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Okay, I'll say it: I actually feel pretty danged smug about the lead story in our January 2013. The intro, as you no doubt recall, focused on new investing terms which might prove useful:
We’ve been listening to REM’s “It’s the End of the World (as we know it)” and thinking about copyrighting some useful terms for the year ahead. You know that Bondpocalypse and Bondmageddon are both getting programmed into the pundits’ vocabulary. Chip suggests Bondtastrophe and Bondaster.
From there I suggested that every manager I'd spoke to called the inflows into long bonds lunatic and they'd gotten out if they had the option. The question was whether you might want to consider getting out ahead of the crowd. Since then, the long Treasury funds have lost more than 12% and long corporate are down nearly 6%. Not awful performance if you're a stock fund, but acceptable if you're into fixed-income.
As the article points out, not all categories of bond funds have had outflows and not all categories of bond funds are negative for the year. As that wise sage Benton Davis pointed out long ago, "Stock (and bond) market success comes from following a principle. The principle of everlastingly keeping your funds invested in the best performing issues"......
Fed plans to taper bond buying is still a mixed proposition of the how or when; without the seeming consequence of raising borrowing costs in many areas, in what remains a still tepid economic status. 'Course, blend this with a .1% price drop at the wholesale level for November, and one may be assured that the Fed still has deflation on the plate of consequences, too; although this one month of data, does not a trend make.
The Fed likely finds the "stuck between a rock and a hard place to be the current "phrase for deep thought".
At least the above Businessweek article link had more defined points about which and what bonds from the data that originally came from the TrimTabs data release. Other articles (here) following the same TrimTabs data release were not so well stated and provided the appearance that every bond fund has been a "bummer" in 2013. Not so, stated the holder of HY funds.
Also of note is that the data is a reflection of mutual funds and not bond etf's.
To state again, from Dec. 11 at MFO: " Per Pimco, via data from the (Bank of International Settlements); global debt/credit outstanding is in the $90-100 TRILLION range. U.S. only debt outstanding is at the $38 TRILLION level."
So, $70 billion is a lot of money, but less so; when related to the above numbers.
And no, no current bond purchases at this house, at this time.
This story is not going to end well. The flight to risk is only going to increase early next year when people get their annual performance reports. They will see their relatively meager returns - 6% or so for conservative allocation and 10-12% for moderate allocation. Media will be full of stories on how the market went up 25% and how airlines went up almost 50% etc. No one will be talking about how narrow the performance 2013 has been relative to broad allocation and diversification and why.
Expected performance chasing from retail investors will pour more of that money into domestic stocks than other sectors that have been lagging just in time for a large correction to occur in US equities after most of that money has come in. Smart money is already leaving US stocks. Lipper is reporting more than $6.5B outflow from US equity funds this week!
The correction in US equities will start a flight to safety to fixed income which will make bonds go up just after most people have left it and they will start to come back after it has risen close to it's top.
Think I have seen this movie again and again.
People who will just do a simple rebalance and benchmark themselves to a sensible global allocation index, ignore the media reports in Jan and Feb and not do anything stupid will likely be the only ones that will come out ok. Other than the few smart and agile investors who manage to stay a step ahead of this cycle.
Reply to @cman: Flight to safety this time may be different than in the past. There are multiple indications that outflow from equity funds goes to cash and not bonds. Asset allocation funds increase their cash positions and not bonds. In that case keeping bonds as safety caution may not work as it was expected.
Reply to @DavidV: You might turn out to be right but then when people say 'this time it will be different...'
In my experience, corrections don't come labeled in advance as such. If they were, very few would sell and run. They come disguised in sentiments of doom or despair where it seems like stocks are at peril of destroying wealth for an unlimited amount of time. Like an avalanche, they can be triggered by a single event or news but not be because of it.
I expect a correction next year either triggered by a real estate retreat from its increasing momentum or a tech bust from the speculative bubble of companies with no earnings.
At that time, 10 year treasuries will probably be 100 basis points above current rates and rates stop rising as sentiments from above events bring out fears of recession or worse. Media will start talking about how the bonds at higher interest rates and little risk of price erosion or inflation look very attractive compared to declining stocks. That snowballs into a stampede into treasuries as they get bid up, not corporate bonds as a safety haven and as always masses will be behind the curve at both ends.
Problem with seeing too many movies is that very few plots surprise...
Of course, I could be wrong and this time it will be different.
David: "Since then, the long Treasury funds have lost more than 12% and long corporate are down nearly 6%."
Fortunately, those are not the only bond options. I'd argue that, for more or less conservative investors, short to intermediate corporate debt in the B's has been among the best reward:risk propositions in 2013 in all of investing, behind quality U.S. equity but not a whole lot else.
I'd expect, though, a change in the wind at some point in 2014.
