Is the U.S. experiencing “secular stagnation” as former Treasury Secretary Larry Summers argues, or is the cause of our economic woes a “global savings glut,” as former Federal Reserve Board Chairman Ben Bernanke has argued?
That is the key debate among economists and investment strategists today, and each view carries with it distinctly different investment implications.
Not everyone falls within one of these camps, though even GMO’s James Montier, who casts doubt on the legitimacy of both, acknowledges that most everyone else aligns with one of those two positions.
As for Research Affiliates, its May newsletter leaves no doubt where it stands on the issue: firmly in Summers’ secular stagnation camp, which is why the Newport Beach, California, firm’s 10-year capital market return expectations are so low.
“We currently expect about 0.7% average annual real returns over the next decade for both core U.S. bonds and core U.S. equities,” writes Shane Shepherd, the firm’s head of macro research.
The reason for the firm’s low return expectations essentially comes down to its belief in the persistence of the negative trends slowing down the U.S. economy as opposed to Bernanke’s view that what ails the global economy is of a more temporary nature.
To Summers, inadequate aggregate demand — i.e., slower consumer spending and tepid investment — is the source of the slow economic growth and low real interest rates we have experienced since 2008, launching a period that PIMCO (presciently, in Shepherd’s view) dubbed the “new normal.”
Rates must remain low under these conditions.
Indeed, according to Summers the Fed is actually constrained in its ability to lower them to the rate (called the equilibrium real interest rate) that is consistent with full employment and stable inflation — (because the Fed can only go as low as zero in nominal terms while the current equilibrium rate is negative).