Alan Greenspan says there are bubbles in both stocks and bonds

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Houe
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Alan Greenspan says there are bubbles in both stocks and bonds

Post by Houe » Wed Jan 31, 2018 3:54 pm

I've been a little concerned with bonds - more so than stocks. That being said I am putting all new contributions into vanguard balanced fund (60/40 allocation). I then came across this bit:
https://www.cnbc.com/2018/01/31/alan-gr ... bonds.html

So the question for you is are you concerned with bonds? Or moving to CDs or some other type of fixed income investment? Have you changed your bond allocation. Where are you putting your non stock portion of your portfolio?

Greatness
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by Greatness » Wed Jan 31, 2018 3:57 pm

I think he has dementia. I wouldn't listen to a word this person says. He caused the original case of "irrational exuberance". He's just blowing his own horn for his ego @ 91.

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bottlecap
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by bottlecap » Wed Jan 31, 2018 4:02 pm

There is no “Greenspan Exception” to the theory that no one can time the market.

JT

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jhfenton
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by jhfenton » Wed Jan 31, 2018 4:05 pm

I'm not the slightest bit concerned with bonds. In fact, I haven't given it a moment's thought. Why would I when my time horizon to retirement is probably 15 years? My bonds are there simply to provide a little stability in an equity-heavy portfolio. I'm not sure I would even notice if the NAV on my intermediate bond funds dropped 5% over the next year.

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Pajamas
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by Pajamas » Wed Jan 31, 2018 4:12 pm

Greenspan isn't the only one saying those things.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by visualguy » Wed Jan 31, 2018 4:16 pm

Houe wrote:
Wed Jan 31, 2018 3:54 pm
So the question for you is are you concerned with bonds? Or moving to CDs or some other type of fixed income investment? Have you changed your bond allocation. Where are you putting your non stock portion of your portfolio?
I'm concerned about bond funds ("rewardless risk"). I moved mostly to CD ladders in 2016 already, but still have some muni bond funds which I'm thinking about selling. That's the only difficult decision because of the tax angle.

WhiteMaxima
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by WhiteMaxima » Wed Jan 31, 2018 4:18 pm

There is no doubt. It is about how and when the bubble will be burst.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by billyo44 » Wed Jan 31, 2018 4:29 pm

Vanguard Short-Term Tax-Exempt Fund Class Admiral (VWSUX) & Money Market in taxable, Total Bond (VBTLX) in tax-deferred. There's no shortage of Soothsayers making predictions. I personally have never liked bonds/cash as part of the portfolio but they do serve a necessary purpose...never popular until we get into an equity bear market. Go short-term if worrying about higher interest rates keeps you up @ night & don't reach for bond/bond funds paying the biggest dividends...just my thoughts...stay diversified my friend.
Independence = Financial assets working for you versus you working for them.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by SeeMoe » Wed Jan 31, 2018 4:35 pm

Not going to guess(time) markets and then act on those assumptions! We are keeping our retiree AA of 40/60 and expect bond NAV to decline gradually with dividends going up. So be it! Not gonna change the AA , and just go along with the flow. That or hire a money manager and then blame him when his crystal ball proves defective.

SeeMoe.. :annoyed
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keystone
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by keystone » Wed Jan 31, 2018 4:45 pm

Greenspan totally missed seeing the housing bubble, I wouldn't put too much stock in any of his predictions.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by bloom2708 » Wed Jan 31, 2018 4:47 pm

Nobody Knows Nothing.

Alan Greenspan included.

He is bad at being retired. :wink:
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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UpsetRaptor
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by UpsetRaptor » Wed Jan 31, 2018 5:14 pm

That guy's still kickin? Good for him.

