Is The Bottom Almost Here?

[Dalal.Holdings]

I wouldn't buy any fixed income w duration greater than 5 years due to rate risk. If there is a repeat of the '70s and '80s where Fed went sky high with rates, you'll be decimated.

 

I-bonds are good choice obviously but limited.

 

I think cash is often derided with inflationary times, but guess what? S&P 500 is down 25% YTD (nominal terms). Cash at 0% return YTD is beating the market by a whopping 25 percentage points. Bonds haven't done as well either. I guess that's what they call "alpha".

 

 

[vinod1]

2 hours ago, thepupil said:

i find the direction of flows out of the bond market puzzling. TIPS yield 1-2% REAL across the curve. treasuries pay 4% across the curve (which is not out of line w/ long term inflation so are no longer negative real LT rates. Mortgage spreads very wide, can buy a fully government guaranteed 6% or so...which i find attractive whether its a 10 year or 20 year cash flow. IG spreads are decent. 

 

I recognize no one wishes to fight the fed, but am still somewhat surprised at the collective cowardice of savers.

 

Man up and buy some bonds, you little bitches.

 

but rates may go up? who cares, all the more reinvestment income on which to gorge. 

 

but inflations? if you think inflation is going to continue to  roar buy tips. not like stocks are going to do well at sustained 8% inflation...but in that scenario you could lock in 10%/yr at whatever duration you want. 

 

but regime change? yes the regime changed. unclear if it will change more. 

 

i feel like an island on this and am probably way early per usual (and was early and knew it). 

 

this is a long way of saying is i think we may be past the theorretical "natural" rate of interest already and am more concerned about not being able to earn these rates on safe stuff for a while than about rates going up more. but no one...and i mean almost no one...agrees with me on this. 

 

I am with you on this. I just opened 529 accounts for kids just for this reason. Buying TIPS fund in this account.

 

I have invested in I-Bonds way back in 2000 when real rate was 3% and 3.6% and you can invest $30k per year per person. TIPS went to 4.5% real but was thumb sucking and did not invest.

 

Now TIPS are roughly at 1.75% real yield if look at total TIPS market. I doubt if they can get more than 2.5% in the future and of course then it would be a terrific opportunity. 

 

Vinod

[vinod1]

54 minutes ago, Dalal.Holdings said:

I wouldn't buy any fixed income w duration greater than 5 years due to rate risk. If there is a repeat of the '70s and '80s where Fed went sky high with rates, you'll be decimated.

 

I-bonds are good choice obviously but limited.

 

I think cash is often derided with inflationary times, but guess what? S&P 500 is down 25% YTD (nominal terms). Cash at 0% return YTD is beating the market by a whopping 25 percentage points. Bonds haven't done as well either. I guess that's what they call "alpha".

 

 

 

If I-bonds are a good choice, TIPS are even better in a non-taxable account.

[changegonnacome]

3 hours ago, thepupil said:

feel like an island on this and am probably way early per usual (and was early and knew it). 

I’m with you…..if you’ve got to hold USD assets…..what your advocating for seems very reasonable way to me to travel through this period with purchasing power somewhat protected. Sometimes you have only bad options…..trying to compound at 20% per annum in the next 24 months is possibly a game for the fool hardy…let them play, take your TIPS and emerge from your bear cave ready to play once inflation is dead and buried. You might be a little skinnier but you survived the winter  

[TwoCitiesCapital]

1 hour ago, vinod1 said:

 

If I-bonds are a good choice, TIPS are even better in a non-taxable account.

 

Only if buying short-term ones. The problem with the TIPS is the duration risk/price fluctuation. 

 

You only get the real yield by holding something close to maturity of the bond. iBonds provide no price risk and liquidity at any point after 12 months without taking principal loss. If the market goes down 20-30% from here over the next 12 months, I'm going to want to be able to sell and buy stocks and it's not clear where I come out owning TIPS with the price risk. 

[UK]

15 hours ago, SharperDingaan said:

Anyone's guess as to what the BoE does, but most would expect a steady GBP devaluation versus higher interest rates. For now, most would expect GBP to settle at around parity with the Euro. Long term (10 yrs+), most would expect further devaluation against the Euro.  

