Bonds!

[TwoCitiesCapital]

4 hours ago, tede02 said:

 

For trust money, treasurys are about as good as they've been across the curve anytime the last the 20 years. If you're worried about recession, nominal yields on bills and notes are basically 5% plus or minus 50 bps. If you're worried about inflation, REAL yields on TIPS are 2.5-3% which has piqued my interest for my bucket of safe money. 

 

I got a good laugh when Jeff Gundlach said the new mantra for individual investors is "T-bill and chill." LOL. 

 

 

In the long-run, I still agree with Lacey Hunt. Debt is deflationary. 

 

It's still growing in real terms regardless of what inflation is/has been. As long as debt is still growing in real term, I expect the  economic trajectory is "lower for longer". 

 

The Fed is making a policy error IMO and the real opportunity isn't in stocks pricing in continued perfection but in bonds pricing in real yields of 2-3% with basically no credit risk ( in treasuries, mortgages, and TIPS). 

 

The treasury bond market has lost more trillions in the last 2-years, amongst risk averse investors, than the real estate market did in 2008 and people are convinced the only fall out from that is a run of the mill 15-20% pull from manic highs? Without considering the impact of higher defaults, insolvent banks, negative PMIs and leading indicators, declining earnings, alternatives yielding significantly more than equities, and geopolitical tensions at multi decade highs? Give me a f*cking break. 

 

The music stopped in 2021. Y'all don't have to dance anymore. 

Edited September 28, 2023 by TwoCitiesCapital

[Spekulatius]

Debt is not always deflationary. One way to get rid of debt is inflation or even hyperinflation. Inflation or hyperinflation is a result of political failure to deal with economic realities and is a soft default on debt. Inflation is a political choice or political issue and in many cases is a whole lot of more palatable than deflation.

[TwoCitiesCapital]

13 minutes ago, Spekulatius said:

Debt is not always deflationary. One way to get rid of debt is inflation or even hyperinflation. Inflation or hyperinflation is a result of political failure to deal with economic realities and is a soft default on debt. Inflation is a political choice or political issue and in many cases is a whole lot of more palatable than deflation.

 

Inflation only works if it grows faster than the debt. 

 

The debt grew by 18% in 2020. 

By 5.5% in 2021. 

And by 8.7% in 2022. 

And by another 7.1% YTD. 

 

Way. Faster. Than. Inflation. 

Cost of servicing that debt has risen way faster than inflation. 

It's grown way faster than incomes. 

 

So far - debt remains deflationary. That may not remain the case, but we have no evidence to the contrary so far. 

 

Edited September 28, 2023 by TwoCitiesCapital

[Gmthebeau]

On 9/27/2023 at 7:24 PM, TwoCitiesCapital said:

 

In the long-run, I still agree with Lacey Hunt. Debt is deflationary. 

 

It's still growing in real terms regardless of what inflation is/has been. As long as debt is still growing in real term, I expect the  economic trajectory is "lower for longer". 

 

The Fed is making a policy error IMO and the real opportunity isn't in stocks pricing in continued perfection but in bonds pricing in real yields of 2-3% with basically no credit risk ( in treasuries, mortgages, and TIPS). 

 

The treasury bond market has lost more trillions in the last 2-years, amongst risk averse investors, than the real estate market did in 2008 and people are convinced the only fall out from that is a run of the mill 15-20% pull from manic highs? Without considering the impact of higher defaults, insolvent banks, negative PMIs and leading indicators, declining earnings, alternatives yielding significantly more than equities, and geopolitical tensions at multi decade highs? Give me a f*cking break. 

 

The music stopped in 2021. Y'all don't have to dance anymore. 

 

Yes, all the debt will eventually be deflationary.  The FED can manipulate the game along time though with quantitive tightening/easing, and other levers they pull.  I had been expecting the 5-30 part of the yield curve to shift higher and it finally has.  All the pundits now say don't buy bonds, after telling everyone to buy them early the year.  The consensus views are nearly ALWAYS wrong.  I don't think we are quite a full peak rates on the long end yet but getting close.  The cycle is taking longer to play out because of a labor shortage is keeping unemployment low.  It will eventually crack and bonds will rally bigly and stocks will plunge bigly.

