Bonds!

[wabuffo]

Moody's warning on private credit as systemic risk 

 

In all seriousness, systemic credit risk generally happens when the whole US household/business sector is over leveraged vs assets/equity/income (as happened in 2007.   That is just not the case today.   Of course, there can be some types of lending and some banks that get into trouble - but no system risk today.

 

Moody’s really having a bad run of trying to make headlines the past few weeks.  
 

Bill

 

[gfp]

It's interesting - the prime rate has barely come off its highs (tied to fed funds obviously) and is still at 7.5%.  I just had a commercial real estate loan re-set this month at the 5 year mark from the 2020 vintage.  4.75% went to 9%.  I will go and refinance it at 7 and change but still - there are a lot of CRE projects with those 2020 vintage loans coming up on their 5 year anniversary.  Rents flat, taxes up, insurance doubled, flood ins. up, cost of money up up up

 

We use 30 year fixed on everything 4 units or below but commercial loans on 5 units and up.  5 year loans, 20 year amortization type of stuff. 

[CanadianMunger]

gfp - from your posts its pretty clear that your are quite adept operating in the stock and bond market.  So why bother with the hassle of real estate investing?

[gfp]

18 minutes ago, CanadianMunger said:

gfp - from your posts its pretty clear that your are quite adept operating in the stock and bond market.  So why bother with the hassle of real estate investing?

 

We used to develop historic tax credit real estate projects here in New Orleans and we still have some apartments that we haven't sold.  I have a love/hate relationship with it.  I would be very happy to not have any New Orleans real estate.  But I also love the first of every month when a bunch of hard working people send a bunch of money to me.

 

We haven't done a new property since 2020.  I'm too lazy now and the economics of new projects have changed significantly.

 

Everything we have is multifamily residential apartments and they are always 100% occupied and the tenants are fine and the notes are small and shrinking further over time.  But if they all burned to the ground tomorrow I would have a certain spring in my step and go on vacation immediately. 

[Munger_Disciple]

WSJ article: https://www.wsj.com/finance/investing/wall-street-bond-market-us-debt-990e12e9?st=6Bupmt&reflink=desktopwebshare_permalink

 

[Spooky]

On 6/1/2025 at 10:01 PM, Malmqky said:

 

Are bonds the best way to hedge/provide optionality during drawdowns? Curious to hear your thoughts (and others) on bonds compared to gold/oil/bitcoin, margin, and even just a cash position instead.

 

I've been lucky enough to have enough inflow where I've been able to ignore hedging/dry powder positions in the past and take advantage of drawdowns in other ways. Always happy to learn and hear different opinions however.

 

It really depends on the time horizon you are looking at. If it is 30 years you are better off not sweating the draw downs and be fully invested in equities and ride things out.

 

Owning gold itself (not gold miners) can be a decent way to reduce volatility in your portfolio if it is a concern - you just need to make sure to re balance at the right time into equities which can be tricky. Bonds can fulfill a similar function. However, what I have noticed with gold is that it is not a surefire thing. Sometimes it works, sometimes it doesn't. Same with bonds. The 60/40 portfolios got crushed when the Fed raised rates sharply.

 

Personally, I don't tend to hold much cash or bonds. I have an emergency fund which is just in money market / IB which I add to when I don't have any screaming obvious investment ideas. Sort of emulating Buffett in this regard - just hold short term government securities which gives you safety and optionality.

[TwoCitiesCapital]

1 hour ago, Spooky said:

Owning gold itself (not gold miners) can be a decent way to reduce volatility in your portfolio if it is a concern - you just need to make sure to re balance at the right time into equities which can be tricky. Bonds can fulfill a similar function. However, what I have noticed with gold is that it is not a surefire thing. Sometimes it works, sometimes it doesn't. Same with bonds. The 60/40 portfolios got crushed when the Fed raised rates sharply.

 

This is why it's important to be diversified. Sometimes bonds hedge.

Sometimes gold hedges.

Sometimes equities are a hedge. 