 

Yes. I am EUR based (btw inflation where I live is like 20+ and we cannot even rise rates ourselves:)) with majority of the portfolio assets in US/Global and so with large, like 60+ percent, USD and other currency exposure. That served well up till now, but those currency movements of lately become so large, that it is becoming hard to ignore, especially also if you do some borrowing in EUR. My long term view is that it is more likely than not, that EUR goes JPY way, with permanently lower rates and depreciation against USD (because of economy, demography, geopolitics, not to mention currently ongoing war and energy issues). But it could be dangerous position in the short/mid term. One more question I do not have a good answer.

[thepupil]

16 hours ago, Dalal.Holdings said:

I wouldn't buy any fixed income w duration greater than 5 years due to rate risk. If there is a repeat of the '70s and '80s where Fed went sky high with rates, you'll be decimated.

 

I-bonds are good choice obviously but limited.

 

I think cash is often derided with inflationary times, but guess what? S&P 500 is down 25% YTD (nominal terms). Cash at 0% return YTD is beating the market by a whopping 25 percentage points. Bonds haven't done as well either. I guess that's what they call "alpha".

 

 

once you get to a point where you have decent coupons / reinvestment (tough to say when that is, but certainly getting closer), duration decreases and you don’t lose that much. It all depends on how quickly rates rise of course. 
 

rate risk just doesn’t scare me. Bonds have lower duration than stocks. Have gone from like 5% bonds to 15% this year, will look to take credit risk as HY goes past 10% and solid BB’s approach 9%. Bonds are so comfortable to average down in.

 

also because floating rates are up and spreads have widened, you can buy stuff with no duration and safety for 5.5-6.0% floating
 

Join the dark side y’all. 
 

Edited October 15, 2022 by thepupil

[changegonnacome]

7 hours ago, UK said:

My long term view is that it is more likely than not, that EUR goes JPY way, with permanently lower rates and depreciation against USD (because of economy, demography, geopolitics, not to mention currently ongoing war and energy issues).

 

Think you could be right longer term…..in the short-medium term however…..I expect the US to solve its inflation first & be cutting rates first….the DXY will then weaken into this.

 

The way it works is USA gets to solve its inflation problem first, by exporting inflation, it is the global hegemon afterall, this is its “exorbitant privilege”.

 

Once the US has ‘solved’ its inflation problem….the rest of the world will get to do the same…..the Euro/RoW currencies will strengthen vis-a-vis the dollar.

 

If you’ve got the stomach & USD cash……Euro/EM is the place to play….you’ve got to pick your spots however.

[vinod1]

13 hours ago, TwoCitiesCapital said:

 

Only if buying short-term ones. The problem with the TIPS is the duration risk/price fluctuation. 

 

You only get the real yield by holding something close to maturity of the bond. iBonds provide no price risk and liquidity at any point after 12 months without taking principal loss. If the market goes down 20-30% from here over the next 12 months, I'm going to want to be able to sell and buy stocks and it's not clear where I come out owning TIPS with the price risk. 

 

Agree but unlike nominal bonds, there is going to be a limit on how high real yields can go. In 2000's when TIPS were brand new and there is not much experience they went up to 4.5%. They were like $20 or $50 billion in TIPS for the first couple of years and liquidity is not there at all. The whole academic world was awash in research on this strange behavior and what it means. Tons of papers where published about this phenomenon. I dont think we would evergo back to a TIPS rate of 4% and I expect an upper limit of 3% at most with 2.5% being more likely top. So the downside from here is limited.

 

A ladder of TIPS to me is the ultimate in safe securities outside of i-Bonds with 1% or more of real yields. 

 

 

[SharperDingaan]

7 hours ago, UK said:

 

Yes. I am EUR based (btw inflation where I live is like 20+ and we cannot even rise rates ourselves:)) with majority of the portfolio assets in US/Global and so with large, like 60+ percent, USD and other currency exposure. That served well up till now, but those currency movements of lately become so large, that it is becoming hard to ignore, especially also if you do some borrowing in EUR. My long term view is that it is more likely than not, that EUR goes JPY way, with permanently lower rates and depreciation against USD (because of economy, demography, geopolitics, not to mention currently ongoing war and energy issues). But it could be dangerous position in the short/mid term. One more question I do not have a good answer.

 

FX devaluation works in your favor when > 50% of your wealth is held in a hard currency (USD, BTC, etc.) AND you are repatriating to a soft currency nation.  If, over your holding period, the soft currency devalues by 50%+; the hard currency FX gain is enough to pay off the entire soft currency liability. All else equal; carry also gets easier over the hold period, as hard currency interest/dividends repatriate into progressively larger amounts of soft currency.