BigMoneyNoWhammies
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by BigMoneyNoWhammies » Wed Jan 31, 2018 5:25 pm

Houe wrote:
Wed Jan 31, 2018 3:54 pm
I've been a little concerned with bonds - more so than stocks. That being said I am putting all new contributions into vanguard balanced fund (60/40 allocation). I then came across this bit:
https://www.cnbc.com/2018/01/31/alan-gr ... bonds.html

So the question for you is are you concerned with bonds? Or moving to CDs or some other type of fixed income investment? Have you changed your bond allocation. Where are you putting your non stock portion of your portfolio?
Considering that when he was Chair of the Fed he was adamant that there was no real estate bubble, I'm going to go ahead and ignore his views on an upcoming one.

schachtw
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by schachtw » Wed Jan 31, 2018 5:31 pm

Greatness wrote:
Wed Jan 31, 2018 3:57 pm
I think he has dementia. I wouldn't listen to a word this person says. He caused the original case of "irrational exuberance". He's just blowing his own horn for his ego @ 91.
+1
Ignore him. His time has come and gone.

Rysto
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by Rysto » Wed Jan 31, 2018 5:32 pm

ISTR that the last time that Alan Greenspan publicly predicted a bubble, the market went straight up for the next 4 years. It's funny, a lot of people seem to recall his "irrational exuberance" phrase, but nobody seems to remember that he said it in 1996.

Edit: My point being that these types of predictions are extremely difficult to make accurately. Ignore the noise and stay the course. If you stay in and he's right, the market will bounce back eventually. If you sell and he's wrong, that's a lot harder to recover from.

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MP123
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by MP123 » Wed Jan 31, 2018 5:38 pm

Rysto wrote:
Wed Jan 31, 2018 5:32 pm
ISTR that the last time that Alan Greenspan publicly predicted a bubble, the market went straight up for the next 4 years. It's funny, a lot of people seem to recall his "irrational exuberance" phrase, but nobody seems to remember that he said it in 1996.
Exactly. Greenspan calling a bubble is a very bullish sign!

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by Grt2bOutdoors » Wed Jan 31, 2018 5:44 pm

Unless Alan can tell you exactly when the market will tank with 100% precision - pay no mind, as he can join the long list of crystal ball readers.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by KSActuary » Wed Jan 31, 2018 5:51 pm

Says the guy hired several months prior to the October, 1987 crash. Between him and Krugman, I don't think any of them really know what is going on.

I once gave a presentation to a group of engineers in a 401k plan regarding Federal Reserve activity since WWI and the outcomes. The historical record would suggest that they miss as many times as they hit when making decisions. The historical record is pretty interesting in that they have changed interest rates sometimes 4 -5 times in a month. Hate to live through that. The Paul Volcker years are very interesting as he was brought in to kill inflation.

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willthrill81
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by willthrill81 » Wed Jan 31, 2018 5:57 pm

Grt2bOutdoors wrote:
Wed Jan 31, 2018 5:44 pm
Unless Alan can tell you exactly when the market will tank with 100% precision - pay no mind, as he can join the long list of crystal ball readers.
I'd listen to him if his track record was around 60-70% or higher, but his isn't even close to that. In fact, I think Greenspan could be a good contrarian indicator.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

alwayshedge
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by alwayshedge » Wed Jan 31, 2018 5:59 pm

Rysto wrote:
Wed Jan 31, 2018 5:32 pm
ISTR that the last time that Alan Greenspan publicly predicted a bubble, the market went straight up for the next 4 years. It's funny, a lot of people seem to recall his "irrational exuberance" phrase, but nobody seems to remember that he said it in 1996.

Edit: My point being that these types of predictions are extremely difficult to make accurately. Ignore the noise and stay the course. If you stay in and he's right, the market will bounce back eventually. If you sell and he's wrong, that's a lot harder to recover from.
These kind of statements scare me more so than the bubble talk. What if....the market doesn't bounce back after a prolonged bear market?

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willthrill81
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by willthrill81 » Wed Jan 31, 2018 6:02 pm

alwayshedge wrote:
Wed Jan 31, 2018 5:59 pm
Rysto wrote:
Wed Jan 31, 2018 5:32 pm
ISTR that the last time that Alan Greenspan publicly predicted a bubble, the market went straight up for the next 4 years. It's funny, a lot of people seem to recall his "irrational exuberance" phrase, but nobody seems to remember that he said it in 1996.

