Have We Hit The Top?

[Dinar]

16 minutes ago, Santayana said:

A much better comparison would be stocks with dividends reinvested and bonds with the semi-annual interest reinvested.

You are correct, but the onus is on the person who made the claim to provide proof.  

[james22]

1 hour ago, Santayana said:

A much better comparison would be stocks with dividends reinvested and bonds with the semi-annual interest reinvested.

 

A much better comparison would be dollar-cost-averaging over the period.

[thepupil]

1 hour ago, Dinar said:

https://www.govinfo.gov/content/pkg/ERP-2011/pdf/ERP-2011-table73.pdf

 

As you can see, had you invested on 12/31/1972 and reinvested on 12/31/2002 (mind you 30 year did not exist till 77), you would not have even been close to double digits over the 50 year frame.  Meanwhile, the opposite claim was made - that bonds outperformed stocks over the past 50 years, and when asked for proof, the answer was go f..ck yourself.  That of course is the response of someone who is clearly assured of his facts, never makes mistakes and all around a gentleman and a scholar....

Mind you, the proper comparison is from September 20th 1973 to September 20th 2023 would be even more in favor of stocks.  

 

 

I think @TwoCitiesCapital was talking about constant maturity long durations, which would have done very well over the time frame. I have tried to find a benchmark/performance for this in the past with no success. I think this would be competitive (not sure more) with equities for much of the past few decades. 

 

If he's talking about bond index vs stock index, obviously stock index done much better than bonds. no idea why he'd say bonds done better. 

[Santayana]

2 hours ago, Dinar said:

You are correct, but the onus is on the person who made the claim to provide proof.  

I don't think there is an onus on anyone on this board to prove their assertions to anyone else.  If you're convinced an argument is wrong and want to disregard it, that is on you.   I think the point he was trying to make is that a savvy bond investor would have outperformed equities over that time especially given the huge advantages the bond investor had in the first half of that time period.   Will we ever see a time like that again?  I don't think so, but that's what makes a market.

[Dinar]

51 minutes ago, Santayana said:

I don't think there is an onus on anyone on this board to prove their assertions to anyone else.  If you're convinced an argument is wrong and want to disregard it, that is on you.   I think the point he was trying to make is that a savvy bond investor would have outperformed equities over that time especially given the huge advantages the bond investor had in the first half of that time period.   Will we ever see a time like that again?  I don't think so, but that's what makes a market.

In the first half of that period (09/20/1973-09/20/1998) S&P 500 returned 13.7% per annum.   Given that 10 year started at under 7% in that time period and 30 Year when it appeared a couple of years later was under 9%, hard to see how a 10 or 30 year would have outperformed.

So how would have a savvy bond investor returned more than 13.7% per annum from 09/20/1973 to 09/20/1998, unless it was in distressed debt, but non-investment grade debt was never mentioned?

 

Edited September 22, 2023 by Dinar

[Dinar]

2 hours ago, thepupil said:

 

I think @TwoCitiesCapital was talking about constant maturity long durations, which would have done very well over the time frame. I have tried to find a benchmark/performance for this in the past with no success. I think this would be competitive (not sure more) with equities for much of the past few decades. 

 

If he's talking about bond index vs stock index, obviously stock index done much better than bonds. no idea why he'd say bonds done better. 

I think what would be real competitive with equities is a 30 year zero coupon Treasury issued in 1981/1982, without checking, I'd bet it crushed S&P over its 30 year life.  Also, TIPS issued/trading at 4% real in late 1990s.

Edited September 22, 2023 by Dinar

[Santayana]

24 minutes ago, Dinar said:

In the first half of that period (09/20/1973-09/20/1998) S&P 500 returned 13.7% per annum.   Given that 10 year started at under 7% in that time period and 30 Year when it appeared a couple of years later was under 9%, hard to see how a 10 or 30 year would have outperformed.

You are assuming that the bond investor took that interest payment every 6 months and just buried it in their backyard rather than reinvesting.

[Dinar]

3 minutes ago, Santayana said:

You are assuming that the bond investor took that interest payment every 6 months and just buried it in their backyard rather than reinvesting.

