A lite-hearted view of the current (well kinda current since 2010) thoughts regarding bond bubbles. This write is very much off-the-cuff, and in a poking fun, as well as more serious considerations and is by no means in any form of completeness; and may be considered an addendum to the Funds Boat.
Rip it, tear it and shread it as needed. We'll all learn something.
"Investors on the quest for yield along with safety are also plowing capital into investment-grade corporate securities, but only about 6.3% of respondents believe that these markets are overbought. About one in six respondents stated that more than one of the fixed-income markets is in bubble territory and a whopping one-fifth believe that all of the markets listed are price rich. In an uncertain macro-environment world where global central banks seem willing to underwrite anxieties, the end of fixed-income bubble markets seems far off."This note, is from
this article, CFA Institute.
Bad plan of the Week?On Wednesday, the Fed announced another round of easing and said it's going to keep interest rates near zero until the nation's unemployment rate drops below 6.5 percent
or inflation tops 2.5 percent.
Okay, my inflation adjusted 2 cents worth.....and then I'll attempt to keep my mouth shut about this until 2013.
---The easy part, bond prices in some sectors will stay near flat for the next year, some sectors will move either up or down in price !
1. So, the Fed. actually placed a plan with numbers, around which, one may do a pole dance. Who is going to play this game? The big money houses? Who is going to complain about whether the numbers (unemployment/C.P.I.) are real? And, Mr. Bernanke indicated that, every month, the Fed would purchase $40 billion worth of mortgage-backed securities (continued) and another $45 billion in long-term Treasuries. After awhile this is really big money, as
the central bank will effectively be electronically printing over $1 trillion next year in order to buy more government bonds. Geez, an investor should be able to make a buck somewhere with this kind of action backing a plan.
2. Hey, what if the "new normal" unemployment rate, reported in fully accurate numbers, will not see the happy side of below 7% for years to come. One has to figure that inflation might ring the Fed. target bell first, eh?
3. Inflation, well except if the official CPI can't move past 2.5% (or projected, as per the Fed. statement). Then what?
Does this spell deflation or just a tiny bit of growth?
4. Perhaps growth is not going to be what it has been in the past 50 years. What if the developed countries have a Japanese moment, for a few decades? Opps, that could also be a problem for the lesser developed countries, too.
5. Perhaps a trend will find its place in the U.S. general populus of re-gifting, and when that does not clean out enough of the clutter in the households, the majority of them will have yard and garage sales in 2013. This action could actually stall sales at QVC, HSN, Amazon, various t.v. sell everything channels will begin to fail, numerous dollar stores and WalMart, too. GDP would drop 1%. And don't forget the ongoing action in the various blackmarket sectors of this country; or the kinder word of barter. Past whatever name for this activity, is no tax revenue.
6. And holy poof. The country needs tax revenue from somewhere; 'cause the outtie numbers are much too big relative to the innie numbers and gets into that debt thing-a-ma-bob. The "great debate", eh?
7. I sometimes wonder about generations of investors, the books that have been written and the charts and graphs that shape so much of what so many attempt to perform with investments in the equity sectors. It still is an equity-centric world; and I do believe that some of these folks get really upset about and with the fits and starts in equity sectors; and that some of the bond folks, while walking down a street, stop at the equity store; open the front door and yell inside, "Hey, we make money, too!; and if it wasn't for the bonds issued, your equity companies would not have a good life."
'Course, in the end; if and when some bond prices tumble off of a cliff and into the sea, for what reason, will be the question?
Must be growth somewhere pushing up the demand for money in other sectors; as within the next two years at the most, anyone and his brother's company will have been able to borrow (bond issues) as much cheap money as they could ever need for decades to come. Corporate bond issues will likely continue to fall from the sky for the next year, so that companies may take advantage of cheap money. Hopefully, they will have a good reason to raise the cash.
Perhaps the next big upmove will be in equities,
for real reasons; and not because bonds are too expensive OR that the big money needs to go play in another arena for a short bit of time to reap the profits.
What would be the ramifications into some equity sectors, if some bond sectors had strong and sustained yield increases over a period of six months?
What about the much discussed contrary indicator? If so many are viewing bonds as over-priced; may this not be a contrary indicator? Are bonds over-priced for a good reason?
'Course, low yields today have the good and bad edge sides of the interest rate blade, eh?
Individuals with good credit scores may obtain low rate financing for homes, autos and related.
The other side of the blade for individuals who have some form of invested monies; but who are also risk intolerant suffer from near zero returns on capital via CD's and related. Another related area, but is seldom noted are monies invested by legal entities as cities, municipalities and/or townships who must keep money at the ready for budget needs. These accounts are generally parked in some form of demand account with local banks. These accounts currently may only provide for a .10% yield on the monies.
Will the U.S. and global consumers find room for spending in their budgets going forward; and therefore promote grow with companies, who will in turn, hire more employees? And what are all of the global boomers going to do with their monies?
The central bankers may yet "lead" this house back to some of its investing roots in equities. We're gonna have to find a balance somewhere.
Respectfully,
Catch
Comments
IMHO, we may have another 12 months for the 'bond party' til Feds starting to raise rate. It's getting late and people are starting to leave the party. Price probably flatline for the next 12 months, but we still get the yield so I am still holding mine.
Probably want to get off the boat sooner [perhaps ?Summer or Late Fall 2013?] rather than later
If you have a chance, watch SKYFALL, very good movie.
Summary of December Fed Statement: http://www.bondsquawk.com/2012/12/12/highlights-from-december-2012-federal-reserve-statement/