Morningstar - Q2 2021 - 57

John Rekenthaler: Ten years ago, 10-year Treasury

notes were yielding 3.5%. Ten years before
that, they were 5%. Today, they're 1.1%. How did we get
here, and did anybody see this coming?

Larry Siegel: I did not see it coming. Even in
the Great Depression, long rates did not go much
below 2%. Now, they've gone below 1% in an
environment where we may have below-average
growth, but there's no extended depression
on the horizon. There's really nothing wrong with
the economy other than COVID-19, which
created a supply collapse and briefly a demand
collapse when people stopped getting paid.
But now, they're being paid more than they were
before the disease through various sources,
so there's no demand collapse, and there's really
nothing for the monetary authorities to fix.

However, when you're a rock star central banker,
it's always an emergency. They're like firemen.
They benefit from an abundance of fires. They run
to the rescue, and they have only one tool, which
is a fire hose: They purchase long-term bonds.
If the current price and yield of long-term
bonds were a market-equilibrating price, central

banks wouldn't need to buy them, and real-money
investors-pension funds, people preparing
for retirement, and so forth-would buy them. But
most of the purchases have been through central
banks, so we can see that it's a manipulated
rate. That's how we got here.
Michael Finke: Larry, that's one way to look
at it. The other way to look at it is that maybe we
could have seen this coming. We have the
largest and wealthiest cohort of near-retirees
in the history of the United States. We have
a lot of other countries that have a much higher
taste for savings than we do and that are
becoming increasingly wealthy and are having
a bigger impact on capital markets.

One of the most amazing things to look at
is the supply of bonds over the last decade or so.
The supply of corporate and government bonds
has just kept going up, which you would
expect would have a negative impact on bond
prices, but it hasn't. The demand for especially
safe assets right now is remarkable. It
almost seems like there's no filling the appetite
for safe assets.

Central banks are providing a tremendous
amount of liquidity to the market. There's a lot
of money in people's bank accounts. It's got
to go somewhere, and it's going in many cases to
financial assets. People are just not spending
money. They're putting it away in some sort
of savings vehicle. If everybody does that at the
same time, then the prices of bonds go up
and the yields go down.
Jonathan Guyton: For me, a big takeaway is that
if the Federal Reserve wants interest rates to
be low, they will be low. And if the Fed wants rates
really low, they'll be really low. What's interesting
is not just what did happen over the past 10
or 20 years, but what didn't happen. Quite a few
things in both fiscal and monetary policy were
supposed to cause higher interest rates and higher
inflation, but they didn't. Unfortunately, a lot of
people have incurred some high opportunity costs
by betting that these things would happen.

As a practitioner who advises primarily retirees
and people over 50, and who has contributed
research in this area, the other big takeaway is
this: If you had pretty much done what
the evidence-based solutions would have told
you to do 20 years ago, and 10 years ago,
you'd actually have come through all of this
fairly well.
Siegel: What are those evidence-based solutions?
Guyton: I'm referring to the safe withdrawal
research. You have a pot of money, and you want
to maximize the income that can come from
that. How should you deploy that money? How can
you utilize it? The answers to that research say
that this will carry you through times that may
be fairly close to unprecedented, with what we've
seen with interest rates.
Siegel: But at a negative real interest rate, the
amount of money you need to produce an income
is infinity. So, people have to withdraw from
principal, and that changes the game radically.

Jonathan Guyton, principal of Cornerstone
Wealth Advisors.

Larry Siegel, director of research of the CFA
Institute Research Foundation.

Guyton: Not necessarily. There are four options
for getting income from a portfolio of money. You
can take interest from fixed-income investments,
get dividends from equity investments, draw

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