The investing opportunity of a lifetime awaits us when the recession arrives

davfor

This possibility is worth keeping in mind...

I think the next selloff in high-yield bonds is going to offer one of the great opportunities of my lifetime.

In a distressed debt market, when the tide is going out, everything goes down. Some very creditworthy bonds will sell at a fraction of the eventual return. This is what makes for such great opportunities. They only come a few times in your life.

There will be one in your near future.

https://marketwatch.com/story/the-investing-opportunity-of-a-lifetime-awaits-us-when-the-recession-arrives-2019-08-20?siteid=yhoof2&yptr=yahoo

MikeM

I'm ready... Been hoping a recession would come sooner than later. Trying to time my retirement around it.

Junkster

I have been reading about all the woes about to befall the junk bond market because of how levered companies are, the maturity wall, etc. for several years now. I would love to exploit it but the opportunity of a lifetime and most likely to never be seen in anyone’s lifetime was 2009 when the Merrill Lynch High Yield Master II Index was up something like 56%. Back in 2008 junk bonds were predicting a default rate (21%) much worse than what occurred during the Great Depression (16%). The next recession may be shallower than most predict and junk bonds at worst will be down more akin to late 2015/early 2016 when oil prices crashed. We heard this same pessimistic song and dance about junk bonds in late 2018 but in reality what occurred was all times highs in 2019.

davfor

@junkster Its my understanding you let market action fully guide your buy and sell decisions. But, I wonder if you care to speculate about the recent resilience of the high yield market. Do you see it as being mostly due to persistently low interest rates and ultra accommodative central bank policies?

LewisBraham

How arrogant, naive and conceited does one have to be to believe you can predict not only the next high yield bear market and economic reccession but the recovery that you are so supremely confident will occur after them? Mauldin has been making terrible predictions for years that have failed to come to fruition. Even the world's top five highest paid economists who've predicted ten of the last five recessions don't make such presumptuous predictions.

Junkster

davfor said:

@junkster Its my understanding you let market action fully guide your buy and sell decisions. But, I wonder if you care to speculate about the recent resilience of the high yield market. Do you see it as being mostly due to persistently low interest rates and ultra accommodative central bank policies?

A great question and something I ask myself too. Certainly the persistently low rates are a part of the equation. Junk rated companies can refinance their onerous debt at near record low rates. Some junk rated companies in Europe even have negative rates. Just my opinion but I think the resilience in junk points to a much stronger underlying economy than presently perceived. Also a President whose survival depends on pulling out all the stops to keep it from faltering. I also believe junk no longer has the stigma associated with it from the past. Meaning so many retirees who would never in the past have considered junk as a viable income option now fully embrace it as such.

rforno

Everyone said the GFC aftermath was a 'generational' buying opportunity. IMO the past 10 years were a cheap-debt fueled 'bull' (key word!) market that was artificially supported by QE, ZIRP, and what-not from the Fed. Yes, it was a fantastic ride, but I still think when the music stops, and the ZIRP drug wears off, the resulting crash in equities will make 07-08 look like a wobble and be the real 'generational' buying opportunity of a lifetime.

Note that I am most certainly NOT a perma-anything, and my accounts are 90% long invested in equities and I'm definitely not sitting all in cash. But when/as the time comes, I will be buying equities on my watchlist hands-over-fists on the way down with the intention of holding 'forever' in my long-term accounts. Embrace the volatility, if you're still in the early or midlife accumulation stage!

In terms of bonds? Who knows ... after '07 I was kind of expecting given all the money-printing, for bond yields to be inching towards 1980s-levels, but that wasn't to be. However, if we ever hit 8, 10, 12% on Treasuries, absolutely I will buy with extreme prejudice, b/c I saw what similar holdings turned out for my relatives back then, and how well they were able to live off them. But I don't see that happening anytime soon, so .. whatever. I stick with stocks.

Ted

@MFO Members: Although the data is a little old according to CXO Advisory John Mauldin batting average is 40%.
Regards,
Ted
https://www.cxoadvisory.com/individual-gurus/john-mauldin/#more-3338

LewisBraham

CXO's data indicates his accuracy is just a little worse than a coin flip, in other words not particularly useful.

Old_Joe

@Ted- That would be fantastic for a baseball batting average but not so great in financial affairs. I'd bet that your financial batting average beats the hell out of Mauldin's.

JoJo26

MikeM said:

I'm ready... Been hoping a recession would come sooner than later. Trying to time my retirement around it.

Good luck. SMH

LewisBraham

A recession or worse is a certainty at some point, but that is no guarantee that bonds bought during it will be great investments just because they were great investments during the last recession. A lot depends on the nature of bankruptices and recovery rates for not just companies but nations/economies overall. Historically, no empire has lasted and company-wise dominance has faded eventually. Or are we now in the FAANG Pax Romana part of history?

bee

@rforno, if you are presently 90 % invested in equities and your equities tank, how will you buy equities "hand over fist"? One needs cash or non-equity correlated assets to exchange into equities when they fall in price.

Over the last couple of years I have milk my equity cows when they have out performed. That milk represents growth above the long term average for that investment (for example, I use yearly growth above 10% as my "milking trigger" for Large Cap).

This "milk" is stored for future retirement income (to pay for things) or, as you mentioned, to potentially buy things on sale.

So far I have enough stored "income milk" for 3 - 5 years. This should keep me from being forced to sell equities when they are temporarily under valued.

My next goal is to store some dry powder from out sized gains if equities continue to out perform. This could serve as a source of money to buy equities when they temporarily go on sale.

Your thoughts?

rforno

@Bee, I have a large cash pile from account consolidations in recent years that for the most part has yet to be deployed into anything other than rolling-over t-bills. I've been using that dry powder to buy new / add to existing positions in recent weeks to my otherwise rather healthy longterm portfolios and am becoming more aggressive b/c I hate to have it just sitting there.

(I don't consider that cash as part of my investment 'holdings' per se, which is why I say that 90% of what I'm invested in are stocks and stock funds -- I don't own much FI or alts or commodities, etc.)

bee said:

@rforno, if you are presently 90 % invested in equities and your equities tank, how will you by equities hand over fist? One needs cash or non-equity correlated assets to exchange into equities when they fall in price.

Over the last couple of years I have milk my equity cows when they have out performed. That milk represents growth above the long term average for that investment ( for example I use yearly growth above 10% as my trigger for Large Cap).

This "milk" is stored for future retirement income to pay for things) or, as you mentioned, to potentially buy things on sale.

So far I have enough stored "income milk" for 3 - 5 years. This should keep me from selling my equities when they temporarily tank.

My next goal is to store some dry powder from out sized gains if equities continue to out perform.

Old_Joe

It's things like this that make comparisons between MFO posters almost impossible, in my opinion. Like rforno, I don't consider most of our cash as "investment 'holdings' per se", and I realize that most MFO posters don't look at it that way. Well, whatever works for each of us.

Derf

@Old_Joe +1
Derf

MikeW

fascinating discussion. It's been a good 10 years in the market so I have reduced equity holdings to about 50%. More of a tactical move though. Probably more driven by my fears of what the great idiot is going to do. I have alot in money markets and short term treasuries right now. Waiting for some kind of move and will probably open an initial position in IOFIX. @bee what are you doing with your "income milk."

Old_Joe

"the great idiot"

Yes, a ticking time-bomb.