How Radical Demographic Shifts Around The World Are Changing How Assets Are Valued

Tracy Alloway (0:08)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:13)

And I'm Joe Weisenthal.

Tracy Alloway (0:14)

Joe, I am looking at a chart of the 10-year US. Treasury.

Yield?

Joe Weisenthal (0:19)

No, you're not.

Tracy Alloway (0:21)

I'm not. I'm not, actually.

Joe Weisenthal (0:22)

You know how I know you're not?

Tracy Alloway (0:23)

Because we're actually sat together for once.

Joe Weisenthal (0:25)

Yeah, we're actually in a studio together, so normally we're on the phone. The last time we recorded an episode in studio together, I think we were both in London.

Now we briefly crossed paths in New York.

Tracy Alloway (0:36)

Yeah, which is a nice change. OK, so I am not actually looking at a chart of the US 10 year.

Joe Weisenthal (0:40)

But I'm imagining you looking at a chart of the US 10 year.

Tracy Alloway (0:42)

I'm visualizing the chart. I can see the yield. It's above 2.6% for the first time in years, really. Is it first?

Joe Weisenthal (0:51)

No, it's March 2017, so really only a year. But nonetheless, it has been a sharp move up. And if we continue this sharp move up, we could soon see multi-year highs in long-term interest rates.

Tracy Alloway (1:01)

Right, so whenever we have a spike in US interest rates, we get a bunch of people who come out of the woodworks and start talking about the end of the 30-year bull market in government bonds.

Joe Weisenthal (1:12)

Yeah, this is something that if you're in markets, you know all about that the US Treasury market has been in almost a nonstop bull market since the early 80s with yields grinding lower and lower. You know, I think to the outside world, when you hear bull and bear market, you think about the stock market, and sometimes we're in a bull market, and sometimes we're in a bear market.

But amidst all these changing economic conditions, the bond bull market has been virtually nonstop for about three decades.

Tracy Alloway (1:40)

Yeah, for most of our lives, basically. Now, whenever you get people talking about the end of the great bull market and government bonds, you also get people who start talking about demographics, which you wouldn't necessarily think about when you think about US treasuries, government bonds.

Joe Weisenthal (1:56)

No, but I guess it makes sense, because if a bull market can persist through changing economic conditions, then naturally there's an inclination to look for structural explanations that could explain why something is persisting even when the economy is up and down.

Tracy Alloway (2:11)

Right. So the kernel of the argument why the bull market and bonds will never end because of demographics is usually we're going to have all these aging people and they're going to need assets in one form or another as they enter retirement. And those assets are most likely to be US treasuries, and that will lend itself to some long-term demand for the assets.

I promise you, it's more interesting than I just made it sound.

Joe Weisenthal (2:34)

Well, I'm very interested, but can it really be that easy? Can we really say, oh, a bunch of people are retiring and they're going to have to buy financial assets and they'll buy bonds? Like, that almost seems like it's free money.

Tracy Alloway (2:45)

Well, I have the perfect person to ask this question. Our guest for this episode is Amlan Roy. He is chief retirement strategist over at State Street Global Advisors. And can I just say, before I bring him on, shout out to Bloomberg Intelligence's Ira Jersey, our chief US rate strategist, for suggesting Amlan as a guest. So, Amlan, thank you so much for joining us.

Amlan Roy (3:09)

Thank you for inviting me, Tracy and Joe. It's a pleasure to be on your show.

Joe Weisenthal (3:13)

Amlan, tell us a little bit about what you do. Before we get into the bond bull market and the structural reasons for it, what is your background? What is your area of study?

Amlan Roy (3:25)

I am a former academic specialized in asset prices, but for the last 18 years, I've been doing research, building macro models to try and understand demographics and pensions. So I started this in Credit Suisse about in 2000 It started off as public policy advisory to governments of how to deal with the demographics time bomb, i.e. a growing mass of old people to be supported by a shrinking mass of young people. And then over time, I extended it to trying to understand growth rates, fiscal sustainability, and expanded the universe of interest to so-called short-term investors, hedge funds, private equity, because I believe that demographics is not just long-term, it is immediate short-term and long-term.