 

To stop the process, simply margin against the hard currency asset, and apply the proceeds against the soft currency liability. To restore the position, simply borrow in soft currency and repay the hard currency margin. The reason why the hard currency asset is typically a second property in the 'west' that is debt free; something that escapes most realtors.

 

It also gives you a 'safe house' in the hard currency nation, should you ever have to 'run'. That soft currency nation is devaluing for a reason; successful escape on a ship/plane is just step 1, step 2 is artful evasion of the subsequent hunt, step 3 is what do you do next. 

 

We have a lot of 'colorful' friends; all of whom are very good survivors 

 

SD

 

 

 

[backtothebeach]

2 hours ago, SharperDingaan said:

…

It also gives you a 'safe house' in the hard currency nation, should you ever have to 'run'. That soft currency nation is devaluing for a reason; successful escape on a ship/plane is just step 1, step 2 is artful evasion of the subsequent hunt, step 3 is what do you do next. 

 

We have a lot of 'colorful' friends; all of whom are very good survivors 

 

SD

 

 

 

I’d love to hear a story or two of your “colorful” friends … Obviously with changed/anonymized details.

[UK]

https://www.bloomberg.com/news/articles/2022-10-15/torched-stocks-are-about-the-only-thing-working-in-fed-s-favor?srnd=premium-europe

 

Even with Thursday’s big bounce, the S&P 500 has lost a quarter of its value this year. Shocking as that’s been for investors, it’s one of the few things happening anywhere that actually accords with the Fed’s goal of draining the economy of bloat. Recently, the toll in terms of wealth destroyed -- about $15 trillion to date -- has started to approach that of the 2008 financial crisis, when measured against US gross domestic product. And while the stock market isn’t the economy, it’s a signal and an input into it, affecting everything from consumer sentiment to the price of private enterprises. Declines on a par with what’s already happened in equities have been a decent proxy for reversals in inflation more than a dozen times since the late 1950s, according to research from Doug Ramsey, chief investment officer at the Leuthold Group.

 

While painful in the short run, the decline of the equity market’s size relative to that of the economy can be seen as a healthy development for market bulls. Plunging asset prices have finally pushed the stock-market capitalization relative to national gross domestic income out of the top quintile of historical readings, which has preceded equity declines in the next year, three and five years, data compiled by Ned Davis Research show. 

[SharperDingaan]

4 hours ago, backtothebeach said:

I’d love to hear a story or two of your “colorful” friends … Obviously with changed/anonymized details.

 

The Ukraine has always been 'colorful', but like everywhere else there is a 'process'; you need a 'roof', put judgement aside, and go with the flow. In Russia, transporting vodka attracts lots of eyes; whereas transporting corpses not so much ... to minimize decomposition they are often frozen, stacked under tarps in open box cars, and a source of jokes. Our lad chose to transport our load in mislabeled plastic barrels, stack the corpses on top, and travel with them. Upon the expected 'inspection' he 'woke-up', scared the hell out of everyone, and asked for another bottle of Stolichnaya to replace his near empty one. He got kicked off the train, and our load traveled through without any disturbances.

 

Damn near kissed the man, when I eventually met him!

 

SD 

Edited October 15, 2022 by SharperDingaan

[Dalal.Holdings]

8 hours ago, thepupil said:

once you get to a point where you have decent coupons / reinvestment (tough to say when that is, but certainly getting closer), duration decreases and you don’t lose that much. It all depends on how quickly rates rise of course. 
 

rate risk just doesn’t scare me. Bonds have lower duration than stocks. Have gone from like 5% bonds to 15% this year, will look to take credit risk as HY goes past 10% and solid BB’s approach 9%. Bonds are so comfortable to average down in.

 

also because floating rates are up and spreads have widened, you can buy stuff with no duration and safety for 5.5-6.0% floating
 

Join the dark side y’all. 
 

I am still struggling to understand why VTIP is down around 8.5% last 12 mo.

 

With TIPS, the par value should increase, correct? So $1000 par becomes $1085 par with 8.5% CPI?

 

With escalating par value of 8-9% I would expect something like VTIP to be up or not down as much…

[thepupil]

1 hour ago, Dalal.Holdings said:

I am still struggling to understand why VTIP is down around 8.5% last 12 mo.

 

With TIPS, the par value should increase, correct? So $1000 par becomes $1085 par with 8.5% CPI?

