Bubbles Everywhere

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Kevin K
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Bubbles Everywhere

Post by Kevin K » Mon Feb 26, 2018 4:00 pm

Here's a quite provocative new piece by Todd Tresidder that not only paints a pretty scary picture of valuations in both equities and bonds but also gets to the root of the appeal of Bitcoin better than anything else I've read:

https://financialmentor.com/investment- ... here/21479

There's quite a lot of info on his site but the other piece (linked to within the first article) that really caught my eye was one from 2013 that as he says he's seen no reason to revise that paints a pretty compelling picture of bonds as riskier than equities under current conditions:

https://financialmentor.com/investment- ... ubble/9064

Obviously a lot of this goes against the grain (to day the least) of much mainstream Boglehead thinking but I can't help but think that Vanguard's ever-increasing allocation to international bonds and equities in its Target Date and Lifestrategy funds, the new international Wellington and Wellesley and so on reflect some level of agreement that U.S.-centric stock and bond portfolios are not the smartest choice in the current environment.

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greg24
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Re: Bubbles Everywhere

Post by greg24 » Mon Feb 26, 2018 4:37 pm

Some interesting stuff. But his solution is to sell you something.

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Toons
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Re: Bubbles Everywhere

Post by Toons » Mon Feb 26, 2018 4:39 pm

Keep Investing :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Bubbles Everywhere

Post by BogleMelon » Mon Feb 26, 2018 4:49 pm

Does this guy can tell the future?
- No? Then why would you bother with his predictions?
- Yes? Then, is there anyone else can tell the future and come up with the same conclusions?
- Yes? Then, current stocks prices and bond prices already have these factors priced in, so no bubble here.
- No? Then, he wouldn't publish his wisdom on a website and sell his advises for money. Anyone with the gift of knowing the future, would buy the
next Apple stock and be a billionaire in 2 years..
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

RRAAYY3
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Re: Bubbles Everywhere

Post by RRAAYY3 » Mon Feb 26, 2018 4:53 pm

I guess Good thing every dollar I’ve invested this year has been international

david1082b
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Re: Bubbles Everywhere

Post by david1082b » Mon Feb 26, 2018 4:54 pm

It does seem to be a common theme to see bubbles everywhere. E.g. this from May 2013 in Marketwatch:
It’s not just stocks; everything is overvalued
http://www.marketwatch.com/story/its-no ... 2013-05-10

From the Tresidder piece:
I can’t show you what a healthy currency looks like because all currency today is “fiat” explaining the unhealthy economic backdrop that gave rise to Bitcoin (and all of these other financial bubbles) in the first place (more on that below…).
Oh dear, that's all rather political isn't it?
the only time the U.S. market has been more overvalued as measured by the CAPE ratio is the narrow window of months preceding the final 2000 top.
This is a bit vague. Looking at the table at Multipl, I looked up the months around the year 2000 with higher CAPE than now: the "narrow window" lasted from spring of 1998 to early 2001. This is actually a multi-year window. http://www.multpl.com/shiller-pe/table?f=m

I've noticed a continuing tactic by bears when they use CAPE: be very vague about the time-scale, then try to be Really Scary about the current valuations because they were Only Higher Around the Dot-Com Bubble. That is all they feel the need to use - after all, everyone knows the dot-com bubble was a Bad Time To Buy, so nothing more needs to be said, right? No mention of the total market's returns from early 1998 to now, which have been rather OK actually. If stocks are "overvalued", compared to what are they overvalued? The author says bonds and real estate are also overvalued, says bitcoin is a bubble, then says the current CAPE is "overvalued" while ignoring the decent returns from the same CAPE number in early 1998 to now. It all points to buying stocks, not avoiding them.

Clearly we can only judge the current market in hindsight. As the quote goes, "If you think the market's too high now, wait til you see it in 20 years."
Last edited by david1082b on Mon Feb 26, 2018 4:56 pm, edited 1 time in total.

