Bonds!

[UK]

34 minutes ago, thepupil said:

I don’t think he’s marketing to wealthy individuals, but rather (mostly) non tax paying institutions.

 

non wealthy to moderately wealthy people have 401ks/IRAs/annuities etc. very wealthy people have private placement life insurance that remove the tax friction. 
 

regarding defaults, agree completely the common practice of quoting gross yields in risky credit is somewhat misleading, but I’m not sure of a good alternative because everyone will have dofferent default rates/LGD. 

 

I agree that 6-8% pre-tax is more or less what’s on offer at this time, most safe stuff I’ve seen being closer to 6 on the long end and 7 on the short end. Extreme safety being ~1% lower then going up from there with credit risk.

 

pre-tax seems pretty competitive with stocks, when get at computer, I’ll run what % of 5 year rolling periods >7% for stocks, my guess would be like 60%-80% or so but not sure. If you’re starting from “with no knowledge, strictly backward looking, this has 30% chance to beat stocks” and overlaying a little bit of bearishness/caution/relative value judgement, think it’d make sense to own some bonds (and would be dumb to own all bonds /no stocks).

 

it at least makes more sense now than any time in my short time as an investor. 

 

 

 

Since what year you expierience starts? I only owned local government 10 year bonds yielding 10 per cent in 2008 (currently at 4.4) and later was looking, but not invested, at long term Greek bonds, yielding some 30 per cent (currently 4.3) at the time of the crisis:). These Greek bonds ended up a very good buy for some who did it:)

 

 

Edited October 12, 2023 by UK

[Dinar]

28 minutes ago, thepupil said:

I don’t think he’s marketing to wealthy individuals, but rather (mostly) non tax paying institutions.

 

non wealthy to moderately wealthy people have 401ks/IRAs/annuities etc. very wealthy people have private placement life insurance that remove the tax friction. 
 

regarding defaults, agree completely the common practice of quoting gross yields in risky credit is somewhat misleading, but I’m not sure of a good alternative because everyone will have dofferent default rates/LGD. 

 

I agree that 6-8% pre-tax is more or less what’s on offer at this time, most safe stuff I’ve seen being closer to 6 on the long end and 7 on the short end. Extreme safety being ~1% lower then going up from there with credit risk.

 

pre-tax seems pretty competitive with stocks, when get at computer, I’ll run what % of 5 year rolling periods >7% for stocks, my guess would be like 60%-80% or so but not sure. If you’re starting from “with no knowledge, strictly backward looking, this has 30% chance to beat stocks” and overlaying a little bit of bearishness/caution/relative value judgement, think it’d make sense to own some bonds (and would be dumb to own all bonds /no stocks).

 

it at least makes more sense now than any time in my short time as an investor. 

 

 

Any info regarding private placement life insurance?  Any companies that you'd recommend?  I agree with you that for an institution, or a moderately wealthy retiree bonds look interesting as a part of a portfolio.  I would not want to take credit risk though right now, I do not think you get paid for it.  I would buy Treasuries/low coupon mortgages for my fixed income allocation.  

[thepupil]

3 minutes ago, UK said:

 

Since what year you expierience starts? I only owned local government 10 year bonds yielding 10 per cent in 2008 (currently at 4.4) and later was looking, but not invested, at long term Greek bonds, yielding some 30 per cent (currently 4.3) at the time of the crisis:). These Greek bonds ended up a very good buy for some who did it:)

2011. 

 

real and nominal yields are drastically higher and ERP's much lower today than in any time of my career (which is short and does not at all comprise the numerous scenarios both backward looking and forward which might occur). 

 

from my college graduation to present the 10 yr TIP has yielded 500 bps less (on average) in real yield than SPX, for the first few years that number was 800 bps. That's now 238 bps (2.3% real 10 yr TIP, 4.66% nominal earnings yield, SPX)

 

Using nominal 10 yr tsy's, the average has been -300 bps, with the first few years** (2011/2012) being -600 bps. Now its 5 bps (10 yr yield and SPX earnings yields are the same).

 

I'd therefore say that on a simplistic yield comparison using broad liquid indices, that bonds are more attractive than they have been over last 12 or so years (post GFC era). 

 

of course there are individual securities of both types that will be better/worse than anything over this time frame (your greek bonds being a nice example). 

