Doomsayers like to argue that the US faces fiscal Armageddon because of all the obligations to retirees that will come due in the coming years.So it’s insane to buy US debt then, right?
Actually this logic gets it 100% backwards.
In an interview on Bloomberg TV, Bill Gross got across a deep point:
On why Ford is shifting billions of dollars a year from their equity portfolio into bonds:
“They’re doing that because of the certainty, locking in their liabilities relative to their assets. Even at a low, 2-3% rate. Boomers, from the standpoint of individual investors, are the same way. They’re beginning to get older and require more certainty. Do they find appeal in a Johnson and Johnson at 3.5% dividend yield with growth potential? Sure they do, but they also believe they want that money back, and if there is a 2008-2009 scenario, perhaps they won’t. So there are demographic tradeoffs here that have to be considered.”
It’s a cliche you’ve heard a bunch of times, but for more and more people, their primary interest is return of capital, not return on capital. This is especially true after 2008-2009, and for people who are retiring this impulse is particularly strong.
So the demographic trends don’t actually signal bond doom; they signal voracious bond demand, exactly as we’ve seen in Japan, another place where demographics were supposed to lead to fiscal catastrophe.