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Pajamas
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Re: Bubbles Everywhere

Post by Pajamas » Mon Feb 26, 2018 4:55 pm

Seems to be a terrible market timer who claims he isn't a market timer. As is so usually the case with such financial gurus, if he's such a great investor and financial expert, why does he spend so much time trying to sell ideas to other people?
What I’m sharing with you here isn’t a forecast. It’s a risk/reward analysis of a broad market sector based on mathematics.

There are rare times when valuations in specific markets reach such absurd levels that the risk vs. reward ratio allows you to make investment decisions without any specific forecast.

I’ve done this twice in the past (publicly), and I’m doing it a third time right now.

How did I know to sell all my investment real estate in 2006 right before the market top?
How did I know to sell my investment management company in 1997 and remove traditional equity allocations from my portfolio 3 years too early before the big top in stocks?

Actually, I never knew either market was at or near a top. That would be a forecast.

All I knew was the risk/reward analysis was extraordinarily unfavorable to where participating in that market no longer made sense. It was based entirely on business common sense and required no forecast.

I want to be clear that I had no idea when the actual market tops would occur in the past or how they would come unwound, and the same is true with the bond bubble today.

WhiteMaxima
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Re: Bubbles Everywhere

Post by WhiteMaxima » Mon Feb 26, 2018 4:58 pm

All due to QE and near zero interest. Very low borrowing cost to invest. Retiree see near zero interest income and money is nowhere to go but equity. Then inflation hits. Fed has to raise interest. The deflation of the bubble depend how much and how fast the rate increase and balance sheet shrink. leveraged investor will get burned just like Y2K and 2008.

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Sandtrap
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Re: Bubbles Everywhere

Post by Sandtrap » Mon Feb 26, 2018 5:18 pm

That fella's website is very well done. Almost makes me want to buy something from him.
Bubbles have been everywhere all the time. But, what to do about it and when?

A sound "Bogle" portfolio is "bubble proof".
j :D

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steve roy
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Re: Bubbles Everywhere

Post by steve roy » Mon Feb 26, 2018 5:39 pm

Todd says a lot of the same things (and says them multiple times) that other financial analysts are spouting: 1) markets are over-valued, 2) high valuations impact almost every asset class, and 3) a correction is coming (sometime). He just puts more top spin on his prediction for the size of the coming correction(s).

But hey! You can buy Todd's handy kit(s) for some actionable solutions to the looming financial disaster(s). Except ... most of the DIYers here already know what the actionable solutions are, things like shorter duration bonds (Bill Bernstein has been advocating short durations for years), shifting assets into less bubbly markets, putting more money in cash (etc.)

I don't disagree with anything the man says by way of analysis, but the breathlessness of his prose gives his article a teensy whiff of hucksterism. (And why would a self-respecting Boglehead buy Todd's information when it's already sitting on the forum and wiki free of charge?)

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220volt
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Re: Bubbles Everywhere

Post by 220volt » Mon Feb 26, 2018 5:47 pm

It seems to me that everyone is fearful of this market. Everyone is predicting a crash. Isn't this time to be greedy?
"If I had only followed the advice of financial analysts in 2008, I'd have a million dollars today, provided I started with a hundred million dollars" - Jon Stewart

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Re: Bubbles Everywhere

Post by tmcc » Mon Feb 26, 2018 6:50 pm

220volt wrote:
Mon Feb 26, 2018 5:47 pm
It seems to me that everyone is fearful of this market. Everyone is predicting a crash. Isn't this time to be greedy?
you never see crashes coming, so they say

Kevin K
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Re: Bubbles Everywhere

Post by Kevin K » Mon Feb 26, 2018 7:12 pm

Yes it's a pretty slick web site and yes Todd has things to sell, but I think the analysis is sound and in his defense he does offer a smattering of things defensive investors might look into at the end of the article:

“Deep diversification” (where you diversify by strategy and source of return, not just asset class, by identifying sources of return that inversely correlate with the stock market)
Diversify into certain business and real estate assets where the outcome is driven by a micro-economy
Diversify into alternative assets
Switch to an investment process that includes an exit discipline
Increase allocation to cash
Switch from high volatility, high beta assets to low volatility assets
Diversify into favorably valued assets that might include domestic value plays, certain emerging markets, commodities, and commodity producers

All of these, to one degree or another, are exactly the kinds of things respected FA's like Larry Swedroe and Rick Ferri have been recommending here for years.