 

**  I remember lots of Jim Grant (and Jeremy Grantham)** articles from the 2011/2012 time frame talking about buying blue chip high quality widow and orphan stocks for like 11-14x earnings (think WMT, JNJ, LMT, GOOG even, MSFT even, UNH, etc). Back then it was very clear to me as a 20 something to be all stocks. and you got paid handsomely for it.  I use those folks because they are often painted as permabears. even with there bearish value oriented bias, they couls see risk/reward much better in stocks. I think the picture is far more murky today. 

 

[Spooky]

Agree, it looks like he is mainly talking to pension plans that have certain required actuarial returns and have more favorable tax treatment for interest income. In his memo, he also had a strange comment about nominal vs real returns - seeming to suggest that some investors are seeking to hit nominal return targets not necessarily real returns.

[thepupil]

10 minutes ago, Dinar said:

Any info regarding private placement life insurance?  Any companies that you'd recommend?  I agree with you that for an institution, or a moderately wealthy retiree bonds look interesting as a part of a portfolio.  I would not want to take credit risk though right now, I do not think you get paid for it.  I would buy Treasuries/low coupon mortgages for my fixed income allocation.  

 

I'm not wealthy enough for PPLI. I think these guys are the leader, but I'm way out of my depth. This is for $100mm+ types, not little old me.https://www.lombardinternational.com/en-US  Owned by a Blackstone fund...of course. I've just heard that's the way wealthy individuals invest in tax inefficient strategies (but you obviously pay fees and give up fulla ccess to your $$$ it's for people who are ensuring their grandchildren's grandchildren will be wealthy). 

 

I agree. I'm all IG/tsy/MBS for now. I don't think risky credit spreads are that interesting.  CDX HY spreads are about 90 bps wide of avg since 2012. I don't think that compensates one enough for what will likely be higher default/low recovery environment than last 10 years. I'm comfy adding a little spread via IG/MBS/etc just to make the returns more "equity like", at the risk of underperformance to tsy's ina big drawdown. 

[brobro777]

26 minutes ago, thepupil said:

2011. 

 

real and nominal yields are drastically higher and ERP's much lower today than in any time of my career (which is short and does not at all comprise the numerous scenarios both backward looking and forward which might occur). 

 

from my college graduation to present the 10 yr TIP has yielded 500 bps less (on average) in real yield than SPX, for the first few years that number was 800 bps. That's now 238 bps (2.3% real 10 yr TIP, 4.66% nominal earnings yield, SPX)

 

Using nominal 10 yr tsy's, the average has been -300 bps, with the first few years** (2011/2012) being -600 bps. Now its 5 bps (10 yr yield and SPX earnings yields are the same).

 

I'd therefore say that on a simplistic yield comparison using broad liquid indices, that bonds are more attractive than they have been over last 12 or so years (post GFC era). 

 

of course there are individual securities of both types that will be better/worse than anything over this time frame (your greek bonds being a nice example). 

 

**  I remember lots of Jim Grant (and Jeremy Grantham)** articles from the 2011/2012 time frame talking about buying blue chip high quality widow and orphan stocks for like 11-14x earnings (think WMT, JNJ, LMT, GOOG even, MSFT even, UNH, etc). Back then it was very clear to me as a 20 something to be all stocks. and you got paid handsomely for it.  I use those folks because they are often painted as permabears. even with there bearish value oriented bias, they couls see risk/reward much better in stocks. I think the picture is far more murky today. 

 

 

Yea I remember taking a shot at MSFT in 2011 when its free cash flow yield was over 10%, while short term Treasuries were 0% and 10 year was around 2%. I understood the negativity with MSFT at the time, with Ballmer as CEO and Windows phones but the company was printing money (and stuff like MS Office were not going away) and what was my alternative, get 0.25% in my savings account?

 

Now MSFT is $2.5Tril 30X PE because of AI and the cloud, even though Treasury Bills are 5%...

 

Haha

 

 

 

[UK]

27 minutes ago, thepupil said:

2011. 

 

real and nominal yields are drastically higher and ERP's much lower today than in any time of my career (which is short and does not at all comprise the numerous scenarios both backward looking and forward which might occur). 

 

from my college graduation to present the 10 yr TIP has yielded 500 bps less (on average) in real yield than SPX, for the first few years that number was 800 bps. That's now 238 bps (2.3% real 10 yr TIP, 4.66% nominal earnings yield, SPX)

 

Using nominal 10 yr tsy's, the average has been -300 bps, with the first few years** (2011/2012) being -600 bps. Now its 5 bps (10 yr yield and SPX earnings yields are the same).

