An interesting speculation that comes from
UBS via Bloomberg through David Stockman (long ago, Reagan's budget guy):
if there's a liquidity crunch in the bond market, e.g., some sort of panic in high-yield debt, investors will begin redeeming their hybrid funds. If the bond market was acting irrationally, managers who needed to meet redemptions would be tempted to sell their most liquid-stocks because that's where they could quickly and easily raise cash. Most 60/40ish funds (collectively they hold $1.4 trillion in assets) have large cap, blue chip portfolios (Microsoft is the #1 holding in the aggregate), so a bond crisis might trigger disproportionate selling in U.S. large cap stocks.
I have some unresolved questions about the argument:
- do 60/40 funds invest much in the most vulnerable bonds? They have a 15-20% corporate stake but that doesn't directly address credit quality or duration.
- do panics in low-quality bonds typically spread to higher-quality ones or does the "flight to quality" impulse make it a wash?
- assuming that hybrid funds sell $100 billion in blue chips over the course of a week, would that be unmanageable? Microsoft trades 35-80 million shares a day and is currently priced in the mid-40s so $2-3 billion/day is normal.
Not clear what one would
do with this insight, even if true.
For what interest that holds,
David
Comments
This may be an unrelated scenario, but over the next 30 year cycle there will be a large portion of our economy (baby boomers...you included) that will be spending a sizable portion of their retirement as their main source of income.
To me this will provide a significant boost to the economy. Without the need to grow jobs, retirees will transfer their jobless income to someone who will claim this spending as their earned income.
If Ray Dalio is correct when he states,
"one man's (retirement) spending is another man's (working) income",
then haven't we added a sizable and persistent form of liquidity into the economy as retirees spend a portion of their retirement income annually?
No one seems to talk about this much.
Without adding any additional labor costs, retirement income is spent and transformed into working income. Working incomes depend on others to spend so they may earn their income...retirees do this almost exclusively from unearned income. But this unearned income once spent becomes a worker's earned income. These earned income workers may even find ways to save enough to invest, thus maintaining an equilibrium on the investment and financial side of the equation.
Over the next 30 year cycle I believe most retirees will be consistent and significant spenders of their wealth. To me, this is a reliable source of liquidity and should be a long and steady "shot in the arm" for the economy.
My apologies if these comments seem unrelated to your thread topic.
"Generally speaking, a high level of liquidity reduces volatility because institutional investors can enter or exit that market more easily. You can see this when comparing a chart of the S&P 500 Index (arguably the most liquid stock market index in the world), over the medium to longer term with indices of most smaller developed countries such as Denmark or Ireland, not to mention any emerging markets such as Brazil or India.
However, the proliferation of hedge funds and particularly high-frequency trading (HFT) in many liquid markets certainly increases the intraday volatility, while producing occasional meltdowns, such as we last saw on 24th August. The HFT promoters and apologists frequently mention their contribution to liquidity. Yes, but on days when they account for most of the volume, and other investors are temporarily frightened into inactivity, we get either small meltups or much bigger meltdowns, usually caused by front running."
Related Bloomberg article he referenced:
world's biggest leveraged etf halts orders on liquidity concern
Good grief, Charlie Brown! As I thought about what I plan to say in this posting, the frightening image of Harry Dent invaded my mind. I’m about to stress the significance of dynamic demographic changes that will strongly influence the marketplace in a negative way in the coming years.
Dent has been singing that same song for decades. I suppose this singular theory of Harry Dent is alive and well.
I few years ago I examined a bunch of broad market data to discover chief contributors to real (after inflation) GDP growth rate. I postulated that corporate profits would be loosely coupled with some time displacement to GDP growth.
My correlation efforts identified demographic growth and productivity increases as primary GDP growth rate factors, with the demographics component contributing one-third to the total picture. The correlation was very tight.
That outcome was not unexpected since consumer spending accounts for roughly 70% of our economy. And consumer spending changes as a function of age. Although his numbers have shifted a little as Dent accumulated more data and as our population ages, he finds that the average consumer reaches peak spending in the 45 to 55 age bracket.
