In yesterday's NY Times Paul Lim has a sort of What Should Investors Do Now article. As the title implies, the article questions many, if not all, of the assumptions investors have about how to have long term success investing in the capital markets.The viewpoint (as I read it) of the article is that it may take a long time for equities to recover and even when they do equities may not be so hot.
There is a huge flaw in the logic, IMO. We are in the middle of the event. As we stand now, the S&P 500 is down thirty something percent from its peak, uncertainties abound and emotion is causing people to reevaluate every financial aspect of their lives. In the middle of the event is not the time where people have the perspective to see such game changing events. How can anyone know the paradigm has shifted until it has shifted (sounds like something Master Po might say)?
As there are more and more articles questioning the death of equities these days there are a couple of facts that no one should lose site of. It is actually possible we are in a bull market right now. The S&P 500 bottomed (for now?) in November around 750 and going into Monday the S&P 500 is at 930. That is 24% in less than two months. I think the probability is greater that 24% in a month and a half is a bear market rally but we can't know the answer until later.
Anyone thinking about giving up on equities should realize where they are emotionally right now in conjunction with where the market is right now. I'll save writing about why giving up on equities is a bad idea for another time and for now just focus on the emotion that is triggering that idea. If you are pondering throwing in the towel it would make more sense to remember how you feel now, then when things recover some more and you no longer are afraid...that would be the time.
Back to the article which, as mentioned above, talks about it taking 16 years to recover from 1966 to 1982 and a similar circumstance in the 1930s. We are of course living through some version of that now. People still working who are smart enough to keep saving and investing are obviously buying at lower prices along the way and would recover much sooner.
Lastly is the ringing endorsement treasuries are given in the article.
AND as this bear has shown, no investment can beat Treasury bonds when it comes to protecting one’s portfolio in a downturn.
How's that for looking in the rearview mirror?
“And the one sector that will do extremely well in such a market will be Treasury bonds.”How well can they do from here? This seems like the exact same thought process that is lamented at the beginning of the article about equities. Long dated treasuries are up 30% so buy them for their safety? Every one percent increase in ten year yields works out to about an 8% drop in price, at 30 years it is about a 12% drop in price. The lower yield trend could of course continue for a while but buying now is buying after an historic rise in prices.
All of this ties in with extrapolation. The thing that caused people to call for $200 oil when it was at $147 causes them to think equities will never work again and that US treasuries will always be safe (price-wise). This is what causes people to buy high and sell low.
14 comments:
On the positive side, people crying that equities are dead = must be near bottom. Heh.
Surely this buy has heard of Business Week. I dunno.
The fed will be buying bonds like crazy to pump money into the system. I am not saying treasuries will not fluctuate, but that does not mean they will decline a lot.
Significant bubbles rely on people taking on significant levels of debt to buy the bubble stuff. I do not see most people borrowing to buy treasuries so they are not a classic bubble even though they will remain at an elevated level for a while.
In the mean time I also think this flood of cash continues the equity rally. Things will remain interesting for some time to come.
i've never been comfortable with the word bubble for treasuries. someone said that people are not buying treasuries to speculate which removes an element of the bubble mentality. i agree with this line of thinking.
i absolutely think yields will go higher, been wrong about the timing, but bubble just doesn't quite seem to fit.
have you looked at the 30 day AA vs A2/P2
I thought it was a fluke the other day. This looks very bullish to me.
http://www.federalreserve.gov/releases/cp/
Treasuries. All asset prices are based on supply and demand. Bubbles are not just made from borrowing. Both Japan and China, the two largest holders of Treauries have less need to hold them if (1) trade reserves are declining; (2) their currency is appreciating against the USD. So there is part of the demand drying up. I would say that on a relative basis the USD currency reserves of foreign nations were in a bubble in the shape of a trade surplus with US. (If my understanding is incorrect, I'd welcome feedback).
And, there will be LOTs of supply of Treasury debt coming on line. So the supply increase suggests that prices might come down.
But...if equities are unattractive due to perceived current and ongoing risks, then treasuries have the opportunity to continue to be strong, particularly if the USD remains strong relative to others.
And finally, I would add that the inflationistas bought up gold and resource stocks hand over fist (to include SHORTING treasuries to get a double dose of goodness from the trade) expecting that all the government's printing of money was going to cause hyperinflation.
As with oil, nat gas and other parabolic moves over the last three year, someone was on the wrong side of the trade and had to cover. Still waiting to hear who.
I wish all the talking heads had your excellent perspective
If you read most of the books written on bubbles in markets the significant bubbles are always associated with markets where the participants used borrowing to leverage their positions. This is why they could not just hold and wait for a better price to sell.
As prices decline the market participants become insolvent, there is then forced selling and the stuff is sold at fire sale prices.
the borrowing is necessary to cause the insolvency of the participants which dramatically increases the decline in prices.
What? A flaw in a New York Times article? HOW CAN THIS BE TRUE???
T
wait, weren't you profiled in the Times? LOL
Interesting crash in long treasuries today on the exact day that a number here argue that there is no treasury bubble.
The world's a funny place.
DE
Just because you don't see "people borrowing to buy Treasuries" doesn't mean they aren't. Example: So much of the Treasury market is rolled over by foreign central banks - China and Japan alone have $1 1/2 T - and Central banks are created by debt, limitless debt.
As the Fed Buys bonds, the Treasury will issue $2T this fiscal year AND has another 11 1/2 T outstanding that needs to be refi-ed.
Sell your treasuries and read the New York Times.
John Hussman discusses the expectations or the bond market in this weeks post on his website. Between Roger, Hussman, and Leisa, I get all the valuable insights I can process. Off the subject, Roger, there was a advertisement for Whole Foods carrying farm raised Icelandic Char. I tracked down the company. The stock is held by four people:)
Sam
How do you farm raise a fish that lives in cold deep water?
How can negative yields on Treasuries not be considered a speculative bubble? Obviously somebody is practicing the "greater fool" theory. Somebody sees Treasury prices going up and they jump on the bandwagon, common sense (yields) be damned.
As far as safety in Treasuries, I read a good comment a few weeks ago: "Ford is in better shape than the U.S. Treasury, the only difference is that Ford cannot print money."
Post a Comment