What makes you say that?  I am not assuming that.  

Edited September 22, 2023 by Dinar

[TwoCitiesCapital]

21 hours ago, thepupil said:

 

I think @TwoCitiesCapital was talking about constant maturity long durations, which would have done very well over the time frame. I have tried to find a benchmark/performance for this in the past with no success. I think this would be competitive (not sure more) with equities for much of the past few decades. 

 

If he's talking about bond index vs stock index, obviously stock index done much better than bonds. no idea why he'd say bonds done better. 

 

The benchmark for Zero coupon bonds only goes back to ~1985 - before that they were STRIPS issued by the Fed.  From 1985 period through 2020 they crushed equities. So not 50-years, but 35 falling only behind after last two years where stocks went up and long bonds went down ~50%. 

 

Before zero coupons you had 20+ year treasuries and STRIPS. Im not sure there is benchmark data for STRIPS since you could only get them via reconstitution through the Fed, but you can find 20+ year treasury data. 

 

While zero coupon bonds outperform 20+ year treasuries from 1985 forward, I'm pretty sure 20+ year treasuries outperformed strips from the 1970s through then. Starting yields in 73 would've been 8-9% for 20+ year treasuries. You'd have been reinvesting that 8-9% every year at higher and higher yields all the way up to 17% several years later - and then you rode it all the way back down. With zeros/strips that's just a ton of price volatility for the same 8-9% return you locked in at inception . With 20+ year treasuries, the semi-annual coupon raised your YTM with every reinvestment for the first several years at rates as high as 17% (locked in for 20+ years). 

 

Yields didn't collapse until post-2008. Having started off at 8-9%, and increased that all the way up to yields of 16%-17% over several years, and then rode that back down to 6-7% over 40 years, you absolutely crushed equities. Its possible post 2021 equities have caught up given their 2021 rally while long bonds lost half of their historical returns in 2021/2022 but then we could still say they outperform over 48 years if not the full 50. Still not a bad showing for securities of significantly higher credit quality with no counterparty or bankruptcy risk. 

 

Without access to the Bloomberg terminal at work any longer, I can only run returns in Morningstar back through 93 or look at benchmark data back to it's inception of 85. But I ran the figures during covid after reading a Lacey Hunt article and zero coupon bonds and long treasuries had wrecked equities for a long time. 

[Santayana]

To me, what's really highlighted here is how much order of returns matter.  Equities basically went sideways for 20 years from the 1973 highs while bonds were giving substantial returns.   If the interest rate moves had been reversed, very low rates at the beginning and double digit rates more recently, the numbers would be very different.

[TwoCitiesCapital]

1 hour ago, TwoCitiesCapital said:

 

The benchmark for Zero coupon bonds only goes back to ~1985 - before that they were STRIPS issued by the Fed.  From 1985 period through 2020 they crushed equities. So not 50-years, but 35 falling only behind after last two years where stocks went up and long bonds went down ~50%. 

 

Before zero coupons you had 20+ year treasuries and STRIPS. Im not sure there is benchmark data for STRIPS since you could only get them via reconstitution through the Fed, but you can find 20+ year treasury data. 

 

While zero coupon bonds outperform 20+ year treasuries from 1985 forward, I'm pretty sure 20+ year treasuries outperformed strips from the 1970s through then. Starting yields in 73 would've been 8-9% for 20+ year treasuries. You'd have been reinvesting that 8-9% every year at higher and higher yields all the way up to 17% several years later - and then you rode it all the way back down. With zeros/strips that's just a ton of price volatility for the same 8-9% return you locked in at inception . With 20+ year treasuries, the semi-annual coupon raised your YTM with every reinvestment for the first several years at rates as high as 17% (locked in for 20+ years). 

 

Yields didn't collapse until post-2008. Having started off at 8-9%, and increased that all the way up to yields of 16%-17% over several years, and then rode that back down to 6-7% over 40 years, you absolutely crushed equities. Its possible post 2021 equities have caught up given their 2021 rally while long bonds lost half of their historical returns in 2021/2022 but then we could still say they outperform over 48 years if not the full 50. Still not a bad showing for securities of significantly higher credit quality with no counterparty or bankruptcy risk. 