Edit: My point being that these types of predictions are extremely difficult to make accurately. Ignore the noise and stay the course. If you stay in and he's right, the market will bounce back eventually. If you sell and he's wrong, that's a lot harder to recover from.
These kind of statements scare me more so than the bubble talk. What if....the market doesn't bounce back after a prolonged bear market?
Then it won't matter what you do because it will likely mean that the world economy has more or less 'permanently' tanked. The only things you'll want then are beans, bandages, gold, brass, and lead.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by Grt2bOutdoors » Wed Jan 31, 2018 6:04 pm

alwayshedge wrote:
Wed Jan 31, 2018 5:59 pm
Rysto wrote:
Wed Jan 31, 2018 5:32 pm
ISTR that the last time that Alan Greenspan publicly predicted a bubble, the market went straight up for the next 4 years. It's funny, a lot of people seem to recall his "irrational exuberance" phrase, but nobody seems to remember that he said it in 1996.

Edit: My point being that these types of predictions are extremely difficult to make accurately. Ignore the noise and stay the course. If you stay in and he's right, the market will bounce back eventually. If you sell and he's wrong, that's a lot harder to recover from.
These kind of statements scare me more so than the bubble talk. What if....the market doesn't bounce back after a prolonged bear market?
That’s what bonds and cash are for.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

inbox788
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by inbox788 » Wed Jan 31, 2018 6:09 pm

MP123 wrote:
Wed Jan 31, 2018 5:38 pm
Rysto wrote:
Wed Jan 31, 2018 5:32 pm
ISTR that the last time that Alan Greenspan publicly predicted a bubble, the market went straight up for the next 4 years. It's funny, a lot of people seem to recall his "irrational exuberance" phrase, but nobody seems to remember that he said it in 1996.
Exactly. Greenspan calling a bubble is a very bullish sign!
Mr. Greenspan totally called it in '96 when he invented the term irrational exuberance. The SP500 was under 1000 and while it shot over 1500, it sank back below 1000 by '02, and repeated the cycle peaking in '07 over 1500 and sinking below 1000 '08. He's usually about 3-5 years early when calling tops, so I'll invest 100% stocks for 3 more years and then completely sell out and wait for SP500 to drop to 1000 again before buying in. How's that for a plan? I'm sure I'm not the only one with this plan, so we'll all be pumping up stocks for the next 3 years and dumping them at the same time. Self-fulfilling prophecy! You're welcome to join along for the ride.

Seriously, though, the bubbles may be present, but rational. They don't necessarily have to burst. With steady earnings growth, the market can catch up to lofty valuations and more gradually deflate the bubble. Sometimes you see a company earnings beat the estimates, but the stock price
still goes down, meaning it's adjusting downward for unmet higher expectations.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by willthrill81 » Wed Jan 31, 2018 6:36 pm

inbox788 wrote:
Wed Jan 31, 2018 6:09 pm
Mr. Greenspan totally called it in '96 when he invented the term irrational exuberance. The SP500 was under 1000 and while it shot over 1500, it sank back below 1000 by '02, and repeated the cycle peaking in '07 over 1500 and sinking below 1000 '08.
Between 1996 and the end of 2002, the S&P 500 returned 6.82% nominal, 4.35% real (including dividends since there is no logical reason to avoid them unless you're trying to sell insurance instead of equities). At no point since 1996 has the total return for the S&P 500 not been positive.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by nisiprius » Wed Jan 31, 2018 6:39 pm

I will listen to the video, if it's not too long, to see if Alan Greenspan cares to explain what he means by a "bond market bubble." Specifically, in numbers, how elevated are bond valuations, and by how much might they come crashing down? Are they three times as high as the before-and-after values, as in the NASDAQ bubble of 2000?

I listened. He doesn't say. It's all quantitative qualitative. No numbers.

Is he talking about the same kind of bond bubble Jeremy Schwartz and Jeremy Siegel wrote wrote in 2010?
Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq today sells at less than half the peak it reached a decade ago.

A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors... have been pouring money into bond funds...