They don't need to move opposite of one another - they just need to move differently. 

 

I tend to like Bridgewater's All Weather quadrant of thinking about diversification. 

 

You want some exposure to things that do well when growth is high and inflation is high (real estate, base commodities, energy, emerging markets). 

 

You want some exposure to things that do well when growth is high and inflation is low (developed market equities, corporate bonds, high yield/emerging markets debt, etc.)

 

You want exposure to things that do well when growth is low and inflation is low (cash, treasuries, money market, mortgages, etc)

 

And then exposure to things that do well when inflation is high and growth is low (TIPS, gold, perhaps Bitcoin). 

 

Bridgewater uses leverage to "equal weight" this exposures based on expected volatility. I don't think you need to get that fancy. But just owning a little bit of all of them is helpful and then you can overweight or underweight according to your views of relative attractiveness and environment going forward. 

[Spooky]

14 minutes ago, TwoCitiesCapital said:

 

This is why it's important to be diversified. Sometimes bonds hedge.

Sometimes gold hedges.

Sometimes equities are a hedge. 

They don't need to move opposite of one another - they just need to move differently. 

 

I tend to like Bridgewater's All Weather quadrant of thinking about diversification. 

 

You want some exposure to things that do well when growth is high and inflation is high (real estate, base commodities, energy, emerging markets). 

 

You want some exposure to things that do well when growth is high and inflation is low (developed market equities, corporate bonds, high yield/emerging markets debt, etc.)

 

You want exposure to things that do well when growth is low and inflation is low (cash, treasuries, money market, mortgages, etc)

 

And then exposure to things that do well when inflation is high and growth is low (TIPS, gold, perhaps Bitcoin). 

 

Bridgewater uses leverage to "equal weight" this exposures based on expected volatility. I don't think you need to get that fancy. But just owning a little bit of all of them is helpful and then you can overweight or underweight according to your views of relative attractiveness and environment going forward. 

 

Very true. A lot of this will require re-balancing though which leads to taxes / transaction costs. I'd rather have a portfolio of 6-8 excellent businesses and just sit on my ass.

[gfp]

Where my bond vigilantes at?  Did something change about the deficit, future supply, foreign capital flows or did everyone just end up consensus on one side of the boat?

 

My own mother!  Who owns only equities, zero bonds!  Even sent me this NYT article yesterday...  If that isn't some kind of contrary indicator I don't know what is

https://www.nytimes.com/2025/06/03/opinion/us-debt-trillions.html?unlocked_article_code=1.ME8.G5oL.3ufNb4Qmj2xE&smid=em-share

[Gregmal]

lol just wait til we bounce back to 4.5 again. The circus will start back up again. Rah rah 

[Malmqky]

2 hours ago, Spooky said:

 

It really depends on the time horizon you are looking at. If it is 30 years you are better off not sweating the draw downs and be fully invested in equities and ride things out.

 

Owning gold itself (not gold miners) can be a decent way to reduce volatility in your portfolio if it is a concern - you just need to make sure to re balance at the right time into equities which can be tricky. Bonds can fulfill a similar function. However, what I have noticed with gold is that it is not a surefire thing. Sometimes it works, sometimes it doesn't. Same with bonds. The 60/40 portfolios got crushed when the Fed raised rates sharply.

 

Personally, I don't tend to hold much cash or bonds. I have an emergency fund which is just in money market / IB which I add to when I don't have any screaming obvious investment ideas. Sort of emulating Buffett in this regard - just hold short term government securities which gives you safety and optionality.

 

I am more or less fully invested at all times. I originally mentioned hedging in this question, but I'm more interested in taking advantage of drawdowns. Volatility isn't a concern.

Appreciate everyone's feedback.

[Spooky]

22 minutes ago, Malmqky said:

 

I am more or less fully invested at all times. I originally mentioned hedging in this question, but I'm more interested in taking advantage of drawdowns. Volatility isn't a concern.

Appreciate everyone's feedback.

 

Another option is to have a line of credit on the side undrawn so you have access to some firepower if we get a big decline.

