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GMO White Paper: The Late Cycle Lament: The Dual Economy, Minsky Moments, And Other Concerns
An informal conclusion with a little humor thrown in....
All of the above leaves me viewing the U.S. market increasingly as the hapless Wile E. Coyote in the ever amusing Roadrunner cartoons, running in thin air only to eventually look down, realise his error, and plunge earthbound.
....black swans are often a matter of perspective. Think about turkeys in the run up to Thanksgiving. Every day a very benign dictator arrives, feeds them, checks their water, and ensures they are safe and warm. Then a few weeks before Thanksgiving, the same dictator goes on what can only be described as a murderous turkey genocide. This is a black swan from the perspective of the turkeys, but anything but to the farmer.
Ask yourself how much exposure you have to the U.S. stock market. Then ask yourself what is the minimum amount you could own. We at GMO own essentially zero in our unconstrained portfolios, but then again we are used to career risk and would rather run it than allocate to such an expensive asset.
My math shows the S&P off 17.5% since its high in late summer. Not cheap - but “cheaper” than during the most recent euphoria. To me that implies valuations are heading in the “right” direction. I’m most curious when the report was actually penned. Dated December, 2018 - but likely drafted sometime in November before the steepest losses of the current bear market. The 15+% YTD drop as of today (much greater in some segments) might have been enough to mitigate the paper’s bear case.
If I’m reading GMO’s “Executive Summary” correctly, it is suggesting “0” exposure to U.S. equities. I’ve been slanting more towards global equities (and currencies) due to the increasingly unstable and chaotiic U.S. political / governmental structure. Certainly bears consideration.
However, the report makes one wonder: Whatever happened to the diversified portfolio - long hearlded as the safest, steadiest approach to investing? Throwing all your marbles into one basket or another is one way to garner outsized reward - if you happen to get it right. But it also opens the door to huge losses if you’re wrong or decide to exit when the pain becomes greater than you can bear.
How bad are things? Price’s TRRIX, a well diversified conservative balanced fund targeted toward retired individuals and having near 60% exposure to fixed income, was off only 4.6% YTD. Their slightly more aggressive TRRFX - targeted towards those near retirement was off a bit less. For those who have been around the block a few times, these are not staggering losses or something one should lose much sleep over.
My math shows the S&P off 17.5% since its high in late summer. Not cheap - but “cheaper” than during the most recent euphoria. To me that implies valuations are heading in the “right” direction. I’m most curious when the report was actually penned. Dated December, 2018 - but likely drafted sometime in November before the steepest losses of the current bear market. The 15+% YTD drop as of today (much greater in some segments) might have been enough to mitigate the paper’s bear case.
If I’m reading GMO’s “Executive Summary” correctly, it is suggesting “0” exposure to U.S. equities. I’ve been slanting more towards global equities (and currencies) due to the increasingly unstable and chaotiic U.S. political / governmental structure. Certainly bears consideration.
However, the report makes one wonder: Whatever happened to the diversified portfolio - long hearlded as the safest, steadiest approach to investing? Throwing all your marbles into one basket or another is one way to garner outsized reward - if you happen to get it right. But it also opens the door to huge losses if you’re wrong or decide to exit when the pain becomes greater than you can bear.
How bad are things? Price’s TRRIX, a well diversified conservative balanced fund targeted toward retired individuals and having near 60% exposure to fixed income, was off only 4.6% YTD. Their slightly more aggressive TRRFX - targeted towards those near retirement was off a bit less. For those who have been around the block a few times, these are not staggering losses or something one should lose much sleep over.
I would be on suicide watch if I was down 4.6% YTD (or for that matter 1% or 2%). and I have definitely been around the block a few times. My nest egg is about all I have. No pension and minimal SS benefits of only $1076 monthly of which they deduct $189 for my Part B premium. And now next year they are deducting another $12.40 for something I don’t quite understand. So $874.60 next year is all I will receive. So I have no choice but to live by two rules. - #1 Don’t lose and # 2 Don’t forget Rule #1.
I would be on suicide watch if I was down 4.6% YTD (or for that matter 1% or 2%). and I have definitely been around the block a few times.
