The challenge for bonds (or any conservative asset with low price volatility) will continue to be inflation. When we look back on the 2020s it is highly likely that the real return for bonds will be negative. Such is life in finance - there is always a price to pay. If you want stability then the price you pay is negative real returns. If you want positive real returns then the price you pay is volatility. This is where we find ourselves after 30 years of increasing government intervention in financial markets…time and again avoiding short-term pain in exchange for future unknown cost…but there’s always a price to pay and now the bill is coming due.
“Although aggressive monetary and fiscal responses can mute volatility in economic cycles, they also come with a cost. Imbalances build up over time, many of which we are seeing now, societal, structural, and economical. And interference with capitalistic cycles only robs the system of longer term growth in GDP, employment, and wages.”1
By the way, more examples of policy mistakes as we write…the House of Representatives recently passed (414-5! Wow, I wonder what kind of bill got that kind of bipartisan support…) a bill (known as Secure Act 2.0) which makes further changes to retirement plan rules (building on Secure Act 1.0) including more incentives for Roth IRA contributions. Why Roth IRAs? Roth account contributions are not tax deductible. Hence, more tax revenue when more individuals contribute to Roth accounts rather than other retirement accounts that allow deductible contributions. But when withdrawals are eventually made from Roth accounts the monies are not taxed. So…generate more revenue for government now in exchange for no revenue later…get the benefit now and worry about tomorrow later.Unless of course Congress changes the Roth IRA rules…later.
Doug Kass, When It Comes Time To Sell…You Won’t Want To, March 21, 2022