[gfp]

9 minutes ago, Spooky said:

 

Another option is to have a line of credit on the side undrawn so you have access to some firepower if we get a big decline.

 

One of the great things about that COVID draw down was they were basically forcing you to re-fi property if you had any economic aptitude at all.  Crazy low rates for an extended period.  Every mortgage broker in town was like, "why don't you bump that cash-out figure up a little more chief."

 

Interest rates do tend to plummet in a crisis, but I wouldn't count on the length of the opportunity being as accommodating as the COVID era was.  A credit line already in place sounds good and helps with the timing problem but in a true crisis it feels a bit scary to blow out your credit lines to catch more falling knives.  Some have the cajones, some don't!

[vinod1]

I had for a long time held 5-10% cash to take advantage of opportunities. That did not really help add any value.

 

The market is going up on average 9-10% a year. Over a 10 year period that is 2.5x your money. Looking at markets, they fall 30% or more roughly once in 10 years. Since, 50% bear markets are rare and you also don't know if they stop at 45% or 40%, you need to take your shot around a 30% fall. Unless it occurs within 3-4 years, you are better off having fully invested.

 

I used to keep a few percent in cash, planning to buy some of these things at a 30% or so discount. They jump up 30-40% over the next few years, and when they fall, I end up buying at the same dollar price as I could have originally invested.

 

So it ends up being a wash.

 

In addition, when markets do actually fall 30%+ they are so many bargains that 5-10% cash is really not moving the needle. I end up selling stuff to buy things that are cheaper. 

 

So in the last several years, if I really lack any ideas and I am at max position size in my holdings, I just buy the index instead of keeping it in cash.

 

Vinod

 

 

[vinod1]

In case of a consistent fast growing company

 

Year 1: Earnings $1  Stock $40 PE = 40

 

Year 4: Earnings $2 Stock $50 PE = 25

 

In the past I would have set a MOS PE of 25 to buy and what I could have bought at $40 I would end up buying at $50, because it now is a bargain at a PE of 25. I did this kind of nonsense for a little while before I wised up.

 

Vinod

[Gregmal]

Yup. But people feel smart being more active. 

[Libs]

<In addition, when markets do actually fall 30%+ they are so many bargains that 5-10% cash is really not moving the needle. I end up selling stuff to buy things that are cheaper. >

 

This. Selling .75 dollars to buy .50 dollars. Of course it only works in tax-deferred accounts.

 

[treasurehunt]

2 hours ago, vinod1 said:

The market is going up on average 9-10% a year. Over a 10 year period that is 2.5x your money. Looking at markets, they fall 30% or more roughly once in 10 years. Since, 50% bear markets are rare and you also don't know if they stop at 45% or 40%, you need to take your shot around a 30% fall. Unless it occurs within 3-4 years, you are better off having fully invested.

 

This is true if cash returns zero, like it did for most of the past 15 years. But if cash returns 4%, then you have six years to buy at 30% off and come out ahead. That doesn't seem like a terrible bet if you think markets are substantially overvalued.

[Gregmal]

1 minute ago, treasurehunt said:

That doesn't seem like a terrible bet if you think markets are substantially overvalued.

Yea the problem is that people whom tend to think the markets are substantially overvalued, always think the markets are substantially overvalued. 

[vinod1]

Just now, treasurehunt said:

 

This is true if cash returns zero, like it did for most of the past 15 years. But if cash returns 4%, then you have six years to buy at 30% off and come out ahead. That doesn't seem like a terrible bet if you think markets are substantially overvalued.

 

Not really.

 

Year 1: Stock investor $100 Wait-for-Market-to-Fall investor: $100 in cash @4%

 

Markets go up 10% for 5 years; ease of calculation we assume markets tank 30% right at year end.

 

Year 5: Stock investor $112 Wait-for-Market-to-Fall investor: $120 cash is used to buy the index at $112

 

This gives a tiny advantage of 7%.