Those who are now crowding into bonds and bond funds are courting disaster. Furthermore, the possibility of substantial capital losses on bonds looms large. If over the next year, 10-year interest rates, which are now 2.8%, rise to 3.15%, bondholders will suffer a capital loss equal to the current yield. If rates rise to 4% as they did last spring, the capital loss will be more than three times the current yield.
See, that last part actually happened. Interest rates really did rise, to over 3.7%. And bondholders really did suffer a capital loss of several times the current yield. That means... several times 2.8%, say -6%. It was actually only about -4% in Total Bond.
Last edited by nisiprius on Sun Feb 04, 2018 11:53 am, edited 2 times in total.
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by willthrill81 » Wed Jan 31, 2018 6:51 pm

nisiprius wrote:
Wed Jan 31, 2018 6:39 pm
See, that last part actually happened. Interest rates really did rise, to over 3.7%. And bondholders really did suffer a capital loss of several times the current yield. That means... several times 2.8%, say -6%. It was actually only about -4% in Total Bond.


A 4% loss??!?!

Ma, time to head for the hills with the MREs!
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

WhiteMaxima
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by WhiteMaxima » Wed Jan 31, 2018 6:59 pm

In a market crash event, less loss is gain. If bond lost 4% and stock lost 20% of their paper value, you can do rebalance and buy stock cheap. So one would need some cash or short term money market on the side to have zero paper value loss.

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Tycoon
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by Tycoon » Wed Jan 31, 2018 7:37 pm

Okay.
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by 1nv35t » Wed Jan 31, 2018 8:02 pm

bloom2708 wrote:
Wed Jan 31, 2018 4:47 pm
Nobody Knows Nothing.
Everyone knows Something.
Nobody knows Everyone.
Everyone knows nobody knows nothing

JBTX
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by JBTX » Wed Jan 31, 2018 8:12 pm

willthrill81 wrote:
Wed Jan 31, 2018 6:02 pm
alwayshedge wrote:
Wed Jan 31, 2018 5:59 pm
Rysto wrote:
Wed Jan 31, 2018 5:32 pm
ISTR that the last time that Alan Greenspan publicly predicted a bubble, the market went straight up for the next 4 years. It's funny, a lot of people seem to recall his "irrational exuberance" phrase, but nobody seems to remember that he said it in 1996.

Edit: My point being that these types of predictions are extremely difficult to make accurately. Ignore the noise and stay the course. If you stay in and he's right, the market will bounce back eventually. If you sell and he's wrong, that's a lot harder to recover from.
These kind of statements scare me more so than the bubble talk. What if....the market doesn't bounce back after a prolonged bear market?
Then it won't matter what you do because it will likely mean that the world economy has more or less 'permanently' tanked. The only things you'll want then are beans, bandages, gold, brass, and lead.
Totally disagree. Look at Japan. Market has tanked for 30 years but people otherwise live fairly normally.

I’m not saying that is likely. But to dismiss it as the end of the world is simplistic. I think you have said, and I agree, that international diversification can lessen the blow of such a scenario.

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willthrill81
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by willthrill81 » Wed Jan 31, 2018 8:20 pm

JBTX wrote:
Wed Jan 31, 2018 8:12 pm
willthrill81 wrote:
Wed Jan 31, 2018 6:02 pm
alwayshedge wrote:
Wed Jan 31, 2018 5:59 pm
Rysto wrote:
Wed Jan 31, 2018 5:32 pm
ISTR that the last time that Alan Greenspan publicly predicted a bubble, the market went straight up for the next 4 years. It's funny, a lot of people seem to recall his "irrational exuberance" phrase, but nobody seems to remember that he said it in 1996.

Edit: My point being that these types of predictions are extremely difficult to make accurately. Ignore the noise and stay the course. If you stay in and he's right, the market will bounce back eventually. If you sell and he's wrong, that's a lot harder to recover from.
These kind of statements scare me more so than the bubble talk. What if....the market doesn't bounce back after a prolonged bear market?
Then it won't matter what you do because it will likely mean that the world economy has more or less 'permanently' tanked. The only things you'll want then are beans, bandages, gold, brass, and lead.
Totally disagree. Look at Japan. Market has tanked for 30 years but people otherwise live fairly normally.

