On Tuesday we hosted a conference where we heard from our own team and a couple of economists. Chris Watling at Longview Economics takes a, well, long view. He is quite a proponent of Kondratieff. Who he? Starting at the end, he faced Stalin’s firing squad in 1938 at the age of 46. Prior to that he had held office in 1917 as deputy minister for supply before the second, October revolution of 1917 after which he moved to academia but ultimately falling foul of Stalin’s fanaticism and being sent to the gulag.
However, in 1922 he published his first book on the long cycle. A simplified explanation is that as capital is invested it creates monies which are reinvested in similar products that are produced more cheaply until this process leads to a loss of confidence and people hoard cash rather than invest. The long cycle is around every 35 years and the slide below suggests we are at a turning point, having seen new lows in government bond markets in 2016.
I don’t dislike this explanation of the world but it has its limitations as well as practical investment limitations. Bond yields may well be materially higher in the long term but as managers we are judged on monthly, quarterly and annual performance. As yesterday’s 10bps rally in 10 year US Treasuries AFTER the Fed rate hike proves, there are plenty of opportunities on the journey to slightly higher yields.
US 10 year bond yields – 1900 to present (showing Kondratieff cycles):