 

I'd therefore say that on a simplistic yield comparison using broad liquid indices, that bonds are more attractive than they have been over last 12 or so years (post GFC era). 

 

of course there are individual securities of both types that will be better/worse than anything over this time frame (your greek bonds being a nice example). 

 

**  I remember lots of Jim Grant (and Jeremy Grantham)** articles from the 2011/2012 time frame talking about buying blue chip high quality widow and orphan stocks for like 11-14x earnings (think WMT, JNJ, LMT, GOOG even, MSFT even, UNH, etc). Back then it was very clear to me as a 20 something to be all stocks. and you got paid handsomely for it.  I use those folks because they are often painted as permabears. even with there bearish value oriented bias, they couls see risk/reward much better in stocks. I think the picture is far more murky today. 

 

 

Thanks. Interesting! I somewhat agree with this view on relative attractiviness of averages between equities and bonds, but if, like you said, one can go after individual securities and has required return of at least 8-10 per cent, it seems to me it is still easier to find such things in equities. Or maybe this is delusional and influenced by some biases. Maybe if choice was only between bonds or snp, 30/70 or 40/60 already would make sense today. Sure, today is nothing like 2011/2012, but this period was extremely attractive, perhaps even more than 2008/2009, at least for me, because in 2008/2009 it was like REALLY scary (especially if you listened to almost anyone except for Buffett and Co:)) and in 2011/2012 it was more about EUR, but US was fine, rates low, equities, even on average, still very cheap.

[UK]

"Sell off the big stocks, the small stocks, the value stocks, the growth stocks, the U.S. stocks, and the foreign stocks.  Sell the private equity along with the public equity, the real estate, the hedge funds, and the venture capital.  Sell it all and put the proceeds into high yield bonds at 9%."

 

 

Listened to Marks memo, all this sea change / higher for longer thesis, it is so tempting to take firmer view, not nesessarily regarding eguities vs bonds, but just in equities, one could make very different bets (in terms of duration and rate sensitivity, kind of AMZN vs FFH), IF was sure that rates really will stay higher for longer. I am positioned much more into this direction vs a year ago, much more than 50/50 currently, but just not sure if it is prudent to get into 100 per cent this time is diferent side. My gut still feels like it is better to stay 50/50 or n9 more than 70/30 on this:)

[mattee2264]

Yeah I remember Buffett often talked about interest rates being like gravity and hedging any market commentary by saying "the market looks cheap if interest rates stay at X%". Well we've seen a big adjustment to interest rates but after the initial market panic wore off no real adjustment to valuations. 

 

Worth noting that valuations are a lot more reasonable if you look at foreign markets or US markets ex-Big Tech and you are still getting an equity risk premium of a few hundred basis points. Only problem is that you aren't getting much growth and you are much more vulnerable to margin pressure and cyclical risks. 

 

With Big Tech you are clearly paying up for the growth and so long as secular growth prospects are expected to remain intact and in line with the outperformance over the last decade then that is going to be a lot more attractive than a 5% fixed return in bonds. 

 

History would suggest that it is hard for companies to grow faster than the world economy for extended periods. Especially when you have a trillion dollar market cap. But in a winner takes all scenario that dynamic can probably continue for some time longer especially as more and more dollars of consumer and business spending continue to get reallocated to Big Tech. That was the dynamic during the pandemic with remote working, almost universal adoption of e-commerce and far more time spent online. And could well be the dynamic in the future as companies spend on AI. 

 

But where I think investors could be getting it wrong is that

a) AI might not be that profitable in the early years as it will require massive investments 

b) Tech hasn't been tested by a proper recession. COVID didn't count because they were pandemic beneficiaries. We've already seen revenues go ex-growth during the slowdown which has so far been offset by popular cost cutting initiatives and AI hype as well as optimism there will be a pivot. But we saw in 2022 how far Tech can fall if investor sentiment sours towards them. 