[brobro777]

On 7/19/2023 at 9:59 AM, Gmthebeau said:

 

With interest rates having moved up so much it will be very hard to spend the way Trump/Biden did recently.  I don't see that at all.

 

I do believe due to the massive debt the FED was intentionally slow in responding to inflation, and continues to be slow to respond.  They want to help inflate way the debt, but obviously they can't say that.

 

I don't see stocks breaking out from their old highs for years.  At best they top the old high slightly to pull in the last suckers then get trashed.  Stocks will be in a trading range for years in my opinion.  At the top of the range people get giddy - as always.

 

I agree with you, SPX could move sideways for 5-10 years

 

 

[scorpioncapital]

 

I am not sure I understand currency debasement. Wouldn't stocks go up and bonds go down? Is it possible for stocks to rise as rates rise?

[TwoCitiesCapital]

18 hours ago, scorpioncapital said:

 

I am not sure I understand currency debasement. Wouldn't stocks go up and bonds go down? Is it possible for stocks to rise as rates rise?

 

In hyperinflation you'd expect that to be the case. For moderate inflation, both stocks and bonds tend to go down. 

[Gregmal]

Think again, surprise, surprise, Tepper is pretty on point. No need to shit your pants, just recognize this ain’t the market of the most recent decade. Similar to what Ackman has said in its basis.
 

You can absolutely own stocks. But fundamentals and valuations need to be in line with the current environment. 
 

My interpretation, fundamental investing matters once again, and that’s great. 

[hardcorevalue]

In the long run if debt is deflationary (japan would be a great example) why do we have all the previous cases like Germany and South America/asia where inflation exploded after the countries took on too much debt?

[Cigarbutt]

9 minutes ago, hardcorevalue said:

In the long run if debt is deflationary (japan would be a great example) why do we have all the previous cases like Germany and South America/asia where inflation exploded after the countries took on too much debt?

If history is any guide, two essential ingredients are necessary:

1-when the state uncouples from some kind of fiscal restraint (size of debt versus general economy) with no end in sight

2-when flight from currency possible

[TwoCitiesCapital]

2 hours ago, hardcorevalue said:

In the long run if debt is deflationary (japan would be a great example) why do we have all the previous cases like Germany and South America/asia where inflation exploded after the countries took on too much debt?

 

All dependent on "real" levels of debt and whether or not you're a reserve currency. 

 

For most countries - debt is deflationary until you are printing money to pay it. I.e. it's deflationary as long as debt growth, in real terms, exceeds monetary growth, growth in incomes, growth of the economy, etc. 

 

Once you pass that Rubicon and it becomes clear the only way to repay the debt IS to print - then you get a hyperinflationary currency crisis. 

 

Even per your example, Germany's economy was in the shitter before the inflation because it was becoming increasingly obvious they couldn't service the reparation payments. It was the continuous printing of paper currency to do so that then led to hyperinflation. 

 

But the US is different: 

1) we're the reserve currency with no reasonable alternative at this time. People will still need $ for global trade regardless of what our fiscal situation is preventing any real currency crisis from occurring and 

 

2) we are not yet at the point where we HAVE to print to pay the debt - but we're rapidly approaching it quickly with budget deficits of 7% in a "strong" economy with rapidly rising cost of carry. 

 

Even if #2 happens, because #1 remains true and most of the globe remains short USD, I wouldn't expect it to play out in the currency as much and would still expect deflation to be the primary thesis until a reasonable reserve alternative comes along

Edited October 2, 2023 by TwoCitiesCapital

[CorpRaider]

Looking at some discounts in CEFs.

[gfp]

Just now, CorpRaider said:

Looking at some discounts in CEFs.

 

Michael Larson - the manager of Bill Gates' stuff - recently picked up some WIW and WIA

https://www.sec.gov/Archives/edgar/data/1267902/000091485123000038/xslF345X03/wf-form4_169592622975535.xml

https://www.sec.gov/Archives/edgar/data/1254370/000091485123000037/xslF345X03/wf-form4_169592586757618.xml

[tede02]

5 hours ago, CorpRaider said:

Looking at some discounts in CEFs.

