Fisher Investments Reviews Its 2024 Outlook for Fixed Income

Transcript

Ken Fisher:

So I get asked sometimes what my outlook is for fixed income. And I think it's a boring question because fixed income should be boring. The reality is, there are some things you can say about fixed income, and then there's things you can't say.

First, fixed income includes the concept of cash or near cash holdings, but it also includes longer-term debt instruments like 10- or 30-year bonds. When we think about that, you say to yourself: "Well, the central banks of the world control what happens with short-term interest rates. They don't control what happens in long-term interest rates, but they're stupid enough to try to impact them to try to push them around some. They're mostly free markets set. They mostly are impacted heavily by what people think will be the future of inflation. When, if there's to be more inflation, lenders have to be compensated for that. So they demand higher interest rates to lend their money out. But if you think of it in the most basic of ways, which is hard for a lot of people to do, a lender ought to get an inflation rate and a little more for taking the risk of lending the money out. And even more if they're lending the money out in a riskier way.

So if you think of the least risky way to lend it out, it's to lend it to the government, the US government. And if inflation in the long term is supposed to be a couple of percent, and if you give them a little more—maybe that's another couple of percent. So long rates should be somewhere around, around, around about approximately just roughly 4%. And that's roughly where they are. So there isn't really a lot of justification if we assume that inflation irregularly ticks down, which I do. Because the quantity of money in aggregate is not growing. Therefore there's not a force for future inflation at this point moving forward. If once we assume that, then you assume that there really shouldn't be a big move in long-term interest rates.

Will the central banks bring down short-term interest rates? Well, at some point in time they surely will when they believe they've won their war against inflation, whenever that is. I don't want to get into that speculation. Everybody does, and it's kind of pointless because the central bank themselves, as I have said many times for decades, never knows itself what it will do. So therefore, how do you know what they'll do? I've always said that basically central banks are crazy, and you don't try to predict what crazy people do.

My notion that central banks and bankers —central bankers collectively—are crazy, stems directly from things that I learned from Milton Friedman when I was very young, about—said differently—his views of why central banks would always do the wrong thing. But while I believe central banks will always do the wrong things, they keep wiggling around. But fixed income should be boring.

The fact is that the long-term interest rate markets are much more efficient than, let's say, the stock market is. There's fewer things to have to anticipate. And if you're talking about government debt, it's really what the future inflation rate going to be. A little bit about what's the central bank doing with short-term rates? And not a lot else. Therefore, it should be pretty efficient because there's less moving parts. When you get to a step of more complication, like corporate debt, well, then you start to introduce varied business risks. And it gets a little less efficient, but it's still more efficient than, let's say, the stock market. Therefore, the volatility should be less. And the whole point of why people focus on fixed income is always either to get a cash-flow return or to get something that's pretty stable. And when it's more efficient, it's more stable.

So I go back to my beginning line, my opening comment, which is what I foresee for fixed income, whether on the long end or the short end, this year is for it to be pretty boring and not for anyone to expect too much excitement, too much volatility, too much big movement and expect boredom. Boredom is not a bad thing. Thank you for listening to me. I hope you found this useful.

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