Healey: If rates go down, say from 5.25% fed funds to 4.50%, there will be fairly significant opportunities to earn capital gains over the next few years. But one should also remind oneself that if they go all the way down 3.00%, that's not a good starting point so you have to rely on active management, and proper timing is important. It's all about when you get in.
Simonoff: Let's look at the long-term cycle and the forces we're facing, with three billion people joining the global economy and seeking jobs. Jay has mentioned that this is a powerful deflationary force. Dan has mentioned the demographic issues and the fiscal issues we face regarding the coming explosion in entitlements. Looking at these two megatrends, does one dominate the other?
Chitnis: Three billion people seeking work is just one side of this coin. Those three billion people also save 20% to 40% which just adds to the imbalances. In terms of the U.S. deficit, at the end of the day some of the entitlement issues you alluded to are just going to change. Social Security is an intergenerational promise. The promise is going to be broken. I'm 39, some of you are in your early forties, and all of us are preparing for it. There will be a huge intergenerational transfer of wealth to people in their thirties and forties, so I think it's very hard to look more than a few years out, because things can change dramatically, legislation can change. We think it will change in the next half decade. We also think there will be a recession inside of 2010, so we think you want to increase your duration.
Fuss: When something like entitlements looks like it can't go on, it won't. These things do take time and no one knows what the political tipping point will be. When things start to get out of control and people start to talk about raising taxes, that's when the pressure will start to build on the spending side.
Healey: If Jay is right that we
will see a recession in the next four or five years, then I think the
bond market will retest the lows of 2003. After that, if world growth
shifts away from being so U.S.-centric, and those three billion people
start spending more and saving a little less and become consumers, then
rates in the U.S. will have to be higher to attract capital. Now it's
still the best place to invest, but as that changes the interest rate
trends will change. I don't think that's happening in the next
cycle.