Morningstar Magazine - August/September 2018 - 13

that passage was written; banks have suffered
no fresh crisis; consumer confidence has
been fine; and business activity has steadily risen.
None of the quantitative-easing warnings
have come true.
Much of the argument against quantitative
easing was politically motivated, which
meant that portion of dissent was useless. The day
that a member of Congress makes a thoughtful
macroeconomic prediction is the day that
the sun refuses to ascend. The informed critics
cannot be fully absolved, however. Once
again, they had not upgraded their software.
By the end of the last decade, it had become clear
that the traditional link between money supply and
inflation had become tenuous. Those who
warned against quantitative easing should have
beaten their drums less loudly.
Wrapping Up

Four lessons seem apparent:
1 Economics matter, greatly. The combination

of persistently high corporate profits and
quiescent inflation fully explains today's Great Bull
Market. The market's gains owe to numbers,
not to sentiment.
2 Getting the economics right is a very difficult

task. Doing so requires being correct about
many things. Somebody who foresees three major
events but misses a fourth will not necessarily
have a more accurate prediction than somebody
who is consistently wrong.
3 Too often, economic forecasts become

groupthink. Following the 2008 financial crisis,
too much attention was paid to the
New Normal and quantitative-easing critiques,
while too little attention was paid to
alternative views.
4 New evidence requires new thoughts! Old

habits may die hard, but die they must if the best
results are to be obtained. K
John Rekenthaler is vice president of research
with Morningstar Research Services.

An Equity Squirrel
Discovers Bonds
Fixed income is where
most investments
reside.

Argentine peso, Argentina sold $2.75 billion
worth of bonds in June 2017 maturing in 2117. No
typo. It sold 100-year bonds priced to yield
7.9% rated B, and the offering was oversubscribed
three to one. The bond was denominated in
dollars, a good thing for the buyers, because in the
12 months since the offering, the Argentine
peso has dropped from 16 pesos to the dollar to 25.
As the peso sinks, the cost of servicing this debt
rises dramatically, suggesting that there is a risk of
default. As one investor told Reuters, "I'm not
sure we can find a 20-year period where Argentina
has not defaulted."

THE OLD SQUIRREL

Ralph Wanger

The Spotlight of this issue is about fixed
income. I spent my career following equities,
so I am going to look at fixed income
from an equity point of view. Stock managers
may think of themselves as fighter pilots,
heroic risk-takers laughing in the face of danger,
and bond managers as boring airline pilots,
glorified bus drivers. That metaphor is colorful but
wrong. Fixed income is where the bulk of
investments resides.

Others have sold 100-year paper, including
Mexico, Ireland, and the troubled Brazilian national
oil company Petrobras PBR. One question I
can't answer is why the United States has not sold
a 100-year bond. We have $20 trillion in national
debt, increasing every year, at very short duration.
It is very likely we could sell $1 trillion in 100year bonds at 3.5%, which is a cheap interest rate
historically. There is a reasonable chance that
a future Treasury secretary will be refinancing 2%
paper at 6% and cursing her predecessor who
didn't lengthen duration when he had the chance.
Bavarian Sunshine

I traveled to Argentina in 1997 with my friends
Nissim and Deena. After a splendid trip,
it was time to take taxis to the Buenos Aires airport
and head home. Nissim, a shrewd New Yorker,
explained how he was going to negotiate
a fixed price for the cab, while I decided to stupidly
pay the meter fare. When we arrived, Nissim
proudly announced he had done the trip
for 40 pesos. I did not tell him that our meter
read 36 pesos.

A few years after Buenos Aires, we went
to Munich to visit the Deutsches Museum. I am
a trustee of the Museum of Science and
Industry in Chicago, a wondrous place to spend
a day. It was modeled on the Deutsches
Museum, so I was eager to visit the original, which
is also a great museum. The Museum of Science
and Industry is designed for a middle school
and high school demographic, while the Deutsches
Museum is aimed at an adult audience.

But the interesting part was that at that time,
Argentina had pegged the peso 1:1 to the U.S.
dollar. I thought that this cabbie would be
thrilled to be paid in U.S. dollars. When I offered
dollars to him, he said that he would take them but
that he would much rather have pesos, which
I gave him. The peso peg ended in 2002, and today
the Argentine peso is worth only four cents U.S.

The first thing that catches your eye when you
approach the Munich museum is the line of people
waiting outdoors to get in. The museum has
a small, oval ticket office with room for two ticket
clerks. That is way too few, so there is a long line
outside in the Bavarian sunshine.

100-Year Paper

So, currency prices dominate governmentbond trading. Despite the long-term collapse of the

Unfortunately, Bavaria doesn't do sunshine
very well, so actually people are huddled in a long
queue under their umbrellas, raising the
question, "If you are exemplifying the greatest
German technology, why haven't you figured

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Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2018