 

Nuveen has a number of CEFs that got clobbered over the last 18 months. I've dabbled a little bit. There are a number trading at double digit discounts to NAV and pay over 10% current yield. 

[lnofeisone]

35 minutes ago, tede02 said:

 

Nuveen has a number of CEFs that got clobbered over the last 18 months. I've dabbled a little bit. There are a number trading at double digit discounts to NAV and pay over 10% current yield. 

Just be mindful that some of these have leverage and leverage works both ways. 

[tede02]

3 minutes ago, lnofeisone said:

Just be mindful that some of these have leverage and leverage works both ways. 

 

For sure. Leverage (and duration) is why some of the funds are down over 50% from their highs. I feel for the unwhitting that owned these things before rates started moving up. 

[lnofeisone]

2 minutes ago, tede02 said:

 

For sure. Leverage (and duration) is why some of the funds are down over 50% from their highs. I feel for the unwhitting that owned these things before rates started moving up. 

Yeah, not great. I usually start looking at this list around the end of November for any possible candidates for rallies. I feel there will be lots of tax selling in these.

[tede02]

Long rates keep drifting up. Will we see 5%?! It's fascinating.

 

I keep dripping a little cash in whenever we get a material move. Been buying some longer duration most recently. If there's one thing I've learned on the equity side the last 5-years, I'm always WAY TOO EARLY. 

[Gmthebeau]

8 minutes ago, tede02 said:

Long rates keep drifting up. Will we see 5%?! It's fascinating.

 

I keep dripping a little cash in whenever we get a material move. Been buying some longer duration most recently. If there's one thing I've learned on the equity side the last 5-years, I'm always WAY TOO EARLY. 

 

I think we will see 5% on the 10 year and higher on the 30 year, but it might consolidate first before the next move...or maybe not.  If we keep seeing an unabated rise in 10-30 year part of the curve stocks will start having crash risk.

[thepupil]

42 minutes ago, tede02 said:

Long rates keep drifting up. Will we see 5%?! It's fascinating.

 

I keep dripping a little cash in whenever we get a material move. Been buying some longer duration most recently. If there's one thing I've learned on the equity side the last 5-years, I'm always WAY TOO EARLY. 

 

as someone who started this thread in 4/2022, I've obviously been way too early...but the nature of bonds is such that we're at levels where (absent wild debasement/currency collapse), it's very difficult to lose money. If you bought at the absolute peak (8/6/2020), you're now down 16% with coupons reinvested. bought at beginning of thread, down 5.6% in the agg index and that's with the yield on the index going up 2% in less than 2 years. just keep buying and reinvesting coup, extending duration a little. 

 

I daresay it's very hard to lose money in bonds. if we do, then you're talking major collapse of currency/fiscal state. could happen, but wouldn't be my base case.

 

honestly, I'm just trying to keep my greed in check. want to keep buying more...

[Dinar]

@thepupil, so I would agree with you that bonds are beginning to look interesting, particularly TIPS - 2.4% real yield, although I would still prefer to own PM or L'Oreal than TIPS.  

However, where I disagree with you is your point that it is very hard to lose money in bonds.  In your 08/06/2020 example, in real terms, you are down another 20%+.  To be down 35% after-tax is gigantic for supposedly a "safe" asset.  By the way, that's probably for the index.  The long bond is down 50% before inflation and 60% after.  

From here yes, I think you will do well in TIPS in a tax indifferent account or to preserve wealth.  To grow wealth for a taxpayer, I don't see how it can be done given 40.8% marginal tax rate (37%+3.8% Obama surtax) when say 30 year pays 4.85% (so 2.9% post tax but before inflation.)

[Gmthebeau]

26 minutes ago, Dinar said:

@thepupil, so I would agree with you that bonds are beginning to look interesting, particularly TIPS - 2.4% real yield, although I would still prefer to own PM or L'Oreal than TIPS.  

However, where I disagree with you is your point that it is very hard to lose money in bonds.  In your 08/06/2020 example, in real terms, you are down another 20%+.  To be down 35% after-tax is gigantic for supposedly a "safe" asset.  By the way, that's probably for the index.  The long bond is down 50% before inflation and 60% after.  

