Bberg: bond bulls say they'll have the last laugh

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grok87
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Bberg: bond bulls say they'll have the last laugh

Post by grok87 » Fri Feb 16, 2018 11:44 pm

So i'm curious what Bogleheads make of this article:

https://www.bloomberg.com/news/articles ... ields-soar
wrote:After all, nothing in their long-term outlook has changed: Inflation is still subdued, consumers have limited capacity to propel economic growth, and the world’s aging population has plenty of appetite for fixed income...

“On the surface, the economy looks very strong,” Hunt said. “But the structural supports to the economy -- the pylons -- are being eroded. They don’t collapse immediately; it takes time, but this is where the vulnerability comes in.”

Consumers’ Burden

One of the bulls’ preferred indicators lately is the declining U.S. savings rate. As a share of disposable income, it fell to 2.6 percent last quarter, the third-lowest on record. To Hunt and Delis, it signals that growth can’t last because consumers, which make up about 70 percent of the economy, will have less purchasing power in the future.
My own take is slightly different. I think we are headed for stagflation. Higher inflation but weak economic growth. All this tax stuff is just a head fake. The retail consumer, who drive like 70% of the U.S. economy is still dead-in-the-water...

Buy tips! Early and often and as long-dated as you can.
Winter is coming...

Cheers,
Grok
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

letsgobobby
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Re: Bberg: bond bulls say they'll have the last laugh

Post by letsgobobby » Sat Feb 17, 2018 12:22 am

grok87 wrote:
Fri Feb 16, 2018 11:44 pm
So i'm curious what Bogleheads make of this article:

https://www.bloomberg.com/news/articles ... ields-soar
wrote:After all, nothing in their long-term outlook has changed: Inflation is still subdued, consumers have limited capacity to propel economic growth, and the world’s aging population has plenty of appetite for fixed income...

“On the surface, the economy looks very strong,” Hunt said. “But the structural supports to the economy -- the pylons -- are being eroded. They don’t collapse immediately; it takes time, but this is where the vulnerability comes in.”

Consumers’ Burden

One of the bulls’ preferred indicators lately is the declining U.S. savings rate. As a share of disposable income, it fell to 2.6 percent last quarter, the third-lowest on record. To Hunt and Delis, it signals that growth can’t last because consumers, which make up about 70 percent of the economy, will have less purchasing power in the future.
My own take is slightly different. I think we are headed for stagflation. Higher inflation but weak economic growth. All this tax stuff is just a head fake. The retail consumer, who drive like 70% of the U.S. economy is still dead-in-the-water...

Buy tips! Early and often and as long-dated as you can.
Winter is coming...

Cheers,
Grok
I’m not afraid of bonds. I don’t pretend to know the future, but I think our (American) extraordinary levels of indebtedness, and lack of appetite for any kind of fiscal discipline will keep a cap on growth, inflation, and bond yields. Long term I worry much more about deflationary forces than inflationary. Globally demographics are more suggestive of deflation than inflation.

Savio
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Re: Bberg: bond bulls say they'll have the last laugh

Post by Savio » Sat Feb 17, 2018 1:23 am

I worry about inflation eventually because that is 1 way to get rid of debt (especially national debt): inflate it away.

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whodidntante
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Re: Bberg: bond bulls say they'll have the last laugh

Post by whodidntante » Sat Feb 17, 2018 1:27 am

grok87 wrote:
Fri Feb 16, 2018 11:44 pm

My own take is slightly different. I think we are headed for stagflation. Higher inflation but weak economic growth. All this tax stuff is just a head fake. The retail consumer, who drive like 70% of the U.S. economy is still dead-in-the-water...
Ah. The one environment where we all lose.

TIPS don't provide full cover. They somehow forget to compensate you for taxes. And I would not be surprised if the Treasury stops issuing TIPS in a stagflation environment.