 

 

[dealraker]

1 hour ago, UK said:

 

Thanks. Interesting! I somewhat agree with this view on relative attractiviness of averages between equities and bonds, but if, like you said, one can go after individual securities and has required return of at least 8-10 per cent, it seems to me it is still easier to find such things in equities. Or maybe this is delusional and influenced by some biases. Maybe if choice was only between bonds or snp, 30/70 or 40/60 already would make sense today. Sure, today is nothing like 2011/2012, but this period was extremely attractive, perhaps even more than 2008/2009, at least for me, because in 2008/2009 it was like REALLY scary (especially if you listened to almost anyone except for Buffett and Co:)) and in 2011/2012 it was more about EUR, but US was fine, rates low, equities, even on average, still very cheap.

While being reasonable as to your abilities and staying power I think - at least for me - part of the equation is to hang out in an investing neighborhood  where you think you know something.  Sold a slew of long held stocks this year, only Brookfield was in the top 10 of size though, luckily I got out of this stuff a few months before some of the recent repricing based on interest rates/expense.  I've added to defense stuff, Norfolk and Parker-Hannifin, but mostly I've gone to short term treasuries.

 

Bonds are not my language....yet!  Most like won't be.   Chill pill time, sort of enjoying it...the investor part anyway.  

 

 

Edited October 12, 2023 by dealraker
rewording!

[UK]

2 hours ago, brobro777 said:

 

Yea I remember taking a shot at MSFT in 2011 when its free cash flow yield was over 10%, while short term Treasuries were 0% and 10 year was around 2%. I understood the negativity with MSFT at the time, with Ballmer as CEO and Windows phones but the company was printing money (and stuff like MS Office were not going away) and what was my alternative, get 0.25% in my savings account?

 

Now MSFT is $2.5Tril 30X PE because of AI and the cloud, even though Treasury Bills are 5%...

 

Haha

 

 

 

 

I passed on MSFT and followed Buffett into IBM! 

[TwoCitiesCapital]

21 minutes ago, mattee2264 said:

Yeah I remember Buffett often talked about interest rates being like gravity and hedging any market commentary by saying "the market looks cheap if interest rates stay at X%". Well we've seen a big adjustment to interest rates but after the initial market panic wore off no real adjustment to valuations. 

 

Worth noting that valuations are a lot more reasonable if you look at foreign markets or US markets ex-Big Tech and you are still getting an equity risk premium of a few hundred basis points. Only problem is that you aren't getting much growth and you are much more vulnerable to margin pressure and cyclical risks. 

 

With Big Tech you are clearly paying up for the growth and so long as secular growth prospects are expected to remain intact and in line with the outperformance over the last decade then that is going to be a lot more attractive than a 5% fixed return in bonds. 

 

History would suggest that it is hard for companies to grow faster than the world economy for extended periods. Especially when you have a trillion dollar market cap. But in a winner takes all scenario that dynamic can probably continue for some time longer especially as more and more dollars of consumer and business spending continue to get reallocated to Big Tech. That was the dynamic during the pandemic with remote working, almost universal adoption of e-commerce and far more time spent online. And could well be the dynamic in the future as companies spend on AI. 

 

But where I think investors could be getting it wrong is that

a) AI might not be that profitable in the early years as it will require massive investments 

b) Tech hasn't been tested by a proper recession. COVID didn't count because they were pandemic beneficiaries. We've already seen revenues go ex-growth during the slowdown which has so far been offset by popular cost cutting initiatives and AI hype as well as optimism there will be a pivot. But we saw in 2022 how far Tech can fall if investor sentiment sours towards them. 

 

 

 

It's all narrative driven. 

 

The high valuations of yester-years was all TINA, negative real rates are bullish for stocks, and "look at all that growth in a 0% rate world". 

 

Now there ARE alternatives, real rates are decidedly positive, and many of these names aren't really growing (like Apple) while many are shrinking (falling index earnings), but you can't own bonds because of inflation? And equities don't have to correct because they are always a better bet than bonds? 

 

Seems like real fuzzy math and rationalizing hindsight as opposed to any honest thoughts given to what the risks are and what stocks SHOULD actually trade for relative to lower risk bonds. 

[brobro777]

34 minutes ago, UK said:

 

I passed on MSFT and followed Buffett into IBM! 

 

Oh yea? Well I sold MSFT for mediocre gains before the massive cloud computing take off (too dumb to understand the potential)!

 

 

 

[Gregmal]

We’ve had these rates and higher before so shouldn’t be impossible to model real stuff 

[UK]

12 minutes ago, brobro777 said:

 

Oh yea? Well I sold MSFT for mediocre gains before the massive cloud computing take off (too dumb to understand the potential)!