I’m not saying that is likely. But to dismiss it as the end of the world is simplistic. I think you have said, and I agree, that international diversification can lessen the blow of such a scenario.
That's why I said "world economy', implying that one's equities were global.

One country can absolutely tank and not come back for decades. Though if that happened in the U.S., I'm not sure if a global portfolio would perform well enough to meet one's goals.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by JBTX » Wed Jan 31, 2018 8:28 pm

Greenspan is a smart guy. I wouldn’t dismiss what he had to say. He wasn’t necessarily wrong when he said irrational exuberance. He was just way early.

Nonetheless I don’t typically place too heavy of a weight on any of these things in terms of actual investing. Because even if they are right, they can be wrong due to timing.

Bogle himself predicts 3-4% nominal returns for stocks for the next decade. You could infer from that he thinks there is a bubble of sorts, or at least significant overvaluation.

As I’ve said before I have trouble getting my arms around the concept of a bond bubble. Unlike stocks bonds have a pretty specific and predictable future cash flow stream and an absolute nominal terminal value. There is real money propping up the value of bonds. If the so called bubble popped, where would it go?

Seems to me the risks are either:

1. Inflation driving up nominal yields which is an macro economic phenomenon and has nothing to do with speculative valuation. Having some TIPS can mitigate some of that risk.

2. The real rate drops because people value bonds less. Usually that is an indicator of extreme economic confidence. The last time that happened was pre 2000 when stocks were so popular that people had no interest in boring mid single digit returns. Ibonds returned something like 4.0% real. If my bond values drop marginally because my stocks are through the roof I think I can suffer through that problem.

3. US rates rise because people lose confidence in the US economy visa vie the rest of the world. While not impossible long term that is highly unlikely in the near future.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by stlutz » Wed Jan 31, 2018 8:30 pm

If one wants better returns from bonds, they *need* rates to go up. Bond returns come from interest. Higher rates=higher returns.

If you're rolling a 10 year Treasury ladder, when your bond matures this year would you rather reinvest in one paying 2% or one paying 4%?

People talk about a 35 year bull market in bonds the dates back to the late 80s because interest rates have mostly gone down since then. That's not really true. Bond returns would have been much higher had rates stayed at 8 or 10% the entire time. Lower rates hurt your returns; they didn't help.

I'm of course looking at this from the perspective of the investor as opposed to the trader looking to make a quick buck by getting in and out of the TLT.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by JBTX » Wed Jan 31, 2018 8:34 pm

willthrill81 wrote:
Wed Jan 31, 2018 8:20 pm
JBTX wrote:
Wed Jan 31, 2018 8:12 pm
willthrill81 wrote:
Wed Jan 31, 2018 6:02 pm
alwayshedge wrote:
Wed Jan 31, 2018 5:59 pm
Rysto wrote:
Wed Jan 31, 2018 5:32 pm
ISTR that the last time that Alan Greenspan publicly predicted a bubble, the market went straight up for the next 4 years. It's funny, a lot of people seem to recall his "irrational exuberance" phrase, but nobody seems to remember that he said it in 1996.

Edit: My point being that these types of predictions are extremely difficult to make accurately. Ignore the noise and stay the course. If you stay in and he's right, the market will bounce back eventually. If you sell and he's wrong, that's a lot harder to recover from.
These kind of statements scare me more so than the bubble talk. What if....the market doesn't bounce back after a prolonged bear market?
Then it won't matter what you do because it will likely mean that the world economy has more or less 'permanently' tanked. The only things you'll want then are beans, bandages, gold, brass, and lead.
Totally disagree. Look at Japan. Market has tanked for 30 years but people otherwise live fairly normally.

I’m not saying that is likely. But to dismiss it as the end of the world is simplistic. I think you have said, and I agree, that international diversification can lessen the blow of such a scenario.
That's why I said "world economy', implying that one's equities were global.