Couple that relatively stable spending distribution with an increasing average lifespan and a decreasing child birth rate, and the makings of a shift in our overall spending profile definitely is possible. Potentially, that shift does not bode well for the stock markets. The same arguments are also valid in the developed nations. Potentially, trouble is everywhere.
I distrust forecasting since I really believe that forecasters can’t forecast. As John Kenneth Galbraith said: “The only function of economic forecasting is to make astrology look respectable”. With that warning, here is my analyses (yes, it’s a forecast by another name).
For the past few decades, a prosperous USA chose spending over savings. We bought what we wanted. With an aging population, our overarching policy will shift from buying what we want to only buying what we really need. Old folks do that. Consumer spending per person will contract. Working against that observation, our population will continue to increase, thus somewhat canceling and ameliorating the reduced spending trend.
Profits will still be positive, but somewhat attenuated. Market returns will be reduced to reflect lower positive levels of GDP growth rates. The markets will mirror lower GDP growth rates. So sad.
Good luck on this forecast being anywhere near what actually happens. The problem has far too many moving and interacting parts. But, nevertheless, it’s a fun task.
The Beatles song “When I’m 64” captures some of the issues of an aging population. Here is a Link to the original version of that song by The Fab Four:
Enjoy. It’s always a losing challenge to accurately project the future. Therefore, I’ll close on the success of the Beatles song.
I realize I failed to answer any of Professor Snowball’s tough questions, but my note does address some issues outlined by MFOer Bee. The questions are well beyond my pay-grade. But I do see a correlation between an aging USA population and muted market rewards for whatever that is worth.
Best Wishes.
There are a few reasons that I find value in hybrid type funds. One reason being that they can roam a wider field of investment choices over most other fund types and weight their holdings accordingly to where they are finding the most opportunity (stocks, bonds, cash and other assets). Two, should they have to sell down assets to meet redemptions in a major market decline then they have more than one asset class to choose from to do this. And, another reason is that they provide somewhat of a walking asset allocation for me within my own portfolio as their fund managers can, and do, make adjustments within their asset allocations from time-to-time due to changing market conditions and this automatically somewhat adjusts my portfolio’s asset allocation without me having to make adjustments myself unless I choose to do so.
In my income sleeve I currently have three funds that at times usually hold a small allocation to equities and other assets besides their main focus in bonds. These funds are LBNDX, NEFZX and TSIAX.
In my hybrid income sleeve I currently hold the following (mostly conservative allocation) funds. They are CTFAX, CAPAX, FKINX, ISFAX, JNBAX & PGBAX.
In my growth and income global hybrid sleeve I currently hold the following (mostly world allocation) funds. They are BAICX, CAIBX & TIBAX.
In my growth and income domestic hybrid sleeve I currently hold the following (mostly moderate allocation) funds. They are ABALX, AMECX, DDIAX, FRINX, HWIAX & LABFX.
In my specialty sleeve I currently hold the following hybrid type fund. It is LPEFX.
You might wish to do an Instant Xray on each of the funds as it will provide a view of how the fund managers have allocated.
Old_Skeet
However, the linked article (in David's original post) is by a Bloomberg journalist and summarizes (from what I can tell) the views of a couple UBS analysts. I'm not aware of any rigid or standard definition for hybrid fund and it's curious they would use the term here. (If you want a real hybrid, buy some PRPFX.)
Not smart enough to pretend to understand all this liquidity jargon - but yes ... it has long been suggested that a sharp rise in interest rates will inflict significant damage on traditional balanced funds. Bonds don't like rising rates. Neither do equities. As '07-'09 demonstrated, today's investors have a very quick trigger-finger - a willingness and ability to sell just about anything on a moment's notice. Heck - even money market funds came under panic selling back than. So the argument is correct in the sense that another big-sell off will happen at some future time (and the dry tinder may well be stacked in the high-yield sector). But I think the argument is a bit misdirected (not to mention ambiguous) in targeting hybrid funds for criticism.
Thanks to David and others for the insights. Regards