 

Without access to the Bloomberg terminal at work any longer, I can only run returns in Morningstar back through 93 or look at benchmark data back to it's inception of 85. But I ran the figures during covid after reading a Lacey Hunt article and zero coupon bonds and long treasuries had wrecked equities for a long time. 

 

And to be clear, I'm not advocating for bonds only, or even long bonds now, just pointing that you had very long periods of time between 1-3 decades long where subsectors of the highest quality bonds outperformed equities (I'm sure plenty more instances if you include a risk premium for credit exposure in high yield, EM debt, etc). 

 

This concept that ONLY equities can deliver attractive long term returns seems incredibly  ignorant given what we can see in hindsight over multiple periods with varying circumstances. Maybe it's not long bonds going forward - but 8-10% in high yield strikes me as reasonable and a way better bet than a 4% earnings yield in equities. 

 

There is absolutely a benefit to switching out of equities when you're not being paid well for the relative risk. I think it's pretty clear that 2021-2023 is another one of those times. Which is why I started the move to iBonds and short duration instruments in late 2021 and have increased the duration of those exposures going into, and throughout, 2023 and missed out on a ton of the volatility in stocks in 2022/2023 as a result OR had the liquidity to take advantage of the dips while also selling the rips. 

 

Edited September 23, 2023 by TwoCitiesCapital

[dealraker]

2 hours ago, TwoCitiesCapital said:

 

And to be clear, I'm not advocating for bonds only, or even long bonds now, just pointing that you had very long periods of time between 1-3 decades long where subsectors of the highest quality bonds outperformed equities (I'm sure plenty more instances if you include a risk premium for credit exposure in high yield, EM debt, etc). 

 

This concept that ONLY equities can deliver attractive long term returns seems incredibly  ignorant given what we can see in hindsight over multiple periods with varying circumstances. Maybe it's not long bonds going forward - but 8-10% in high yield strikes me as reasonable and a way better bet than a 4% earnings yield in equities. 

 

There is absolutely a benefit to switching out of equities when you're not being paid well for the relative risk. I think it's pretty clear that 2021-2023 is another one of those times. Which is why I started the move to iBonds and short duration instruments in late 2021 and have increased the duration of those exposures going into, and throughout, 2023 and missed out on a ton of the volatility in stocks in 2022/2023 as a result OR had the liquidity to take advantage of the dips while also selling the rips. 

 

I think you have made your point clear many times. Can you move to specific investments in bonds you are making?  I'd like to read some of your choices to consider them.

[TwoCitiesCapital]

18 hours ago, dealraker said:

I think you have made your point clear many times. Can you move to specific investments in bonds you are making?  I'd like to read some of your choices to consider them.

 

Agency mortgages are probably the best deal in the bond market right now. Can get ~6-6.5% in government guaranteed mortgages with some duration. 

 

Moving from money market/short-term funds to core increases duration some and roughly ~40-50% of your exposure is likely to be to mortgages pending the fund. I have been doing this. 

 

You can also buy funds geared primarily towards agency and non-agency mortgages like Doubleline Total Return fund (or the new ETF Harley Bassman & Simplify are about to launch which buys new issues of ~5-year mortgage bonds). 

 

You can also buy mortgage REITS. Slightly different risks here with the leverage, but with mortgage spreads so high relative to the treasuries/repos, the negative carry from the inverted yield curve isn't killing them and you've got multiple turns of leverage to drops in rates.

 

And lastly I've been buying OTM calls on TLT for a duration kick as I do expect rates to come down. 

 

 

[dealraker]

15 minutes ago, TwoCitiesCapital said:

 

Agency mortgages are probably the best deal in the bond market right now. Can get ~6-6.5% in government guaranteed mortgages with some duration. 

 

Moving from money market/short-term funds to core increases duration some and roughly ~40-50% of your exposure is likely to be to mortgages pending the fund. I have been doing this. 

 

You can also buy funds geared primarily towards agency and non-agency mortgages like Doubleline Total Return fund (or the new ETF Harley Bassman & Simplify are about to launch which buys new issues of ~5-year mortgage bonds). 