Reply to @cman: If the US stocks experience a sudden decline, do you think global stocks will stand still. They will also nose dive… They will not provide the protection people think they will get.
However, if US stocks are somewhat stagnant, global stocks might take the leadership. That's why there is a role for international components in the portfolio.
Reply to @Investor: Fair point but confuses my thoughts on flight from fixed income to US equities and possible negative correlation of fixed income, treasuries in particular, with US equities if there was to be a correction with the comment at the end of staying with a diversified global allocation.
The rationale for the latter which includes international equities and US equities amongst others is different and the obvious one. No one knows what scenarios amongst all of the possibilities including the two you have mentioned will happen. There could a reversion to mean in international stock to catch up, there could be a massive rotation to balance, they could continue to underperform, etc.
So for most investors not into momentum trading or trend following staying balanced in that diversification even if that diversification fared relatively poorly this year because of the over performance of US equities would be prudent. Making a skewed bet because of what happened this year that could result in being out of sync with how the assets perform going forward.
Didn't say anything about international stocks providing protection in a US equities decline.
Comments
Okay, I'll be quiet now.
David
Fed plans to taper bond buying is still a mixed proposition of the how or when; without the seeming consequence of raising borrowing costs in many areas, in what remains a still tepid economic status. 'Course, blend this with a .1% price drop at the wholesale level for November, and one may be assured that the Fed still has deflation on the plate of consequences, too; although this one month of data, does not a trend make.
The Fed likely finds the "stuck between a rock and a hard place to be the current "phrase for deep thought".
At least the above Businessweek article link had more defined points about which and what bonds from the data that originally came from the TrimTabs data release. Other articles (here) following the same TrimTabs data release were not so well stated and provided the appearance that every bond fund has been a "bummer" in 2013. Not so, stated the holder of HY funds.
Also of note is that the data is a reflection of mutual funds and not bond etf's.
To state again, from Dec. 11 at MFO: " Per Pimco, via data from the (Bank of International Settlements); global debt/credit outstanding is in the $90-100 TRILLION range. U.S. only debt outstanding is at the $38 TRILLION level."
So, $70 billion is a lot of money, but less so; when related to the above numbers.
And no, no current bond purchases at this house, at this time.
Expected performance chasing from retail investors will pour more of that money into domestic stocks than other sectors that have been lagging just in time for a large correction to occur in US equities after most of that money has come in. Smart money is already leaving US stocks. Lipper is reporting more than $6.5B outflow from US equity funds this week!
The correction in US equities will start a flight to safety to fixed income which will make bonds go up just after most people have left it and they will start to come back after it has risen close to it's top.
Think I have seen this movie again and again.
People who will just do a simple rebalance and benchmark themselves to a sensible global allocation index, ignore the media reports in Jan and Feb and not do anything stupid will likely be the only ones that will come out ok. Other than the few smart and agile investors who manage to stay a step ahead of this cycle.
In my experience, corrections don't come labeled in advance as such. If they were, very few would sell and run. They come disguised in sentiments of doom or despair where it seems like stocks are at peril of destroying wealth for an unlimited amount of time. Like an avalanche, they can be triggered by a single event or news but not be because of it.
I expect a correction next year either triggered by a real estate retreat from its increasing momentum or a tech bust from the speculative bubble of companies with no earnings.
At that time, 10 year treasuries will probably be 100 basis points above current rates and rates stop rising as sentiments from above events bring out fears of recession or worse. Media will start talking about how the bonds at higher interest rates and little risk of price erosion or inflation look very attractive compared to declining stocks. That snowballs into a stampede into treasuries as they get bid up, not corporate bonds as a safety haven and as always masses will be behind the curve at both ends.
Problem with seeing too many movies is that very few plots surprise...
Of course, I could be wrong and this time it will be different.
Fortunately, those are not the only bond options. I'd argue that, for more or less conservative investors, short to intermediate corporate debt in the B's has been among the best reward:risk propositions in 2013 in all of investing, behind quality U.S. equity but not a whole lot else.
I'd expect, though, a change in the wind at some point in 2014.
However, if US stocks are somewhat stagnant, global stocks might take the leadership. That's why there is a role for international components in the portfolio.
The rationale for the latter which includes international equities and US equities amongst others is different and the obvious one. No one knows what scenarios amongst all of the possibilities including the two you have mentioned will happen. There could a reversion to mean in international stock to catch up, there could be a massive rotation to balance, they could continue to underperform, etc.
So for most investors not into momentum trading or trend following staying balanced in that diversification even if that diversification fared relatively poorly this year because of the over performance of US equities would be prudent. Making a skewed bet because of what happened this year that could result in being out of sync with how the assets perform going forward.
Didn't say anything about international stocks providing protection in a US equities decline.