One country can absolutely tank and not come back for decades. Though if that happened in the U.S., I'm not sure if a global portfolio would perform well enough to meet one's goals.
Agree it is likely any sort of US crash would likely be mirrored globally. But it is possible the rest of the world could have better long term recoveries (in terms of market values) than the US.

Also while we see it as unthinkable now international war and instability could drag the world markets down for an extended period.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by Jeff Albertson » Wed Jan 31, 2018 10:17 pm

Houe wrote:
Wed Jan 31, 2018 3:54 pm
I've been a little concerned with bonds - more so than stocks. That being said I am putting all new contributions into vanguard balanced fund (60/40 allocation). I then came across this bit:
https://www.cnbc.com/2018/01/31/alan-gr ... bonds.html
You're making invest decisions based on what you see on the boob tube? How's that working for you?

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by drk » Wed Jan 31, 2018 10:30 pm

willthrill81 wrote:
Wed Jan 31, 2018 5:57 pm
In fact, I think Greenspan could be a good contrarian indicator.
Exactly my thought when I saw this headline earlier today.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by willthrill81 » Wed Jan 31, 2018 10:51 pm

stlutz wrote:
Wed Jan 31, 2018 8:30 pm
If one wants better returns from bonds, they *need* rates to go up. Bond returns come from interest. Higher rates=higher returns.

If you're rolling a 10 year Treasury ladder, when your bond matures this year would you rather reinvest in one paying 2% or one paying 4%?

People talk about a 35 year bull market in bonds the dates back to the late 80s because interest rates have mostly gone down since then. That's not really true. Bond returns would have been much higher had rates stayed at 8 or 10% the entire time. Lower rates hurt your returns; they didn't help.
+10

Best post of the week!
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Taylor Larimore
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by Taylor Larimore » Wed Jan 31, 2018 10:58 pm

I've been a little concerned with bonds - more so than stocks.
Houe:

You must rethink the risk in bond and stocks. Stocks are far riskier.

I remember when stocks lost 89% in the Great Depression. My Vanguard Total Bond Market Index Fund has never had a yearly loss of more than 3%.

Bonds let us sleep well. Stocks let us eat well.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by willthrill81 » Wed Jan 31, 2018 11:26 pm

Taylor Larimore wrote:
Wed Jan 31, 2018 10:58 pm
I've been a little concerned with bonds - more so than stocks.
Houe:

You must rethink the risk in bond and stocks. Stocks are far riskier.

I remember when stocks lost 89% in the Great Depression. My Vanguard Total Bond Market Index Fund has never had a yearly loss of more than 3%.

Bonds let us sleep well. Stocks let us eat well.

Best wishes.
Taylor
Just as a word of warning, intermediate term treasuries (roughly analogous to TBM) had an inflation-adjusted drawdown between Nov., 1976, and Sep., 1981, of over -32%. That's a far bigger loss in real dollars than most think of when they talk about 'safe' bonds, and that bear market lasted nearly five years.

Granted, that situation might never occur again, but the very fact that it did happen seems proof that it could happen again.

IMHO, the safety in T-bills, short-term treasuries, and short-term FDIC-insured CDs is superior to that of TBM, though TBM will very likely have higher long-term returns.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by BolderBoy » Wed Jan 31, 2018 11:46 pm

Taylor Larimore wrote:
Wed Jan 31, 2018 10:58 pm
I've been a little concerned with bonds - more so than stocks.
Houe:

You must rethink the risk in bond and stocks. Stocks are far riskier.

I remember when stocks lost 89% in the Great Depression. My Vanguard Total Bond Market Index Fund has never had a yearly loss of more than 3%.

Bonds let us sleep well. Stocks let us eat well.

Best wishes.
Taylor
Even though Jack Bogle says, "Nobody knows nothin'.", I'm a believer in Taylor knowing a bit more than nothing.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by sreynard » Thu Feb 01, 2018 12:16 am

I could be a completely naive simpleton, but even though the prices seem high, I just don't see a sign of a bond "bubble". If there were a bubble forming, what would we expect to see?