 

You can also buy mortgage REITS. Slightly different risks here with the leverage, but with mortgage spreads so high relative to the treasuries/repos, the negative carry from the inverted yield curve isn't killing them and you've got multiple turns of leverage to drops in rates.

 

And lastly I've been buying OTM calls on TLT for a duration kick as I do expect rates to come down. 

 

 

Thank you.   

[TwoCitiesCapital]

1 hour ago, TwoCitiesCapital said:

 

Agency mortgages are probably the best deal in the bond market right now. Can get ~6-6.5% in government guaranteed mortgages with some duration. 

 

Moving from money market/short-term funds to core increases duration some and roughly ~40-50% of your exposure is likely to be to mortgages pending the fund. I have been doing this. 

 

You can also buy funds geared primarily towards agency and non-agency mortgages like Doubleline Total Return fund (or the new ETF Harley Bassman & Simplify are about to launch which buys new issues of ~5-year mortgage bonds). 

 

You can also buy mortgage REITS. Slightly different risks here with the leverage, but with mortgage spreads so high relative to the treasuries/repos, the negative carry from the inverted yield curve isn't killing them and you've got multiple turns of leverage to drops in rates.

 

And lastly I've been buying OTM calls on TLT for a duration kick as I do expect rates to come down. 

 

 

 

Would also just add you could obviously buy the bonds directly. 

 

I'm not buying with enough size to make that worthwhile since I'm doing all of this incrementally over time. Lots need to be like above 100k per purchase before bid/asks make more sense than the slow accrual of fund fees. 

 

Might pay more on fees this way if takes more than 12-18 months for rates to come down. Might pay less if rate cuts start in the next 6 months and I start removing the exposures. 

[SharperDingaan]

The whole bonds vs equities thing requires the investor to have confidence in their own forecast of future interest rates, over some period of time (economic cycle). Cognisant as to where you are in the current cycle today, forecasting whether future yields go higher/lower from here, & trading the bonds vs holding to maturity; however it's not really executable unless you're trading minimum lots of 100K. Historic bond performance just isn't relevant, & most people are confined to a bond fund, paying fees, with some kind of a medium term duration at best. 

 

For most people to outperform equities via a medium term bond fund, interest rates need to fall by quite a bit (fed intervention to prevent a global/great depression). Most would argue that we are now past this (all CB's are raising rates, & all at the same time), & that going forward - it will just be return to routine business. If you think that going forward; stocks fall significantly as the various liquidity supports are withdrawn, bonds might be the better option; simply 'cause after inflation, they lose less. The reality is that if you expect global inflation to average 3%/yr at best, market yields are not going to go down by much.

 

70/30, 60/40 doesn't mean 40% in bonds; it just means 40% in fixed income, which could easily be dividend paying utilities/banks, preferred shares, rental housing etc. Depending on risk tolerance, a lot of these are a lot better alternatives to bonds.

 

Different strokes.

 

SD

 

 

 

 

 

 

 

 

Edited September 24, 2023 by SharperDingaan

[TwoCitiesCapital]

17 hours ago, SharperDingaan said:

The reality is that if you expect global inflation to average 3%/yr at best, market yields are not going to go down by much.

 

This is where you and I disagree. The 10-year rate was sub-1% just 15-months preceding CPI inflation @ 9%. 

 

The market is going to be just as bad as forecasting and just as emotional trading as it always has been. Even if inflation averages 3% over the next decade which I think is probably right-ish, there will be significant variation between the highs and lows of interest rates and yields. 

[Viking]

Great discussion. Some thoughts:

- where are the body bags hiding from the spike at the long end of the curve? Wo are the big losers here? What should be avoided?

- how high could the yield on the 10 year go? 5% or higher?
- does the US 10 year treasury set the value of all other investments? 
- if so, what is the move higher in the 10 year treasury tell is about other asset classes?

- i am a total return investor. I don’t really care where it comes from. 
 

