Now some conservative financial managers anticipate something similar – or worse – for future returns on US stocks and bonds.
The conservative asset management company GMO released its
most recent forecast of anticipated future real returns for several different
asset classes over a 7-year time horizon.
As of Jan 31, 2015, their 7-year forecast projects negative real returns for
US stocks and bonds. Even for emerging
markets the estimated future returns are far below historical averages.
Of course, these are just estimates, which GMO accompanies by the usual caveats. But they are not alone in taking a pessimistic view. After several years of stock market gains and artificially low interest rates, it is not surprising that nearly every financial asset class in the world is overpriced. There have been plenty of warnings from market observers.
Of course, these are just estimates, which GMO accompanies by the usual caveats. But they are not alone in taking a pessimistic view. After several years of stock market gains and artificially low interest rates, it is not surprising that nearly every financial asset class in the world is overpriced. There have been plenty of warnings from market observers.
Markets arrive at overpriced points like this in the normal
course of events, every once in a while, but this time is hardly normal. This time the situation is entirely
artificial, the result of extreme fiscal and monetary policies intended to prop
up the financial markets and the real economy.
After the 2008-2009 financial crisis, only extreme measures could stop
the financial world from crashing and sending the world into a deep
depression. To many people who lost
homes and jobs, it was a depression anyway.
The economy is not responding as well as wanted, and so the
Fed has continued to levitate markets with QE, low interest rates, and other
manipulations.
The crisis was a chain of failures caused by unreal
expectations and extremes of leverage.
The Fed and regulators were supposed to prevent such extremes from
recurring. Instead, they have added fuel to the fire, and financial markets are more leveraged now than ever.
If something happens, the repercussions of a crisis could be
greater than in 2008-09.
We don’t have to look far in today’s world to
find escalating financial risks and potential triggers: deflation, currency wars, soaring government
debt-to-GDP ratios in the developed countries, failing economic growth. It is just a matter of time.
I wrote about issues like this until two years ago and then
figured “Why bother? I’ve said it all
before.” But the problem is still here, and it’s getting
worse. I can’t foresee the future, but there are many reasons to believe that when the markets crack, it will not end well.