 

With escalating par value of 8-9% I would expect something like VTIP to be up or not down as much…

1. It’s not down 8.5%. The price is down 8.5% but total return is -2.8%.

 

2. it’s short but not zero duration. Avg maturity/duration is 2.5, let’s just think of it as a 3 yr tip.

 
 

3. yes the principal does go up. 

 

 why it’s down 3% is because real rates have increased, which is precisely the appeal of them going forward. I can’t find it for 2 yr TIP but TIPs yields were -1 to -2% about a year ago. 
 

one thing I’m not sure of is of the fact that you’re in the ETF and it’s maintaining a constant maturity of some of those losses were realized, one could own individual TIPs to resolve this 

[Dalal.Holdings]

1 hour ago, thepupil said:

1. It’s not down 8.5%. The price is down 8.5% but total return is -2.8%.

 

2. it’s short but not zero duration. Avg maturity/duration is 2.5, let’s just think of it as a 3 yr tip.

 
 

3. yes the principal does go up. 

 

 why it’s down 3% is because real rates have increased, which is precisely the appeal of them going forward. I can’t find it for 2 yr TIP but TIPs yields were -1 to -2% about a year ago. 
 

one thing I’m not sure of is of the fact that you’re in the ETF and it’s maintaining a constant maturity of some of those losses were realized, one could own individual TIPs to resolve this 

 

That's helpful. Thank you

[dealraker]

On 10/12/2022 at 3:56 PM, Castanza said:

 

How did you guys go about picking stocks to buy in? Members present their thesis individually then you put it to a vote? 

Somewhere along the line our club voted to establish a 4 person investment committee to recommend stocks to the rest of the members (to be bought and sold), then we'd vote on those buys/sells.  We did that primarily because most of the members enjoyed the club but were older and had no energy/interest in doing much work.  Keep in mind these guys are not poor, they all know one another, and the atmosphere while at times had some jousting so to speak....well it is a wonderful setting where anything within reason is forgiven and accepted.    

 

We were absolutely "value" focused through the years although in the early 1990's we did buy some tech stocks like EMC, Cisco, and Intel, etc at very reasonable PE's (below 20) that were growing fast.  We failed to sell a lot of them anywhere close to their peaks so...

 

In the end we bought EMC at a split adjusted less than $1 per share and it went to $105!   Yes 105.  We ended up selling it at $7.  Yes all the way down to $7.   We too (not me, I never owned it personally and thought we should sell that one) got fearful of selling things going up at 50% a year!  We ended up selling Cisco at $12 after it sold for $82 (we did well, our basis was $4 or so).  For your humor, at one point we had averaged 35% a year for 7 or so years...only to eventually (after 10 years) do even with Mr. Market!  LOL!!!

 

That is our system and for us it works ok and nobody has challenged it for the last 25 years.  

Edited October 16, 2022 by dealraker
spelling

[Gregmal]

8 minutes ago, dealraker said:

Somewhere along the line our club voted to establish a 4 person investment committee to recommend stocks to the rest of the members (to be bought and sold), then we'd vote on those buys/sells.  We did that primarily because most of the members enjoyed the club but were older and had no energy/interest in doing much work.  Keep in mind these guys are not poor, they all know one another, and the atmosphere while at times had some jousting so to speak....well it is a wonderful setting where anything within reason is forgiven and accepted.    

 

We were absolutely "value" focused through the years although in the early 1990's we did buy some tech stocks like EMC, Cisco, and Intel, etc at very reasonable PE's (below 20) that were growing fast.  We failed to sell a lot of them anywhere close to their peaks so...

 

In the end we bought EMC at a split adjusted less than $1 per share and it went to $105!   Yes 105.  We ended up selling it at $7.  Yes all the way down to $7.   We too (not me, I never owned it personally and thought we should sell that one) got fearful of selling things going up at 50% a year!  We ended up selling Cisco at $12 after it sold for $82 (we did well, our basis was $4 or so).  For your humor, at one point we had averaged 35% a year for 7 or so years...only to eventually (after 10 years) do even with Mr. Market!  LOL!!!

 

That is our system and for us it works ok and nobody has challenged it for the last 25 years.  

So largely the underlying basis for investment was what? It seems common theme to be an established business, profitable, little debt? Just guess-working from some of the stuff you mentioned. Any exceptions at time of purchase? IE 50x PE or debt at 90% of EV?

