If the below GMO forecast is correct, investment returns over the next seven years will be dismal across nearly all asset classes, as none of them are expected to be near their historical rates of return.
These indications point to a heavy overvaluing of markets, and scarcity in terms of which asset classes have growth potential. The search for returns is becoming increasingly tough!
All that said, it’s impossible to point to a singular reason for the situation we’re in because the ripple effect of any one factor can be big. For instance, monetary policy alone probably isn’t to blame. But when considered in the context of how it affects interest rates, which determine the cost and availability of capital, and the subsequent deployment of that capital, the policies could be seen as the first domino to fall.
Interest rates have been misaligned for quite some time, at least according to the evidence. It makes you wonder what would happen if central banks didn’t set rates at all. We’d probably have uncontrolled volatility and uncertainty…kind of like we have now.
The big fear is that all this economic malaise furthers the divide between the Protected and Unprotected classes that have formed in the U.S. and elsewhere. I truly worry what will happen if the next recession is stronger, its recovery weaker, and people realize central banks are shooting blanks.
The gulf in classes will be compounded, ushering in further uncertainty, which could lead to global crisis. There is precedent for this already, back in the 1930′s. My guess is we’d rather relegate that period to the history books and learn from its lessons, rather than have it become our current reality.