If you bought a 30-year Treasury on Oct. 27, 1981, you were a courageous soul. That bond, issued with a 15.20% coupon, matures at the end of this month and it appears the government will have the cash to meet that redemption.
I’m not writing about sovereign debt, but rather about poor economic and financial market conditions and how we can move beyond them. Back in 1981, yields had been rising and bond prices falling for more than a decade. And while headline inflation had already declined from its near 15% per year peak, the Consumer Price Index (CPI) was still more than 10%. Suspicions ran high that it could begin to accelerate at any time, making even such a fat coupon a money loser.
In fact, as late as 1985 I can recall sitting at a trading desk next to a very experienced and successful bond trader who assured me that no one would ever again buy a U.S. long-term Treasury bond at a yield below 10%. He was, of course, wrong and is now comfortably retired because he recognized that successful investors don’t let their short-term memory get in the way of recognizing value.
I’ve been thinking about the late 1970s and early 1980s recently and the chart below tells you why. That was the last period of extended, depressed U.S. equity market performance, and the domestic market’s behavior over the past four years looks discouragingly similar. During both periods, equity markets suffered from serious, underlying macroeconomic problems. In the 70s and early 80s that problem was accelerating inflation; today it’s the burden of household debt and the slow unwinding of that debt. They’re very different issues, but producing worryingly similar results.
Does the recent U.S. equity market selloff represent that 15.20% Treasury coupon and the end of our problems? I’d like to be convinced that it does, but I’m not. However, unlike the late 70s, I believe we understand the problem and we’re on our way to fixing it—at least among households.
Also, 30 years ago, the U.S. market was on its way to becoming the only game in town. That’s no longer the case. Today, that investment we may someday regret leaving on the table probably has an unrecognizable name and comes from an unfamiliar part of the world. In the U.S., we need to step back from our myopic focus and look at the remarkable potential for rapid growth in other parts of the world.