The Global Economy in Turbulent Times

CHAPTER 29 It’s a Dangerous World out There¹

I delivered the 19th Tun Dr. Ismail Oration at the 46th Malaysia-Singapore Congress of Medicine in Kuala Lumpur on Thursday, July 12, 2012.² Here are some excerpts.

In Search of Safe Haven

The surest sign that all is not well about the global economy is when investors rush to buy gilt-edged or sovereign bonds of the United States, Germany, the United Kingdom, and Japan. Indeed, they are even prepared to “pay” (after adjusting for inflation) the German and Japanese governments for the privilege of holding their two-year bonds, which earn them practically nothing. They will even lend to the United States, Germany, and the United Kingdom for 10 years in exchange for bonds yielding a nominal 1.5 percent a year. What they receive is a return below the target inflation rate set by central banks! In the eurozone, only Germany enjoys this privilege. People are just scared of the dangers out there. They expect either years of stagnation or imminent disaster. Either way, they feel uncomfortable with the global outlook, so they opt to pay for safety. For them, what matters today is return of capital, not return on capital. I have been in this business for 50 years. I have seen crises come and go. Not even the Great Depression pushed bond yields down this far. History suggests that investing in low-yielding Treasuries is not a good deal. In 1945, I recall investors took in 2 percent a year on 10-year Treasuries. Over the next 35 years, they ...