For me, the most interesting development in 2023 is the resilience to higher interest rates in the US. Its like higher rates don’t matter. Businesses (issued debt and locked in low rates for a few years) and consumers (locked in low rates on 30 year mortgages) in the US both made smart decisions during covid so higher rates are not affecting many. And governments aren’t interest rate sensitive (with spending). At least thats the case today.
 

What happens in the US matters in the rest of the world. Other part of the world are much more sensitive to higher rates (like Canada). 
 

I know we are supposed to ignore macro. If interest rates at the long end of the curve continue their march higher I think we will get some wonderful opportunities to ‘buy low.’ Because, contrary to what we have learned in 2023, interest rates really do matter. A lot.
 

Where will the opportunities come from? No idea right now. And that is one of the things i love about investing. 
 

The value (optionality) of having a little cash on hand is going up. And you are getting paid 5% while you wait. Cash as an investment is looking very good to me today (for a part of ones portfolio).

Edited September 25, 2023 by Viking

[thepupil]

1 minute ago, Viking said:

Great discussion. Some thoughts:

- where are the body bags hiding from the spike at the long end of the curve? Wo are the big losers here? What should be avoided?

- how high could the yield on the 10 year go? 5% or higher?
- does the US 10 year treasury set the value of all other investments? 
- if so, what is the move higher in the 10 year treasury tell is about other asset classes?

- i am a total return investor. I don’t really care where it comes from. 
 

For me, the most interesting development in 2023 is the resilience to higher interest rates in the US. Its like higher rates don’t matter. Businesses (issued debt and locked in low rates for a few years) and consumers (locked in low rates on 30 year mortgages) in the US both made smart decisions during covid so higher rates are not affecting many. 
 

What happens in the US matters in the rest of the world. 
 

I know we are supposed to ignore macro. If interest rates at the long end of the curve continue their march higher I think we will get some wonderful opportunities to ‘buy low.’ Just not sure what yet.

 

the bodies are in here. you can't see them yet;. higher for longer will really hurt a few buyout/private RE vintages. publicly traded mostly IG corporate america and the locked in debt at fized rates consumer are fine. privately held, levered to the tits with floater, private equity is not.  there's big equity cushion and tons of uncalled commitments and private credit to extend / can kick / distract, but if we stay here for a while, you're gonna start seeing problems. 

 

the real world impact is not clear to me. institutional investors won't be able to make 15%/yr buyouts anymore. they'll take some writedowns and continue to invest with the same folks after a few shitty vintages. the question to me is it a big enough issue to cause banking problems or problems in the REAL economy. for now, I'm at a "not yet"...and most of the risk on credit/loan side is likewise w/ instititions/not in the banking system. 

 

[no_free_lunch]

10 minutes ago, Viking said:

Great discussion. Some thoughts:

- where are the body bags hiding from the spike at the long end of the curve? Wo are the big losers here? What should be avoided?

- how high could the yield on the 10 year go? 5% or higher?
- does the US 10 year treasury set the value of all other investments? 
- if so, what is the move higher in the 10 year treasury tell is about other asset classes?

- i am a total return investor. I don’t really care where it comes from. 
 

For me, the most interesting development in 2023 is the resilience to higher interest rates in the US. Its like higher rates don’t matter. Businesses (issued debt and locked in low rates for a few years) and consumers (locked in low rates on 30 year mortgages) in the US both made smart decisions during covid so higher rates are not affecting many. Today.
 

What happens in the US matters in the rest of the world. 
 

I know we are supposed to ignore macro. If interest rates at the long end of the curve continue their march higher I think we will get some wonderful opportunities to ‘buy low.’ Because, contrary to what we have learned in 2023, interest rates really do matter. A lot.
 

Where will the opportunities come from? No idea right now. And that is one of the things i love about investing. 
 

The value (optionality) of having a little cash on hand is going up. And you are getting paid 5% as you wait. 

 

Right now, it feels a little like early 2008.  Back then they were raising rates, home prices were shaky but still stable, the stock market was doing ok, just a little dip here and there.

 

I am watching Canada to see what happens here.  5 year mortgages (or less) are the norm and by most metrics we have higher mortgage debt levels, so we should see sooner the impact of rising rates.  Perhaps though, rates will push through to commodity prices and that will soften the blow but I think this Canada is a good bellweather.

