Burt Malkiel: We’re in an era that has been called an era of financial repression. And what that means is the following: We see in the United States that our government is having a very hard time reining in deficits. We have very large budget deficits. We have a very large amount of government debt relative to economic activity; the so-called debt-to-GDP ratio is close to 100%. So you’ve got high debt. You’re having a lot of trouble reining in deficit spending. So what does the government do?
The government says, “We will try to finance that debt at as low interest rate as possible.” And what that means is we will depress interest rates well below where the market might have had them be. And we now have short-term interest rates in the United States that are essentially zero. And this is a tremendous problem for savers. You can’t buy a CD that has any kind of a meaningful positive interest rate. You don’t get any interest from your savings account.
And even if you bought a 10-year Treasury bond, the interest rate is 2% and that is probably about the same as the current rate of inflation, so that in real terms, after inflation, you’re not getting anything even with 10-year Treasury bonds. And it’s not only happening in the United States. It’s happening in Europe. German government bonds yield less than U.S. bonds. It’s happening in Japan. Japanese 10-year government bonds yield less than U.S. 10-year government bonds.
And so this is a tremendous problem for savers who are trying to have their savings grow to provide a reasonable lifestyle in retirement.
We have different classes of income-producing securities in an attempt to get away from this problem of financial repression. And what we do, for example, is we are using some international bonds from countries that don’t have big deficits, from countries that don’t have a lot of debt relative to GDP.
The other thing we do, and we’re doing this today, is to do what might be called a stock-substitution strategy. Because U.S. Treasury yields are so low, corporate bond yields are very low. For example, AT&T, a blue-chip stock, has a 10-year bond yield of 2.5%.
Now, AT&T stock has a yield of almost 5%. Moreover, the dividend on AT&T stock has been growing at almost 5% a year. It may not grow at 5% a year in the future, but it is likely, with the growth of the economy, that the dividend will grow in the future.
Now, we can’t believe that we won’t be better off with AT&T stock and the stocks of other blue-chip, dividend-paying growth stocks than we will be in the bonds of the same companies.
Some people might say, “Gee, if you’re substituting some high-dividend paying stocks for bonds, aren’t you taking on a lot more risk?” We don’t think so. We think we’re doing a good job, an even better job, for investors who want a good retirement. And that’s one of the unique things that Rebalance does that we don’t see in the standard retirement portfolio advice.