From here yes, I think you will do well in TIPS in a tax indifferent account or to preserve wealth.  To grow wealth for a taxpayer, I don't see how it can be done given 40.8% marginal tax rate (37%+3.8% Obama surtax) when say 30 year pays 4.85% (so 2.9% post tax but before inflation.)

 

It depends on your time horizon.  If you buy treasuries and hold to maturity you are not going to lose money.  Sure they could be down 50% at some point, but they will mature at PAR value and you will get the interest payments.  If you buy a bond index you can figure you will get at least the starting yield to worst if you hold it for at least 2x the duration of the fund.  If rates continue rising and you reinvest it will shorten how long you need to hold.  But yea, it's hard to lose money in bonds if you hold them to maturity.   If you try trading in and out of them thats a different story.

[Dinar]

@Gmthebeau, sure, if you hold bonds to maturity, you don't lose money in nominal terms, you actually make money.  However I presume that most people care about purchasing power=real wealth, and once you take inflation and taxes into account, you can easily end up with a huge loss in real terms even if you hold long term bonds to maturity.  TIPS, in my opinion, are a different story.  

[TwoCitiesCapital]

46 minutes ago, Dinar said:

@thepupil, so I would agree with you that bonds are beginning to look interesting, particularly TIPS - 2.4% real yield, although I would still prefer to own PM or L'Oreal than TIPS.  

However, where I disagree with you is your point that it is very hard to lose money in bonds.  In your 08/06/2020 example, in real terms, you are down another 20%+.  To be down 35% after-tax is gigantic for supposedly a "safe" asset.  By the way, that's probably for the index.  The long bond is down 50% before inflation and 60% after.  

From here yes, I think you will do well in TIPS in a tax indifferent account or to preserve wealth.  To grow wealth for a taxpayer, I don't see how it can be done given 40.8% marginal tax rate (37%+3.8% Obama surtax) when say 30 year pays 4.85% (so 2.9% post tax but before inflation.)

 

That's why you buy munis that pay 3.5-4.5% instead and then don't have to deal with the federal tax problem. 

 

Definitely easier to compound wealth in the 37% bracket versus the 0% bracket IMO. 

[thepupil]

44 minutes ago, Dinar said:

@thepupil, so I would agree with you that bonds are beginning to look interesting, particularly TIPS - 2.4% real yield, although I would still prefer to own PM or L'Oreal than TIPS.  

However, where I disagree with you is your point that it is very hard to lose money in bonds.  In your 08/06/2020 example, in real terms, you are down another 20%+.  To be down 35% after-tax is gigantic for supposedly a "safe" asset.  By the way, that's probably for the index.  The long bond is down 50% before inflation and 60% after.  

From here yes, I think you will do well in TIPS in a tax indifferent account or to preserve wealth.  To grow wealth for a taxpayer, I don't see how it can be done given 40.8% marginal tax rate (37%+3.8% Obama surtax) when say 30 year pays 4.85% (so 2.9% post tax but before inflation.)

 

agreed here, and I mostly think/invest pre-tax for bonds, but have bought bonds in taxable recently (mostly w/ duration so there will be significant capital appreciation/loss component). taxation definitely messes w/ the math on bonds (or dividend paying stocks)  

 

I used 8/2020 as the worst example to the day and yes, realized inflation since then is bad. I'm not sure what realized inflation has been since 4/2022 (the point at which I thought bonds were becoming attractive and the point at which bonds have lost 5% cumulatively / underperformed bills by ~9% cumulatively). 

 

5 yr TIPS yield 2.5% if you want to use that instead as the "very hard to lose money in tax free account" thing. 

 

my broad point is that I think bonds are very attractive and am struggling to fight the urge to invest more in them. I think over very long time frames, stocks will beat bonds, so I have to constantly remind myself of that before I end up with much less in stocks than I have now. 

 

you can buy 1 median HHI for $1.3 million of 20 yr IG bonds. 2 for $2.6mm 3 for $3.9mm. That just seems cheap to me. like it only takes a few million to have a couple households of nominal income. that's a world in which I have never lived. if inflaition persists, then the HHI will probably go up faster than the income from bonds and it won't be all that great for bondholders, but for now, I think it's pretty awesome.