Math is hard: University of Chicago Bond version

From Chicago finance professor John Cochrane:

http://johnhcochrane.blogspot.com/2013/07/on-au.html

" But long-term bonds have a magic property: When the price goes down -- bad return today -- the yield goes up -- better returns tomorrow. Thus, because of their dynamic property (negative autocorrelation), long term bonds are risk free to long term investors even though their short-term mean-variance properties look awful.

Gold likely has a similar profile. Gold prices go up and down in the short run. But relative prices mean-revert in the long run, so the long run risk and short run risk are likely quite different."


Wow. Just wow.

First, let's look at a corporate bond or asset-backed bonds, such as mortgage-backed securities.
One reason a bond price can drop is a negative credit event.
In that case, the price of the bond drops because expected future cash flows have dropped.
Why in the world would this imply higher future returns?
Yes, the bond will offer a higher yield to maturity after the price drop.
And IF the bond does not default, it will produce  a higher return.
BUT, the reason for the price drop is an increased probability of default.
So no higher expected returns, just lower expected future cash flows.
If Professor Cochrane truly intended to include corporate bonds, well, I can't imagine what he thinks the world looks like, so let's assume he forgot about corporate and/or asset-backed bonds.
OK, mulligan.

What about Treasury bonds?
Well, one reason a T-bond price can drop is increased inflation expectations.
And yes, the nominal return from a T-bond increases after the price drops.
But the real return does not.

What asset pricing model is Professor Cochrane using where investors do not care about real returns from bonds, but care instead about nominal returns?

In exactly what sense are long-term T-bonds "risk-free" to an investor who cares about real returns?
After declaring long-term bonds to be risk-free, Professor Cochrane states:

"Gold likely has a similar profile. Gold prices go up and down in the short run. But relative prices mean-revert in the long run, so the long run risk and short run risk are likely quite different."

Does Professor Cochrane think gold is likely "risk free to long-term investors" as well?
Really?
In one sense, gold IS riskless:  gold is gold, and no matter the price, it will still be shiny.

But I'm really unclear as to where the idea that gold would somehow be akin to an investment that is risk-free in a nominal sense came from, other than perhaps the opinion that gold's price mean reverts (does it, I'm not sure...doubt it, though).

At any rate, I must agree with Professor Cochrane's larger point, I think Mankiw's exercise was a fun exercise in optimization, but makes little sense.
Like Warren Buffett, I see very little sense in owning gold for anything else but the joy of shiny objects.