[Dinar]

23 minutes ago, no_free_lunch said:

 

Right now, it feels a little like early 2008.  Back then they were raising rates, home prices were shaky but still stable, the stock market was doing ok, just a little dip here and there.

 

I am watching Canada to see what happens here.  5 year mortgages (or less) are the norm and by most metrics we have higher mortgage debt levels, so we should see sooner the impact of rising rates.  Perhaps though, rates will push through to commodity prices and that will soften the blow but I think this Canada is a good bellweather.

No way this is early 2008 in the US.  There like 5 bids for every home that comes on the market, half from cash only buyers.   There was very strict mortgage underwriting in the US over the past decade.  

[gfp]

15 minutes ago, Dinar said:

No way this is early 2008 in the US.  There like 5 bids for every home that comes on the market, half from cash only buyers.   There was very strict mortgage underwriting in the US over the past decade.  

 

Commercial real estate, not conforming 30 year residential.

[TwoCitiesCapital]

1 hour ago, Viking said:

Great discussion. Some thoughts:

- where are the body bags hiding from the spike at the long end of the curve? Wo are the big losers here? What should be avoided?

- how high could the yield on the 10 year go? 5% or higher?
- does the US 10 year treasury set the value of all other investments? 
- if so, what is the move higher in the 10 year treasury tell is about other asset classes?

- i am a total return investor. I don’t really care where it comes from. 

 

The bodies are in plain sight, but have accounting rules that obfuscate them. Damn near every bank in this country is nearing insolvency if they had to mark their bonds to market. They don't - so you don't see the losses until declining deposits threaten liquidity and force the crystalization of losses a la Signature, Silicon Valley, etc. 

 

Who else? Insurance companies. Part of the reason insurance rates are going up is due to inflation, increasing catastrophies (both scale and frequency), AND because they took a hit of 10-15% to their capital over the last 2-years as rates rise which constrains the amount of insurance they can write. And again, they're not forced sellers barring a massive catastrophe year so you probably won't immediately see the damage outside abnormal policy renewal rates. 

 

Who else? Pensions. But again, most of these are "liability driven" investors and their liabilities have similarly "cratered" along with their assets. Funding status might've actually improved seeing as most pension plans are underfunded and their assets would go down less than the assumed value of the liabilities. 

 

Who is the next shoe to fall who may NOT have the benefit of accounting rules to hide the loss? Hard to say. Commercial real estate feels obvious with the double whammy of fewer lease renewals and refinancing mortgage debt into higher rates. But it does concerns me because it is so obvious - feels like that won't be where the bodies are hidden? Maybe the banks that lent to them? 

Edited September 25, 2023 by TwoCitiesCapital

[rkbabang]

 

On 9/20/2023 at 7:00 PM, Santayana said:

On 9/20/2023 at 5:18 PM, Parsad said:

What do you do with all those eggs?  Do you freeze them...doesn't that change the texture?  Generally, the best before is about a month out. 

In my house we go through a couple dozen per week, so those 6 dozen wouldn't even last a month!

 

I was going to reply that eggs have a long shelf-life (in the fridge).  If you can't eat 6 dozen eggs by the time they expire you are not eating anywhere near enough eggs.  I eat about 3-4 eggs per day myself on most days, so 6 dozen would only last me around 18-24 days.  That doesn't count my wife and son.  We typically go though about 4+ dozen eggs per week in my house. If I saw eggs at $0.99/dozen I'd buy a lot more than 6.

 

[Gregmal]

11 minutes ago, rkbabang said:

 

 

I was going to reply that eggs have a long shelf-life (in the fridge).  If you can't eat 6 dozen eggs by the time they expire you are not eating anywhere near enough eggs.  I eat about 3-4 eggs per day myself on most days, so 6 dozen would only last me around 18-24 days.  That doesn't count my wife and son.  We typically go though about 4+ dozen eggs per week in my house. If I saw eggs at $0.99/dozen I'd buy a lot more than 6.

 

How much statin are you taking lol?