The Fed is slowly raising short term interest rates and, as theory says, the yield curve is drifting higher. Sure, there's some delay and the curve has indeed been flattening, but the 10 and 30 year yields haven't continued drifting down since September. All looks like it's responding as theory predicts.

What would it look like if a bubble was expanding and getting ready to pop. My thought would be that the Fed would continue pushing short term rates higher and the long term would continue to sink. At some point, POW!, they snap back to a "reasonable" yield. If inflation kept raising and yields didn't raise, the same thing would happen. The pressure would build until it popped.

I think of it like earthquakes here in California. As long as we have small ones periodically, the pressure is getting relieved, so we shouldn't have a really large one. So if the yields drift higher, its letting off the pressure, and no burst. That's one of the reasons I don't like negative interest rates, like in Germany. At least it's only with short term Bunds. If they did that with longer term ones, it seems to me, that would be an awful lot of pressure just waiting to go.

It's only when it starts looking like the Fed is "pushing a wet string" I start getting worried, and that's mostly from their habit of just shoving harder when they don't get the response they want; which eventually results in them "breaking things".

Of course, I or theory, or my understanding of theory, could be completely wrong, or they could explode for some other reason, but if they did that really would seem to be "unprecedented". I can't even imagine what a "Bond Market Black Swan" would look like, but maybe they're swimming around out there somewhere?

sreynard
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by sreynard » Thu Feb 01, 2018 12:20 am

BolderBoy wrote:
Wed Jan 31, 2018 11:46 pm
Taylor Larimore wrote:
Wed Jan 31, 2018 10:58 pm
I've been a little concerned with bonds - more so than stocks.
Houe:

You must rethink the risk in bond and stocks. Stocks are far riskier.

I remember when stocks lost 89% in the Great Depression. My Vanguard Total Bond Market Index Fund has never had a yearly loss of more than 3%.

Bonds let us sleep well. Stocks let us eat well.

Best wishes.
Taylor
Even though Jack Bogle says, "Nobody knows nothin'.", I'm a believer in Taylor knowing a bit more than nothing.
If nothing else, he's seen a whole lot of "That'll never happen!" and "Hey, watch this [stupid investor trick]!" :D

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AtlasShrugged?
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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by AtlasShrugged? » Thu Feb 01, 2018 7:25 am

Bogleheads....Maybe we need to look at this another way. Mr. Greenspan might well be right: A bubble exists. Let's assume he is the greatest living financial clairvoyant who ever walked the earth.

What if that proverbial bubble pops? What are we really talking about? If it pops, sounds like a buying opportunity to me. My bond fund NAV is nearing 52-week lows, so I have been increasing my contributions to bonds to maintain my overall allocation (per my ISP)

In a recent post, Livesoft posited the biggest decline you'd see is ~10% in bonds (I'll go out on a limb and assume he meant a US total bond fund). I checked my bond fund (FSITX), and lo and behold....it looks like he was right on the money (worst decline was 7%). :wink:

So if there is a bubble and it pops....maybe a 10% decline, worst case? So what. If you are in the accumulation stage, and more than 3 years from retirement, are you really worried about that? I am not. I would submit that you should not be particularly worried either. Even if Mr. Greenspan is right, and there is a bubble -- so what.

Seems to me that this is the time (like every other time) to follow this piece of sage advice:
Stay the course. If I said it a thousand times, I meant it every time.
- John Bogle
“If you don't know, the thing to do is not to get scared, but to learn.”

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by likegarden » Thu Feb 01, 2018 9:07 am

He did not see the housing bubble and did not see the Great Recession coming. He did not limit dealings by Wallstreet. Why would you trust his advice for anything?