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dodecahedron
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Re: Bberg: bond bulls say they'll have the last laugh

Post by dodecahedron » Sat Feb 17, 2018 1:42 am

whodidntante wrote:
Sat Feb 17, 2018 1:27 am

Ah. The one environment where we all lose.

TIPS don't provide full cover. They somehow forget to compensate you for taxes. And I would not be surprised if the Treasury stops issuing TIPS in a stagflation environment.
If Treasury stops issuing new ones, won't that just make the TIPS that are already out there even more valuable?

nativenewenglander
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Re: Bberg: bond bulls say they'll have the last laugh

Post by nativenewenglander » Sat Feb 17, 2018 6:22 am

letsgobobby wrote:
Sat Feb 17, 2018 12:22 am
grok87 wrote:
Fri Feb 16, 2018 11:44 pm
So i'm curious what Bogleheads make of this article:

https://www.bloomberg.com/news/articles ... ields-soar
wrote:After all, nothing in their long-term outlook has changed: Inflation is still subdued, consumers have limited capacity to propel economic growth, and the world’s aging population has plenty of appetite for fixed income...

“On the surface, the economy looks very strong,” Hunt said. “But the structural supports to the economy -- the pylons -- are being eroded. They don’t collapse immediately; it takes time, but this is where the vulnerability comes in.”

Consumers’ Burden

One of the bulls’ preferred indicators lately is the declining U.S. savings rate. As a share of disposable income, it fell to 2.6 percent last quarter, the third-lowest on record. To Hunt and Delis, it signals that growth can’t last because consumers, which make up about 70 percent of the economy, will have less purchasing power in the future.
My own take is slightly different. I think we are headed for stagflation. Higher inflation but weak economic growth. All this tax stuff is just a head fake. The retail consumer, who drive like 70% of the U.S. economy is still dead-in-the-water...

Buy tips! Early and often and as long-dated as you can.
Winter is coming...

Cheers,
Grok
I’m not afraid of bonds. I don’t pretend to know the future, but I think our (American) extraordinary levels of indebtedness, and lack of appetite for any kind of fiscal discipline will keep a cap on growth, inflation, and bond yields. Long term I worry much more about deflationary forces than inflationary. Globally demographics are more suggestive of deflation than inflation.
I agree with this line of thinking.

grok87
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Re: Bberg: bond bulls say they'll have the last laugh

Post by grok87 » Sat Feb 17, 2018 8:06 am

whodidntante wrote:
Sat Feb 17, 2018 1:27 am
grok87 wrote:
Fri Feb 16, 2018 11:44 pm

My own take is slightly different. I think we are headed for stagflation. Higher inflation but weak economic growth. All this tax stuff is just a head fake. The retail consumer, who drive like 70% of the U.S. economy is still dead-in-the-water...
Ah. The one environment where we all lose.

TIPS don't provide full cover. They somehow forget to compensate you for taxes. And I would not be surprised if the Treasury stops issuing TIPS in a stagflation environment.
Agree on the tax issue. I think its best to own them in a tax advantaged account
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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AtlasShrugged?
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Re: Bberg: bond bulls say they'll have the last laugh

Post by AtlasShrugged? » Sat Feb 17, 2018 9:18 am

My own take is slightly different. I think we are headed for stagflation. Higher inflation but weak economic growth.
grok87....Not being a wise guy (I had a more colorful term in mind), but could you more fully explain why you see stagflation in the future?

I have read a number of your posts, and they are very informative. So I am genuinely curious to understand your thoughts and reasoning on this. I was a little guy back in the early 70's, but I remember vividly what that period was like. It was not pretty. I am asking because if stagflation is truly headed our way, it would be very helpful to know what investments were the best back then. Was it treasuries that were best?

I don't account for a stagflationary environment/scenario in my IPS. I see that as a serious shortcoming that I need to fix.
“If you don't know, the thing to do is not to get scared, but to learn.”

