precisely this point and it is a good one. It’s a reason for suggesting there isn’t much to see here and maybe we should move on. There just wasn’t room in a 900 word piece to go into every possible driver of bond prices.
Like every other asset market, bonds are mysterious. Government bonds are the ‘risk free’ asset central to all asset pricing models: every other asset price - houses, equities, art etc - is determined in part by bonds. Those models usually assume some degree of stability and predictability. A great paradox is that bonds exhibit neither characteristic. Bond yields have been very volatile and, generally, have been falling for the last 800 years (really). Why should risk free assets yield much of return? There are questions that only philosophers, perhaps, are equipped to answer.
Economists do try to answer this question. We use models with lots of assumptions. ‘Fiscal susatinability’ is at the heart of these enquiries. In current circumstances that speaks directly to the scope that govenments have to help the unemployed and other sectors of the economy laid low by coronavirus.
There is lots of algebra but two key parameters are the real rate of interest and the long term growth rate of the economy. Pinning down these parameters is both hard and subject to huge uncertainties. You have to start thinking about concepts like the time preference of money and productivity growth. Right now, the real rate of interest is much lower than the real rate of growth of economies. That is at the heart of the ability of governments to borrow at such huge scale. The size of these parameters and how they move in the future will in no small part determine how long we can sustain large budget deficits.
Pre-dating the pandemic is the puzzle of low bond yields. Yields are so low, prices so high, that many think it is bond bubble. As mentioned, falling yields is a phenomenon going back 800 years. Explanations vary. Economists think ‘secular stagnation’ (disappointing real economic growth) might have something to do with it. Some point to rule changes: regulators all over the world have in recent years forced pension funds and insurance companie to buy government bonds (using our savings) at almost any price, creating an artificial shortage of these safe assets. And, of course, there are the central banks: they have been hoovering up bonds for a decade now, first in response to the financial crisis and now because of the economic consequences of the pandemic. Nevertheless, nobody is quite sure about why yields are so low, why bond prices are so high.
If bonds are a bubble, it’s bursting could mean that we are, economically, toast. We think this is unlikely but what do we know?
Bonds will merit careful study. They always do. But they are not sexy, certainly not as fun as Bitcoin or Gamestop. Bonds are orders of magnitude more important for ordinary people than the level of the Dow Jones or FTSE indices.
Fiscal arithmetic and debt sustainability are tough subjects. Bonds don’t get enough attention in the media, perhaps because of the complexities. But there are myriad ways in which they influence all of our lives. This is particularly true at the moment. Expect us to return to this topic many times!