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by nisiprius » Thu Feb 01, 2018 9:58 am

Image

The basic dynamics of both bubbles is the same. And your predictions of when they are going to pop are equally inaccurate.
Last edited by nisiprius on Thu Feb 01, 2018 11:14 am, edited 2 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by Dottie57 » Thu Feb 01, 2018 11:04 am

Greenspan also thought there was no need fr regulation on the securities which nearly brought down the U.S. financial systems from 2007/2009.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by garlandwhizzer » Thu Feb 01, 2018 1:59 pm

stultz wrote:
People talk about a 35 year bull market in bonds the dates back to the late 80s because interest rates have mostly gone down since then. That's not really true. Bond returns would have been much higher had rates stayed at 8 or 10% the entire time. Lower rates hurt your returns; they didn't help.
The only kind of investment returns that really matter are real inflation adjusted returns, not nominal returns. For the 4 decades prior to the early 1980s, interest rates constantly went up. 10 year Treasuries went from around 2% to 15%. Nominal returns were great, but real inflation adjusted returns were significantly negative for 40 years. In spite of great looking nominal returns it was a disaster for bond holders during those 4 decades of ever rising rates and ever increasing inflation, deep risk as Bernstein puts it, far more devastating to a portfolio than shallow risk from equities.

People who talk about the 35 year bull market in bonds are correct in the only way that matters, real inflation adjusted returns over time. Historically when interest rates are in a long period of decline as they did for the 35 years after 1982, inflation also steadily is declining and real returns improve due. Inflation is the single thing that is most toxic to bonds and it is directly related to nominal interest rates. A long period of declining interest rates and inflation is a great time to hold bonds particularly long duration bonds whose principal value tends to appreciate significantly since its yields are no longer available in a declining rate environment. Rates don't stay at 8 or 10% without substantial inflation and substantial inflation expectations for the future so the numbers may sound good but inflation causes holders to lose purchasing power over time. An important key to bond real returns is the direction of change in inflation and in the 35 year bond bull market inflation was going the right way for a long, long time.

Garland Whizzer

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by visualguy » Thu Feb 01, 2018 2:16 pm

garlandwhizzer wrote:
Thu Feb 01, 2018 1:59 pm
The only kind of investment returns that really matter are real inflation adjusted returns, not nominal returns. For the 4 decades prior to the early 1980s, interest rates constantly went up. 10 year Treasuries went from around 2% to 15%. Nominal returns were great, but real inflation adjusted returns were significantly negative for 40 years. In spite of great looking nominal returns it was a disaster for bond holders during those 4 decades of ever rising rates and ever increasing inflation, deep risk as Bernstein puts it, far more devastating to a portfolio than shallow risk from equities.
Right, so how do we make our investment portfolios more robust to this? Move to TIPS? During the period that you mentioned, my parents owned direct real estate investments, and those provided some good protection from inflation, so that's another option in some cases.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by Whakamole » Thu Feb 01, 2018 2:17 pm

Taylor Larimore wrote:
Wed Jan 31, 2018 10:58 pm
I've been a little concerned with bonds - more so than stocks.
Houe:

You must rethink the risk in bond and stocks. Stocks are far riskier.

I remember when stocks lost 89% in the Great Depression. My Vanguard Total Bond Market Index Fund has never had a yearly loss of more than 3%.

Bonds let us sleep well. Stocks let us eat well.

Best wishes.
Taylor
What would a Total Bond Market Index Fund have returned during the Great Depression? Treasuries apparently did OK (at least according to Roth's book), but I don't remember him being enthusiastic at all about corporate bonds. Total Bond is ~40% treasuries and agency bonds.

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Re: Alan Greenspan says there are bubbles in both stocks and bonds

Post by survivor » Thu Feb 01, 2018 3:01 pm

Lots of people on here smarter than me, but when Mr. Buffet says buying bonds is like buying stocks with a 50 pe, when Mr. Gross says he is shorting Treasuries, and Mr. Greenspan says stocks and bonds are bubbles, I at least pause. Many things have happened in the pas 10 yrs that have never happened before.
I wonder if the Fed really controls long term interest rates.
I wonder what would happen if we had a spike in inflation.
I wonder what would happen if millions of investors ( Bogleheads excluded) decided to sell bonds.
I am not sure we have ever seen a bond market bubble burst.
Guess for now I will stay the course with my lowly CDs.

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