I appreciate the sentiment. Different situations require different approaches. But I’m wondering if, perhaps, we’ve been around “different blocks” over our lifetimes? I’ve always associated increased risk with increased potential reward. Over my 50 years investing (my “block”, so to speak), I’ve witnessed the following:
A 22.6% one-day drop in the Dow Jones Industrial Average (1987).
An 86% one-year increase in the NASDAQ (1999).
A 50%decline in the NASDAQ the following year.
A 50%drop in the S&P in fewer than 2 years (2007-‘09).
The “halving” of home values across large portions of the U.S. over just 3 or 4 years (2007-10)
Japan’s Nikkei 225 topping out @ 39,000 (1989) & bottoming @ 7,055 20 years later.
Gasoline at 16-cents a gallon - and at $5.00 a gallon.
The price of gold @ $35 and @ $1600.
A United States prime lending rate of 22% (1983) and 3% (2015)
Mortgage rates as high as 15-20% and as low as 3%.
New full-sized American autos priced at $3,000 (1970) / new pickups priced at $70,000 (today).
The Enron (energy) fiasco, Michael Milken and junk bonds, Richard Strong and mutual funds, and Bernard Madoff with his ponzi scheme.
The Vietnam War, the 9-11 attacks, the impeachment of two Presidents and attempted assassination of two others.
In short, stuff happens. No one should ever put money at risk in the markets that they can’t afford to (or aren’t willing to) lose.
>> I would be on suicide watch if I was down 4.6% YTD (or for that matter 1% or 2%).
So what are you in to keep you alive with 1% or 2% drops, and more important why are you on any investment forum in the first place?
The $12 is for your PDP, right? (rx plan)
I must be a relic from bygone days. The predecessor of MFO - Fund Alarm - had many of us who traded equity sector funds using various momentum strategies. One fellow here even had a free website of all the funds daily based solely on momentum. rono would probably remember his name, (Pony Express Bob?) After 2008 some including me moved on to bond funds instead of the more volatile equity sector funds, Fund Alarm and MFO were/ are forums for those who invest/trade in mutual funds. At least that is my understanding.
Re: TRRIX - The fund lost 18% during 2008. The S&P was off 36.5% that year. Over the past 10 years (including 2008) the fund has averaged in excess of 6% annual. I’d guess that cash and cash-equivalency instruments failed to return even half that much over the same period.
I’m not a momentum investor. Further, I can afford to have 2 or 3 bad years back-to-back without seriously impacting my subsistence / standard of living. What I never hear mentioned here (or anywhere) are the dangers of paper currencies - implicit in their tendancy to self-devalue over the years. Just think about that new car sticker of $3,000 in 1970 (which I referenced above) to get a sense of what happens to virtually all paper currencies over time. Trying to fight that continuous devaluation of paper is the best reason I can think of for charting a long term investment course.
@Junkster is known to be a superb investor. He was so good trading in and out during his day that he was banned by at least one house. Says a lot. And I always welcome his contributions here!
>> some including me moved on to bond funds instead of the more volatile equity sector funds, Fund Alarm and MFO were/ are forums for those who invest/trade in mutual funds.
Sure, but even when you look at, say, DODIX since winter 2010-11 you see a few occasions of ~1% drops, sometimes more than that (hence suicidal ideation opportunities). So I inferred that someone who felt as you do would be not even in a bond fund, but in actual bonds, where absolute drop avoidance is the principle. Hence the question about reading investment forums, that's all.
DODIX is an intermediate term bond fund, A category I have never and won’t ever trade. This is a discussion for after Christmas, As an aside, because of a comment I made here, I ended up sending an investor my 1040s going back to 1992 - as well as my current brokerage statement for my IRA account. Again for after Christmas.
Thanks Hank, but I wish he was only one company.
Why I read this forum? I enjoy Ted’s links. Saves me a lot of time staying informed. Whether you trade or invest, knowing as much as you can about the markets is integral. - at least for me. You never know when one small bit of information can have a powerful effect on your performance results.
Investment board sentiment is important to me and when I see too many investors leaning in the same direction I become wary. A recent case in point was when so many income investors became loaded to the gills in the bank loan bond sector yet amid deteriorating fundamentals ala record covenant lite issuance.
Comments
My math shows the S&P off 17.5% since its high in late summer. Not cheap - but “cheaper” than during the most recent euphoria. To me that implies valuations are heading in the “right” direction. I’m most curious when the report was actually penned. Dated December, 2018 - but likely drafted sometime in November before the steepest losses of the current bear market. The 15+% YTD drop as of today (much greater in some segments) might have been enough to mitigate the paper’s bear case.
