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As a former Treasury secretary under Bill Clinton and an ex-Harvard University president, economist Lawrence Summers is one of the best known academics at Harvard.
The same can’t be said for Paul Schmelzing, a Ph.D. candidate at the university.
But both men have made headlines in the past days for their warnings about the investment marketplace.
During an interview with Bloomberg television Wednesday, Summers argued that investors, by pushing on stocks over the past two months, have been too optimistic about the risks associated with Donald Trump’s pending presidency.
The Harvard professor, a Democrat, cited the possibility of protectionist measures by the U.S. as well as changes to foreign policy and domestic social policy as issues that are creating extraordinary uncertainty. 
Meanwhile, Schmelzing, a Ph.D. candidate in economics who is currently a visiting scholar at the Bank of England, writes that if the latest bond market bubble bursts, it will be worse than in 1994 when global government bonds suffered the biggest annual loss on record.
In an article posted on Bank Underground, which is a blog run by Bank of England staff, Schmelzing writes that history suggests a big selloff in bonds will be driven by inflation fundamentals, and leave investors worse off than the 1994 ”bond massacre.”
As for Summers’ comments, it’s easy to discount them as the “sour grapes” utterances of a man who wound up on the losing side of the contentious political debate. Summers is after all among the more partisan members of the economist fraternity.
But to be fair to Summers, he seems on firm ground in much of what he says, especially when he talks about Trump’s most controversial protectionist policy prescriptions.
He also has a legitimate claim in questioning whether Trump’s plan to alter the tax law to encourage U.S. companies to bring foreign profits back to the U.S. will end up achieving the goal of helping the U.S. economy and creating jobs in the process. It must be added that Hillary Clinton backed a similar approach as a candidate so one would hope that he would have voiced these concerns if she had won.
“The vast majority of the companies who have large overseas cash also have substantial amounts of domestic cash,” says Summers. “The reality is that cash that is brought home will be used to pay dividends, to buy back shares, to engage in mergers and acquisitions, to rearrange the financial chessboard, not to invest in large amounts of new capital. It is a chimera to suppose that there will be large increases in capital investment as a consequence of that repatriation.”
Schmelzing, by contrast, focuses his comments on the bond market.
In his paper, he divides modern-day bond bear markets into three major types: inflation reversal of 1967-1971, the sharp reversal of 1994, and the value at risk shock in Japan in 2003.
According to Bloomberg, the Bank of America Merrill Lynch Global Government Index of bonds fell 3.1% in its worst-ever annual loss in 1994 as then-Federal Reserve Chairman Alan Greenspan surprised investors by almost doubling the benchmark short-term rate. Treasury 10-year yields surged from 5.6% in January 1994 to 8% in November.
Schmelzing writes that the current bond market is facing the “perfect storm” of potential steepening of the bond yield curve, monetary policy tightening, and a multiyear period of sustained losses due to a “structural” return of inflation resembling that of 1967.
Global inflation expectations, as measured by the yield difference between nominal and index-linked bonds, have risen to the highest since May 2015 after falling to a record low in February last year.
“By historical standards, this implies sustained double-digit losses on bond holdings, subpar growth in developed markets, and balance sheet risks for banking systems with a large home bias,” Schmelzing says.
But there are a few things worth considering before getting too worried. Rumors of the bond market’s demise have been rampant for several years and yet the sector has stubbornly held up.
Also, if Summers is right in his contention that Trump won’t be able to deliver on the promises implied in current stock markets, bonds may be a refuge, making a liar out of his junior Harvard colleague.