I had filed the MoneyNews piece in my “investment porn” collection, along with a reminder to check back in a year to see how the forecast turned out. On Dec. 2, 2013, Bill Blain, a senior fixed income broker at Mint Partners, told CNBC, “I reckon we’re going to have hell in the bond markets next year.” He added: “I think there is potential for a massive sell-off in the U.S. once we see the taper finally start, and that’s not because people are not prepared, it’s because that is what happens when you stop distorting markets.”
One Year Later
Unfortunately for investors, Blain was far from alone in his forecast of rising interest rates. Investment “guru” Jeremy Grantham was among the many who forecasted a bear market in bonds. For example, in a quarterly client letter released in February 2014, Grantham warned that “because of the U.S. Federal Reserve’s expansive monetary policy… all global assets are once again becoming overpriced,” When asked about fixed income as an investment, he wrote: “fugetaboutit.”
Through Dec. 2, 2014, Vanguard’s Short-Term Treasury Fund (VFISX) returned 0.9 percent, their Intermediate-Term Treasury Fund (VFITX) had returned 4.2 percent, and their Long-Term Treasury Fund (VUSTX) had returned 20.0 percent.
Ignore the Forecasters
The really sad news is that—despite the overwhelming body of evidence demonstrating the active management of bond portfolios is at least as much a loser’s game as it is in equities, if not more so—many individuals allow such forecasts to influence their investment decisions.
The Fortune Sellers
- Economists cannot predict the turning points in the economy. Of the 48 predictions made by economists in his sample, 46 missed the turning points.
- Economists’ forecasting skill is about as good as guessing. For example, even the economists who directly or indirectly run the economy — the Federal Reserve, the Council of Economic Advisors and the Congressional Budget Office — had forecasting records that were worse than pure chance.
- There are no economic forecasters who consistently lead the pack in forecasting accuracy.
- There are no economic ideologies whose adherents produce consistently superior economic forecasts.
- Increased sophistication provides no improvement in economic forecasting accuracy.
- Consensus forecasts offer little improvement.
- Forecasts may be affected by psychological bias. Some economists are perpetually optimistic and others perpetually pessimistic.
For the last several years, investors have persistently heard warnings about how rising interest rates were going to doom their bond portfolios unless they dramatically shortened maturities. Investors who heeded those warnings missed out on earning the term premium, which not only has existed, but for most of the past six years, the curve has been fairly steep. It’s also worth noting that the research demonstrates term risk has been best rewarded exactly then, when the curve is steep. Thus, investors who heeded the gurus were acting contrary to (likely without knowing) the historical evidence. Consider the following: The mid-year 2014 S&P SPIVA report card on active versus passive bond funds shows that more than 96 percent of actively managed long-term government bond funds had underperformed their benchmark over the prior five years.