Gyroscopic Investing

I don't think bonds, as an investment asset class, have ever looked more unattractive in my lifetime. (Mid 50s here.) Thought?

Ad Orientem wrote: ↑Mon Jul 27, 2020 1:43 pm I don't think bonds, as an investment asset class, have ever looked more unattractive in my lifetime. (Mid 50s here.) Thought?

Are you thinking of Treasuries, corporates, munis, all of the above?

When an investment class looks unattractive could easily be a great time to jump in.

Really glad the PP handles that for me so I don't have to worry about it.

The time to jump in is when an asset class looks unattractive because it is selling off and people want to pay less and less .

The problem here is this reminds me of the dot coms ... on every forum I see people who never bought Gld or Tlt loading up now .

That is always a bad sign ....those who said they won’t own gold have been buying the last few days so I am Leary of where we are now

Dutch/German 30y treasury yield is negative, inflation here is currently 1.6%, yeah they look pretty unattractive to me...

Ad Orientem wrote: ↑Mon Jul 27, 2020 1:43 pm I don't think bonds, as an investment asset class, have ever looked more unattractive in my lifetime. (Mid 50s here.) Thought?

"Return free risk"

http://econompicdata.blogspot.com/2017/ ... bonds.html

I am not much bothered by the long-term bonds in the PP. For a few reasons in brief form:

- Bond convexity
- Increasing interest rates don't cause bond prices to go down. Only unexpected increases do. And the market is the most efficient forward pricing mechanism there is.
- nominal rates are insanely low, but real rates are nowhere near as far off historically
- We still need a volatile asset to offset the volatility of the other assets, no matter how low rates are
- central bankers are aware of how volatile bonds are at these low rates. So rate increases tend to be small in absolute terms when rates are low.
- if central banks did increase rates at an accelerating pace it would likely be due to inflation. we have gold for that. and even stocks and cash provide a margin of protection. (EDIT: or it could also be because the economy is just that robust, so stocks should do well. point remains.)

Smith1776 wrote: ↑Mon Jul 27, 2020 7:35 pm I am not much bothered by the long-term bonds in the PP. For a few reasons in brief form:

Agree, however if you had to pick just one asset class for all your funds, what would it be?

For me it would be Gold first and Bonds last. Which means I have just given Gold the "Kiss of Death"

Smith1776 wrote: ↑Mon Jul 27, 2020 7:35 pm I am not much bothered by the long-term bonds in the PP. For a few reasons in brief form:

- Bond convexity
- Increasing interest rates don't cause bond prices to go down. Only unexpected increases do. And the market is the most efficient forward pricing mechanism there is.
- nominal rates are insanely low, but real rates are nowhere near as far off historically
- We still need a volatile asset to offset the volatility of the other assets, no matter how low rates are
- central bankers are aware of how volatile bonds are at these low rates. So rate increases tend to be small in absolute terms when rates are low.
- if central banks did increase rates at an accelerating pace it would likely be due to inflation. we have gold for that. and even stocks and cash provide a margin of protection. (EDIT: or it could also be because the economy is just that robust, so stocks should do well. point remains.)

We have not had a true bear market in bonds in 40 years ....the jury is likely still out on this ...if investors fear inflation they will want more interest on bonds ....if they see raising short term rates working then they will want less interest on bonds ....we just don’t know what the deal will be when the time comes

Ad Orientem wrote: ↑Mon Jul 27, 2020 1:43 pm I don't think bonds, as an investment asset class, have ever looked more unattractive in my lifetime. (Mid 50s here.) Thought?

Could you have made the same statement at some given point in your lifetime, about pretty much every major asset class?

Has it ever not rained after a dry spell?

glennds wrote: ↑Fri Jul 31, 2020 11:15 am

Ad Orientem wrote: ↑Mon Jul 27, 2020 1:43 pm I don't think bonds, as an investment asset class, have ever looked more unattractive in my lifetime. (Mid 50s here.) Thought?

Could you have made the same statement at some given point in your lifetime, about pretty much every major asset class?

Has it ever not rained after a dry spell?

Excellent points!

Vinny

mathjak107 wrote: ↑Tue Jul 28, 2020 6:58 am

Smith1776 wrote: ↑Mon Jul 27, 2020 7:35 pm I am not much bothered by the long-term bonds in the PP. For a few reasons in brief form:

- Bond convexity
- Increasing interest rates don't cause bond prices to go down. Only unexpected increases do. And the market is the most efficient forward pricing mechanism there is.
- nominal rates are insanely low, but real rates are nowhere near as far off historically
- We still need a volatile asset to offset the volatility of the other assets, no matter how low rates are
- central bankers are aware of how volatile bonds are at these low rates. So rate increases tend to be small in absolute terms when rates are low.
- if central banks did increase rates at an accelerating pace it would likely be due to inflation. we have gold for that. and even stocks and cash provide a margin of protection. (EDIT: or it could also be because the economy is just that robust, so stocks should do well. point remains.)

We have not had a true bear market in bonds in 40 years ....the jury is likely still out on this ...if investors fear inflation they will want more interest on bonds ....if they see raising short term rates working then they will want less interest on bonds ....we just don’t know what the deal will be when the time comes

In a PP, you actually welcome the volatility of the T bond, even if the movement is negative. If you eliminated that asset class because it looks unattractive then the portfolio's one flank is exposed and it is no longer a bulletproof, all-weather portfolio. In theory, if the bonds are crushed, then another asset class should be pulling the load in reaction. If the investor were not comfortable trusting this thesis, then the PP is not the right strategy.

But setting that aside, a technical question - In isolation, is not the downside risk of a Treasury limited, if the investor was willing to hold it to maturity? I.e. the yield is known.
Of course, the question assumes that default risk is not a factor, and we're not counting the opportunity cost of foregoing other alternatives while locked in. Same question would apply to any bond where default is deemed by the investor to be highly unlikely. But this is also why the light is red or at least blinking yellow on a negative yielding bond IMO, again, outside the PP.

There is a reason I posted this in the VP section. I am not planning on abandoning my HBPP. But approaching bonds on a speculative basis, the only scenario I see for their outperforming, is a deflationary depression.

Ad Orientem wrote: ↑Fri Jul 31, 2020 2:11 pm There is a reason I posted this in the VP section. I am not planning on abandoning my HBPP. But approaching bonds on a speculative basis, the only scenario I see for their outperforming, is a deflationary depression.

Yeah, that would probably be the best case scenario for LTTs.

I am (not even for one second) going to assume that a deflationary depression can't happen. Even massive money printing might not cause inflation if the collapse in aggregate demand and credit is really that bad. There's the question of "animal spirits" and people's propensity to spend too. Additionally, debt deleveraging, aging demographics, and technological unemployment are deflationary/disinflationary forces we have to contend with.

Japan is a prime example of a country unable to get any kind of inflation going for a whole generation despite having the same central bank bag o' tricks that we do.

Smith1776 wrote: ↑Fri Jul 31, 2020 3:57 pm

Ad Orientem wrote: ↑Fri Jul 31, 2020 2:11 pm There is a reason I posted this in the VP section. I am not planning on abandoning my HBPP. But approaching bonds on a speculative basis, the only scenario I see for their outperforming, is a deflationary depression.

...Japan is a prime example of a country unable to get any kind of inflation going for a whole generation despite having the same central bank bag o' tricks that we do.

Japan is a near unique example for a number of reasons. Their aging population and demographic decline being high on the list. Their debt is also largely held internally, which is unusual among developed nations.