From Morgan Stanley economist Richard Berner's January 3rd comments:
For three years, my annual thematic forecasting ritual has profiled the tug of war between a secular world of single-digit returns and my cyclical view that rising inflation and strong growth would push yields higher... As I see it, the cyclical forces are finally likely to regain the upper hand in 2006. Indeed, I think five related macro themes will likely dominate the investment landscape this year, and on balance they add up to higher yields: US 'core' inflation will resume its upward crawl, productivity will undershoot its trend, corporate and personal saving will swap places, home prices will rust rather than bust as housing activity declines, and term premiums and volatility will rise.
...despite my confidence about the validity of each of these themes, three straight years of being wrong about yields has made me humble about the risks to this call. Among them: Secular disinflationary forces may overwhelm the cyclical factors boosting inflation; notably, trend productivity growth could be higher than I reckon. Faster job gains and strong productivity growth may also coexist, yielding robust growth with low inflation. Significant slippage in the growth of home prices could imply collateral damage for consumer spending. The shift of saving-investment imbalances that I think will promote higher real yields may be deferred. These would be bullish for bonds and risky assets.