 

Not really adding much value. All this effort could be better spent on finding a better value.

 

[vinod1]

41 minutes ago, Libs said:

<In addition, when markets do actually fall 30%+ they are so many bargains that 5-10% cash is really not moving the needle. I end up selling stuff to buy things that are cheaper. >

 

This. Selling .75 dollars to buy .50 dollars. Of course it only works in tax-deferred accounts.

 

 

Nothing screwed my thinking more than the hesitation to defer taxes. For years, my taxable returns were nearly double digits behind my tax-deferred accounts. They hold the same damn stocks, but I would hesitate to sell, wait for more drawdown before reallocating, all for tax efficiency. Then I said, screw it, I am going to treat my taxable account pretty much the same as a tax-differed account, albeit with tiny more attention to not taking short term capital gains which was not really the issue anyway. Last 5 years they are nearly identical pre-tax and even with taxes I am much better off.

 

 

 

 

[Eldad]

Howard Marks claims to have studied a lot of the great investors and has come to the conclusion that most of them slightly trail but keep up with the markets in the good times and then ultimately outperform in the long run by crushing the index in the bad years. If you look at the famous BRK chart of yearly performance vs. S&P his best years vs SPY are in the horrible market years. 
 

I have had a lot of success not selling high markets but letting the cash pile up and waiting for an event and then buying like crazy. But to each his own. But I think a bond reserve makes sense in light of Howard Mark’s wisdom. 

[vinod1]

7 minutes ago, Eldad said:

Howard Marks claims to have studied a lot of the great investors and has come to the conclusion that most of them slightly trail but keep up with the markets in the good times and then ultimately outperform in the long run by crushing the index in the bad years. If you look at the famous BRK chart of yearly performance vs. S&P his best years vs SPY are in the horrible market years. 
 

I have had a lot of success not selling high markets but letting the cash pile up and waiting for an event and then buying like crazy. But to each his own. But I think a bond reserve makes sense in light of Howard Mark’s wisdom. 

 

That is apples to oranges. BRK vs SPY during bear markets vs bull does not have anything to do with Buffett's actual allocation. Just that BRK tends to outperform SPY during bear markets for a lot of reasons, market timing not being one of them.

 

Unless you actually measure the alternative, it is hard to say you were better off. Maybe you might have ended up with even more money by investing right away.

 

It also tends to be period specific. You need like 2 bear markets of 30% plus in 10 years to make it worthwhile. Or the market just stagnating for a long period and you just get to play the ups and downs.

 

Long term you are not going to add value this way.

 

Marks point is also quite different. He is saying that good investors do not get caught swimming naked during bear markets. There is a quite famous manager whose name I cannot recall right now, he was bearish during 2007, had 50% in cash, talked nonstop about the excesses, then was down 70% during that crash!  Bob Rodriguez.

 

 

Edited June 4, 2025 by vinod1

[gfp]

The best way to outperform in a bear market is to have a huge portion of your equity portfolio (consolidated + equity method businesses) not marked to market!

 

Watch those UNP shareholders flail while your BNSF shares stay profitable and stable.

 

Maybe I should get into the non-traded REIT business.  People love this stuff.

[Eldad]

1 minute ago, vinod1 said:

 

That is apples to oranges. BRK vs SPY during bear markets vs bull does not have anything to do with Buffett's actual allocation. Just that BRK tends to outperform SPY during bear markets for a lot of reasons, market timing not being one of them.

 

Unless you actually measure the alternative, it is hard to say you were better off. Maybe you might have ended up with even more money by investing right away.

 

It also tends to be period specific. You need like 2 bear markets of 30% plus in 10 years to make it worthwhile. Or the market just stagnating for a long period and you just get to play the ups and downs.

 

Long term you are not going to add value this way.

Ok you are possibly right. I’m just saying one of the great investors says most great investors stop buying in the euphoria stage and let defensive things build up and wait and then deploy lots of cash when no one else has any. It has worked for me. Plus that stuff you reach for in the euphoria period is going to go down the most when said event occurs.