[Viking]

Just re-reading a couple chapters in Peter Lynch’s One Up on Wall Street. Scariest time for him was between July 1981 and November 1982. This was a period when there was 14% unemployment, 15% inflation and a 20% prime rate. (Funny how people today are freaking out with Fed funds rate forecast to go to 4.5% and unemployment going to 4% or horrors 5%.)

 

“Then at the moment of greatest pessimism, when eight out of 10 investors would have sworn we were headed into the 1930s, the stock market rebounded with a vengeance, and suddenly all was right with the world.”

Edited October 16, 2022 by Viking

[UK]

30 minutes ago, Viking said:

“Then at the moment of greatest pessimism, when eight out of 10 investors would have sworn we were headed into the 1930s, the stock market rebounded with a vengeance, and suddenly all was right with the world.”

 

This is very good point and I would say we are nowhere near that sentiment, at least around me. Now, like 80 per cent or more people in my country invests only in RE, but in the last 5 years, but especially since pandemic, more and more are discovering equities. These days they still get lots of publicity and, like every day in a local business paper I see articles, how to invest in stocks etc, where to open account, lots of success stories, usually how one invested in Tesla during pandemic etc. So far no fear or apathy at all. Even some enthusiasm. However they already mostly stopped writing about cryptocurrencies and NFTs. Also I have some friends, who usually, like in the worst moment, want to sell everything and swear to do not own equities anymore, or they switch their life insurance from equities to bonds. Not happening yet either. Though recently seems nobody also inquires about how to invest into Chinese EVs and similar stuff anymore:)

Edited October 16, 2022 by UK

[Gregmal]

30 minutes ago, UK said:

 

This is very good point and I would say we are nowhere near that sentiment, at least around me. Now, like 80 per cent or more people in my country invests only in RE, but in the last 5 years, but especially since pandemic, more and more are discovering equities. These days they still get lots of publicity and, like every day in a local business paper I see articles, how to invest in stocks etc, where to open account, lots of success stories, usually how one invested in Tesla during pandemic etc. So far no fear or apathy at all. Even some enthusiasm. However they already mostly stopped writing about cryptocurrencies and NFTs. Also I have some friends, who usually, like in the worst moment, want to sell everything and swear to do not own equities anymore, or they switch their life insurance from equities to bonds. Not happening yet either. Though recently seems nobody also inquires about how to invest into Chinese EVs and similar stuff anymore:)

Can you point me to anything or anyone meaningful who is wildly bullish? I mean even Cramer is now telling people sell on any rally and realistically, here, where we have people who have some experience, the sentiment is at best basically, “I see some long term value and small caps are cheap”. Hardly any craziness. 

[UK]

23 minutes ago, Gregmal said:

Can you point me to anything or anyone meaningful who is wildly bullish? I mean even Cramer is now telling people sell on any rally and realistically, here, where we have people who have some experience, the sentiment is at best basically, “I see some long term value and small caps are cheap”. Hardly any craziness. 

 

I agree with you on that. I read that now even Klarman finally sees some value for long term investors now:). But I was talking about sentiment which usually marks the bottom and also my surounding anecdotal sentiment, from very unprofessional people etc, and which is probably always late and not that important. However in spring 2020 these pain points were quite quickly checked during the markets darkests hours. And yes, no craziness anymore, but not that big pesimism either. US market and CBNC comentators are probably ahead of that, but I remember Cramer was screaming for rate cuts in GFC, not just telling to sell into the rallies.

 

 

Edited October 16, 2022 by UK

[Gregmal]

I bring it up because yes, 2020 was a good example. Particularly June and July. For all the folks who have infinite wisdom about the Fed controlling the stock market, simply because they talk or whatever, I vividly recall that Sunday in March when the Fed cut to 0. And guess what? Market plummeted for the next while. Weird right? Money printing? Nope, market went to hell anyway. And even in June and July the prevailing sentiment was “look at how bad things are! Buffett is super bearish! Great Depression! How TF are we only 10% off all time highs!?!?” And then surely enough, things just kept correcting up and then finally like today everyone is a fuckin expert about how it was money printing. Imagine that? Well yea that happened and all the experts like Drunkenmiller and Marks were wrong as fuck. So I just try to think for myself and keep perspective. One or two years of earnings or interest rates don’t really mean shit.

[Lazarus]

I wouldn't put any importance to the sentiment of ma and pop investors (or cobf investors). It's the sentiment of the major institutional investors, pension funds, hedge funds, etc., that matter. The billionaires control the markets, not the random retail investor you're talking about. 

[Lazarus]

(That comment was for UK)