Desperately Seeking Susan is a 1985 American comedy-drama film directed by Susan Seidelman and starring Rosanna Arquette and Madonna. Set in New York city, the plot involves the interaction between two women – a bored housewife and a bohemian drifter – linked by various messages in the personal column of a newspaper. We recalled the movie, and its title, while talking to a 70-year-old contemporary who told us that in this low interest rate environment he is, “Desperately seeking savings.” Wow, what a clever twist of words and it made us think of an old friend and mentor, Stan Salvigsen. Stan cut his teeth in this business as the strategist for C.J. Lawrence. Later he moved on to be the number one rated strategist on Wall Street at Merrill Lynch. Eventually, Stan broke with Merrill and teamed up with Michael Aronstein and Charles Minter to form Comstock Partners, which wrote some of the most colorful strategy reports ever on Wall Street. It was Stan who first opined, “Before the bond bull market is over (lower interest rates) retirees in Florida will be fishing golf balls out of the golf course water hazards to supplement their retirement income.” Well, here we are!
So, what does my generation do for income in the current interest rate environment? Most of you know that one of the vehicles I personally have opted for is the midstream Master Limited Partnerships (MLPs). They are cheap, have decent yields, those dividend distributions have a very favorable tax treatment (much of it tax deferred), and everybody hates them because they got killed with the upstream MLPs. Those folks lost a lot of money because they did not follow investment rule number 1, “Manage the risk and do not let anything go very far against you.” Our friend, and the best MLP centric portfolio manager I know, Eric Kaufman of VE Capital, told me some 8 years ago to not own any upstream MLPs because they have too much price sensitivity to crude oil. Boy, did that prove to be good advice! So, I called Eric last week to ask, “With the 10-year T’note yielding roughly 1.5%, and the Alerian Index (AMZ) yielding over 8% should not that spread narrow over the coming years?” Here was his response:
Currently the capital markets are experiencing much lower bond market returns which have evolved rapidly over the last 10 months from a high yield on the 10 Year Treasury of 3.259% on 10-9-18 to a 1.44% yield on 8-26-19. Many countries are even experiencing negative yields on both sovereign and some corporate debt.
The reasons for this phenomenon abound aplenty from trade war concerns with attendant supply chain disruptions to the Central Bank accommodation to stimulate growth. Perhaps, some of these factors are merely a trigger for what is possibly a much different and simpler explanation. Consider the following possibility. Perhaps a new period of protracted low bond yields has at its core the aging of the Baby Boom Generation. What if low yields become the norm? In that case persistent ultra-low bond yields will likely force the huge cohort of under-saved Baby Boomers into equities as they search for sufficient returns. Such a situation has at its roots a shift in patterns of consumption due to aging from one of accumulating stuff. Generally speaking, when a large population exhibits acquisitive behavior, it inflates the value of whatever is being accumulated. In the years ahead, perhaps it will be equities, and especially those where a significant percentage of hoped for total return is comprised of cash, such as dividends/distributions. Likewise, as the Boomers stuff is sold off (downsizing) the economic result, is deflationary. This result may be somewhat balanced by normal consumption of other demographic groups, thus producing a long-term sub-optimal rate of inflation (probably well below the Feds current preferred stated level of 2%) and should support below average interest rates for many years. A cursory review of the Japanese experience since the 1990's could be instructive here.