Theoretical
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Re: Bberg: bond bulls say they'll have the last laugh

Post by Theoretical » Sat Feb 17, 2018 9:37 am

Tyler 9000 has done some research on your stagflationary example, with a surprising finding: tbills and money market funds. This is further borne out by reviewing the data from the Simba spreadsheet. Except in the 1940s immediately after WWII, where interest rate caps were imposed, tbills have done a good job more or less tracking inflation plus or minus a bit.

Bill Bernstein has suggested that one of the strongest inflation fighters is unhedged international stocks due to both the market and currency effects.

REIT are also a classic example.

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Tycoon
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Re: Bberg: bond bulls say they'll have the last laugh

Post by Tycoon » Sat Feb 17, 2018 9:44 am

I know with a great degree of certainty that predictiing the future has been proven to be pointless.
...I might be just beginning | I might be near the end. Enya | | C'est la vie

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nisiprius
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Re: Bberg: bond bulls say they'll have the last laugh

Post by nisiprius » Sat Feb 17, 2018 10:08 am

Both funds continually pump out interest in the form of fund dividends, and also experience fluctuations in capital value on top of that. In the case of bonds, capital appreciation is not usually the reason for owning an investment-grade bond fund. In an investment-grade bond fund there shouldn't, and usually doesn't, have much if any long-term trend. Total Bond began life at $10/share in 1986, and in thirty-two years that hasn't changed much.

So, in my world, in my scale of things, what would "bond bulls having the last laugh" look like? Something like this?

Image

(The green line is price (not growth) for the Vanguard Total Bond Market Index Fund. The orange fund is Total Stock.)
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.

grok87
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Re: Bberg: bond bulls say they'll have the last laugh

Post by grok87 » Sat Feb 17, 2018 10:32 am

JCE66 wrote:
Sat Feb 17, 2018 9:18 am
My own take is slightly different. I think we are headed for stagflation. Higher inflation but weak economic growth.
grok87....Not being a wise guy (I had a more colorful term in mind), but could you more fully explain why you see stagflation in the future?

I have read a number of your posts, and they are very informative. So I am genuinely curious to understand your thoughts and reasoning on this. I was a little guy back in the early 70's, but I remember vividly what that period was like. It was not pretty. I am asking because if stagflation is truly headed our way, it would be very helpful to know what investments were the best back then. Was it treasuries that were best?

I don't account for a stagflationary environment/scenario in my IPS. I see that as a serious shortcoming that I need to fix.
Sure JCE, but thus is slightly dangerous ground. Don't want to tread onto political ground and get the thread locked!

:)

Let me first say that i generally agree with Tycoon about predicting the future. What i would say is that stagflation is a very real risk right now and you should factor it in as a scenario as well as deflation, etc.

1) i think economic growth will be weak. The environment we are now in is not consistent with george cooper's model for a strong economy in his book "Money, Blood and Revolution: How Darwin and the doctor of King Charles I could turn economics into a science".
https://www.amazon.com/Money-Blood-Revo ... 0857193821

Basically he argues for a circulatory model for the economy, and we are not in that mode now i don't think.

2) inflation, lots of signs of that, deficits, etc.

As far as what performed well in the stagflation of the 70s, i think real estate and tbills. But of course tips weren't around then. I personally have strong allocations to tips and real estate.

The other thing that i think did well were small cap value stocks relative to large caps.i personally i am not doing that because i want also to be hedged against deflation and small cap value stocks tend to get crushed in deflation.

