![]() read moreįoreign reserves, used to fund a subsidy programme for basic goods including fuel, medicine and wheat, are running out and shortages have been worsening across the board in recent weeks. What gives? (Apr 9th)įor more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.The last time the pound hit a low of 15,000 in March protesters took to the streets across Lebanon for over a week, blocking roads by burning tyres. Read more from Buttonwood, our columnist on financial markets: A requiem for negative government-bond yields (Apr 23rd) The complicated politics of crypto and web3 (Apr 16th) Bonds signal recession. The big philosophical questions are never truly settled. Even Mr Guttenberg has been teasing fans with the prospect of “Police Academy 8”. Perhaps this and other gaps will be filled in “Expected Returns III”. The fast-pain scenario, for instance, is surely preferable for young savers, to whom the book is dedicated. Readers would have benefited greatly from a chapter on the implications of low expected returns for different sorts of savers. This weighting gives the book a less independent air than “Expected Returns”. ![]() A quarter of the 500+ references are from authors affiliated with AQR Capital Management, Mr Ilmanen’s employer. Along the way, he explains why market timing is a snare (you end up taking too little risk) what the true appeal of private equity is (not superior returns) and why portfolio insurance will not save you (it is too expensive in the long run). He advises how to put them together in a truly diversified portfolio. He sets out a chapter-by-chapter analysis of various investment assets and styles. Understandably, Mr Ilmanen’s focus is on the third approach. Saving more means sacrificing today for the sake of tomorrow, a highly personal choice. The first approach may increase returns but also makes them more uncertain. But he generally eschews investing on hunches.įaced with lower expected returns, investors have three courses of action: they can take more risk to reach for higher returns they can save more or they can accept reality and play the hand they have been dealt as well as they can. Mr Ilmanen’s hunch is that the 2020s will see something of a reversal of the investment trends of the preceding decade. Many of the factors that kept a lid on inflation in that decade-globalisation, efficient supply-chain management, tight fiscal policy, an expanding global workforce-are now attenuating or unwinding. He is also too careful an analyst to miss that low inflation made the high-asset-price, low-yield 2010s what they were. Mr Ilmanen is too much of an epistemological sceptic to put all his chips on one scenario. The choice is between well-heeled stagnation and a crash. ![]() This implies a spell of brutal capital losses followed by fairer returns thereafter. In the fast-pain scenario yields revert to their higher historical averages. In the slow-pain scenario, assets remain expensive and investors receive desultory bond coupons, equity dividends and rental receipts for years on end. What now? As Mr Ilmanen sees it, low expected returns can materialise through either “slow” or “fast” pain. But today’s low yields imply low expected returns in the future. Owners of all kinds of assets have experienced windfall gains. Dividend and rental yields have fallen in response to the secular fall in interest rates. ![]() This bond-like logic holds for other assets-equities, property, private equity and so on. So low yields imply low expected returns. But as yields fall ever lower the scope for further capital gains becomes more limited. You get the income now you were going to get later. In essence a capital gain of this kind brings forward future returns. So when interest rates fall, as they did for much of the past four decades, bond investors enjoy a capital gain. The income on, for instance, a government bond is the interest (or “coupon”) paid once or twice a year. There are two sources of return on an investment: income and capital gain. Start, though, with a recap of the expected-returns framework.
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