 

 

 

 

Well, at least you have tried:). Btw, ValueAct, who initiated these changes for good, sold out in 2017 for something like 60 or 70 USD:)

[UK]

10 minutes ago, Gregmal said:

We’ve had these rates and higher before so shouldn’t be impossible to model real stuff 

 

True, I always forget this, and than begin to think of it like some kind of end of the world / binary situation.

[mattee2264]

We've had these rates before. What is different this time is we haven't had this extent of household and government debt. 

The other factor is the speed at which rates have increased which has resulted in a lot of bond portfolios deeply underwater. 

 

Of course there are a lot of individuals and businesses insulated from the rate increases because they have 30 year mortgages taken out at cheap rates and have a lot of cash on hand as a result of borrowing at low rates in the past and most of the really big companies generate tons of cash and actually benefit from getting a better rate of interest on their cash balances.

 

But there is always a degree of contagion in the economy. The Fed can probably mop up any difficulties in financial institutions with bail outs. 

And the government can put pressure on banks to hold off on foreclosing properties and so on.

 

But if enough individuals and businesses get into trouble and have to cut back on consumption and spending that will start to affect even the large cap companies.

 

[tede02]

Why do you think the real yield on TIPS has popped up to the high end of the 20 year range?

 

Further, why were TIPS real yields at 4% from 1999-2001? 

 

Are TIPS just moving in response to nominal yields also developing a spread over inflation? 

[thepupil]

TIPS were a very new asset class in the late 90's and were, with hindsight, a spectacular buy.

 

In 2000 there were only like $75 billion of TIPS. There are now $2T. They were about 1% of tsy market then. Now they're 6%. For these, and a host of other reasons, I don' think we'll see 4% real on TIPS again. 

 

I may be wrong. 

 

 

in the early 90's TIPS were <2% of a much smaller treasury market. They are now 6%. 

 

from when they were 4% real TIPS OP'd stocks for the next  20 years. 

 

 

[tede02]

That last chart is pretty crazy. 

[thepupil]

15 minutes ago, tede02 said:

That last chart is pretty crazy. 

 

I don't think we'll see that kind of relative performance out of LT tips. At peak equity valuations in 1/2000 TIPs offered 1% more than SPX's earnings yield. stocks were more expensive then then they were today. then stocks collapesed in GFC and bonds went to negative real yields. 

 

I think today is much less extreme. but 2.5% risk free real in context of a highly highly indebted society, is attractive and unsustainable IMO. 

 

[tede02]

7 hours ago, thepupil said:

 

I don't think we'll see that kind of relative performance out of LT tips. At peak equity valuations in 1/2000 TIPs offered 1% more than SPX's earnings yield. stocks were more expensive then then they were today. then stocks collapesed in GFC and bonds went to negative real yields. 

 

I think today is much less extreme. but 2.5% risk free real in context of a highly highly indebted society, is attractive and unsustainable IMO. 

 

 

All good points. I looked up where the 10-year nominal treasury was in 2000 vs. CPI. The spread at that time was around 400 bps. That also explains to me why real yields were so high at the time. Let's say CPI is 3.5% this year. The 10-year is only 110 bps over that which makes TIPS look quite attractive by comparison. 

[tede02]

Added a little to my 10-year holdings and 5-year TIPS today. Keeping my purchases small. I'm gravitating toward a barbell approach with money market on one side and stuff that matures in 5-10 years on the other. But my barbell is much heavier on the money market side. I'm too chicken to make a big bet on duration. 

[Gmthebeau]

On 10/13/2023 at 1:10 PM, thepupil said:

 

I don't think we'll see that kind of relative performance out of LT tips. At peak equity valuations in 1/2000 TIPs offered 1% more than SPX's earnings yield. stocks were more expensive then then they were today. then stocks collapesed in GFC and bonds went to negative real yields. 

 

I think today is much less extreme. but 2.5% risk free real in context of a highly highly indebted society, is attractive and unsustainable IMO. 

 

 

2.5% risk free real is very good deal today.  I think there is a chance it could get as high as 3%, which would be back up the truck moment.

 

[Spekulatius]

I added a bit TIPS (fund) in 401k yesterday. Also added some $LUV.

Edited October 18, 2023 by Spekulatius