Cheers,
Grok
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

grok87
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Re: Bberg: bond bulls say they'll have the last laugh

Post by grok87 » Sat Feb 17, 2018 11:05 am

Savio wrote:
Sat Feb 17, 2018 1:23 am
I worry about inflation eventually because that is 1 way to get rid of debt (especially national debt): inflate it away.
Yep
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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smegal
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Re: Bberg: bond bulls say they'll have the last laugh

Post by smegal » Sat Feb 17, 2018 11:33 am

So, in my world, in my scale of things, what would "bond bulls having the last laugh" look like? Something like this?
I am not a bond expert but the above illlustrates my problem with Total Bond market; what's the upside? If interest rates increase quickly Total Bond will lose principle. Conversely, how much lower can they go, and does anyone think they will go lower? If things go well it may earn about 3% over the next 4 years. I recall hearing Jack Bogle and Mohamed El-Erian suggest 3% would be good estimate for bond returns over the next 5-10 years or so on Barry Ritholz's podcast. In the current environment a direct (non-brokered) 3% CD with a low early withdrawal penalty seems like a much better risk/benefit ratio. If interest rates skyrocket, just pull it out and move it to a better CD, no lost principle. If Total Bond does fantastic, and actually returns 4%, you have lost 1%. But if interest rates go up quickly you avoid principle loss. So to me the risk/benefit ratio of Total Bond does not look good. Harry Sit, Allan Roth and Kevin M have good articles on the benefits of CDs for those interested.

Scooter57
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Re: Bberg: bond bulls say they'll have the last laugh

Post by Scooter57 » Sat Feb 17, 2018 11:40 am

The investing landscape was very different in the early 1970s, so different that you can't really draw useful conclusions. Commissions were huge to buy anything. Mutual funds had huge fees and commissions too. This limited how often people traded and even who invested. There were no money market funds. They were something new that appeared in the early 1980s.

There are so many new, complex vehicles that are traded at light speed nowadays that change the market dynamics.

Money market funds were very good to me as a beginning investor in the early 1980s. They kept up with inflation at a time when my employer was having to give us quarterly raises to keep up with it. I started at a salary of $17,000 in a professional job in 1980 and was earning $32,000 only two years later.

Stocks took a while to catch up then soared, but people forget that the rise in stocks occurred just as the PC revolution dramatically improved productivity in the early 1980s. It may be a mistake to think that the market always rises in response to strong inflation. Without some transformational innovation corporate profits may stagnate for decades.

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AtlasShrugged?
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Re: Bberg: bond bulls say they'll have the last laugh

Post by AtlasShrugged? » Sat Feb 17, 2018 12:03 pm

As far as what performed well in the stagflation of the 70s, i think real estate and tbills. But of course tips weren't around then. I personally have strong allocations to tips and real estate.
grok87....Thank you. This is something actionable, and something I can work into my IPS. I am strongly considering purchasing rental properties in 5-7 years. I was thinking more along the lines of income diversification, and lowering portfolio withdrawal rates when I retire. But I never thought it could also be a potential hedge against stagflation.... :idea:
“If you don't know, the thing to do is not to get scared, but to learn.”

grok87
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Re: Bberg: bond bulls say they'll have the last laugh

Post by grok87 » Sat Feb 17, 2018 12:04 pm

smegal wrote:
Sat Feb 17, 2018 11:33 am
So, in my world, in my scale of things, what would "bond bulls having the last laugh" look like? Something like this?
I am not a bond expert but the above illlustrates my problem with Total Bond market; what's the upside? If interest rates increase quickly Total Bond will lose principle. Conversely, how much lower can they go, and does anyone think they will go lower? If things go well it may earn about 3% over the next 4 years. I recall hearing Jack Bogle and Mohamed El-Erian suggest 3% would be good estimate for bond returns over the next 5-10 years or so on Barry Ritholz's podcast. In the current environment a direct (non-brokered) 3% CD with a low early withdrawal penalty seems like a much better risk/benefit ratio. If interest rates skyrocket, just pull it out and move it to a better CD, no lost principle. If Total Bond does fantastic, and actually returns 4%, you have lost 1%. But if interest rates go up quickly you avoid principle loss. So to me the risk/benefit ratio of Total Bond does not look good. Harry Sit, Allan Roth and Kevin M have good articles on the benefits of CDs for those interested.
Getting harder to find those low early withdrawal penalty cds though. And often there is fine print saying the bank can refuse to allow the early withdrawal.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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