If I’m reading GMO’s “Executive Summary” correctly, it is suggesting “0” exposure to U.S. equities. I’ve been slanting more towards global equities (and currencies) due to the increasingly unstable and chaotiic U.S. political / governmental structure. Certainly bears consideration.
However, the report makes one wonder: Whatever happened to the diversified portfolio - long hearlded as the safest, steadiest approach to investing? Throwing all your marbles into one basket or another is one way to garner outsized reward - if you happen to get it right. But it also opens the door to huge losses if you’re wrong or decide to exit when the pain becomes greater than you can bear.
How bad are things? Price’s TRRIX, a well diversified conservative balanced fund targeted toward retired individuals and having near 60% exposure to fixed income, was off only 4.6% YTD. Their slightly more aggressive TRRFX - targeted towards those near retirement was off a bit less. For those who have been around the block a few times, these are not staggering losses or something one should lose much sleep over.
A 22.6% one-day drop in the Dow Jones Industrial Average (1987).
An 86% one-year increase in the NASDAQ (1999).
A 50% decline in the NASDAQ the following year.
A 50% drop in the S&P in fewer than 2 years (2007-‘09).
The “halving” of home values across large portions of the U.S. over just 3 or 4 years (2007-10)
Japan’s Nikkei 225 topping out @ 39,000 (1989) & bottoming @ 7,055 20 years later.
Gasoline at 16-cents a gallon - and at $5.00 a gallon.
The price of gold @ $35 and @ $1600.
A United States prime lending rate of 22% (1983) and 3% (2015)
Mortgage rates as high as 15-20% and as low as 3%.
New full-sized American autos priced at $3,000 (1970) / new pickups priced at $70,000 (today).
The Enron (energy) fiasco, Michael Milken and junk bonds, Richard Strong and mutual funds, and Bernard Madoff with his ponzi scheme.
The Vietnam War, the 9-11 attacks, the impeachment of two Presidents and attempted assassination of two others.
In short, stuff happens. No one should ever put money at risk in the markets that they can’t afford to (or aren’t willing to) lose.
I’m not a momentum investor. Further, I can afford to have 2 or 3 bad years back-to-back without seriously impacting my subsistence / standard of living. What I never hear mentioned here (or anywhere) are the dangers of paper currencies - implicit in their tendancy to self-devalue over the years. Just think about that new car sticker of $3,000 in 1970 (which I referenced above) to get a sense of what happens to virtually all paper currencies over time. Trying to fight that continuous devaluation of paper is the best reason I can think of for charting a long term investment course.
@Junkster is known to be a superb investor. He was so good trading in and out during his day that he was banned by at least one house. Says a lot.
>> some including me moved on to bond funds instead of the more volatile equity sector funds, Fund Alarm and MFO were/ are forums for those who invest/trade in mutual funds.
Sure, but even when you look at, say, DODIX since winter 2010-11 you see a few occasions of ~1% drops, sometimes more than that (hence suicidal ideation opportunities). So I inferred that someone who felt as you do would be not even in a bond fund, but in actual bonds, where absolute drop avoidance is the principle.
Hence the question about reading investment forums, that's all.
Thanks Hank, but I wish he was only one company.
Why I read this forum? I enjoy Ted’s links. Saves me a lot of time staying informed. Whether you trade or invest, knowing as much as you can about the markets is integral. - at least for me. You never know when one small bit of information can have a powerful effect on your performance results.
Investment board sentiment is important to me and when I see too many investors leaning in the same direction I become wary. A recent case in point was when so many income investors became loaded to the gills in the bank loan bond sector yet amid deteriorating fundamentals ala record covenant lite issuance.
uh, only sort of:
http://portfolios.morningstar.com/fund/summary?t=DODIX®ion=usa&culture=en_US
Core is what Lipper designates.
Whatever. I could have chosen FTBFX and BND and made the same point about small but suicidal (your definition) fund drops.
As for your staying here to read, you seemed to be implying something larger than Ted links. general sentiments, or granular info.
As for your historical prowess, bully for you, and may it continue into next year, without
>> on suicide watch if I was down ... 1% or 2% ....
which is all I was curious about.