As for bonds, my conclusion after reading his article is that CD's make a whole lot more sense than bond funds in this environment if my main reason for holding bonds is to offset the risks I take on the equity side. I don't see any advantages to short-term corporate or treasury funds and of course longer maturities make no sense at all. This is one area where there are obvious and tangible rewards from some active management IMHO.

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Re: Bubbles Everywhere

Post by bikechuck » Mon Feb 26, 2018 10:21 pm

Tressider seems like a bright guy. I have visited his web site often and he could very well be right in his analysis.

As a 2017 retiree his writing confirms that I want to stay at 50/50 for now. It also makes me wonder if I should use more cds and dial back on the bonds a bit.

Tressider is a good writer and he grabs my attention and makes me think.

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Rick Ferri
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Re: Bubbles Everywhere

Post by Rick Ferri » Tue Feb 27, 2018 2:07 pm

Kevin K wrote:
Mon Feb 26, 2018 7:12 pm
Switch from high volatility, high beta assets to
All of these, to one degree or another, are exactly the kinds of things respected FA's like Larry Swedroe and Rick Ferri have been recommending here for years.
Commodities? Alternatives?

Nope, that’s not anything I ever recommended. That stuff is way to complex for me. I like Investments that pay dividends, interest and rental income. If it doesn’t pay cash, I’m not interested.

Rick
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Kevin M
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Re: Bubbles Everywhere

Post by Kevin M » Tue Feb 27, 2018 2:33 pm

Kevin K wrote:
Mon Feb 26, 2018 7:12 pm
As for bonds, my conclusion after reading his article is that CD's make a whole lot more sense than bond funds in this environment if my main reason for holding bonds is to offset the risks I take on the equity side.
Please share more of your reasoning about this.

I've been a big proponent of direct CDs since late 2010, but the benefits are not nearly as great now as they have been in recent years. The yield premiums over Treasuries of same maturities are much smaller, and it's very hard to find a good yield premium with a low early withdrawal penalty (EWP), like six months of interest on a 5-year CD.

For one-year maturities, Treasuries typically have had a slight advantage over new-issue brokered CDs lately, and in a taxable account, they're clearly superior if you have a high state tax rate. For example, I see 1-year Treasury rate at 2.09% at Fidelity, which translates into 2.35% taxable-equivalent yield (TEY) for me (8% marginal state, 27% marginal federal, not itemizing). You probably will get a couple basis points less for quantities of less than 100 (100,000 face value), but it still beats a 1-year CD. This is compared to 2.0% for new-issue 1-year CD.

You also might find better deals in AAA/AA munis in a taxable account. I've been buying mainly AA/AAA munis in the 4-month to 3-year range in taxable accounts. Fixed-income yield curves (CDs, Treasuries, Munis) all are reasonably steep out to three years, but taper off after that, which is why I'm not going past 3-year maturities much. Treasuries can be a better deal than munis, especially out to one year, in a high-tax state, unless you're willing to concentrate your muni holdings in higher-risk states, like Illinois.

An early withdrawal penalty is not so valuable for shorter maturities, and since there haven't been too many super-good direct CDs deals lately, I've been buying brokered CDs out to three year maturities in tax-advantaged accounts.

For those who want to keep things simple and keep maturities short, and who otherwise would use a rolling bond ladder, I see nothing wrong with short-term or limited-term bond funds, either muni, Treasury, or corporate, depending on location (taxable or tax-advantaged), and one's view on credit risk. These are holding mostly in what I consider to be the sweet range of the yield curve--one to three years.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

Kevin K
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Re: Bubbles Everywhere

Post by Kevin K » Tue Feb 27, 2018 4:50 pm

Kevin M wrote:
Tue Feb 27, 2018 2:33 pm
Kevin K wrote:
Mon Feb 26, 2018 7:12 pm
As for bonds, my conclusion after reading his article is that CD's make a whole lot more sense than bond funds in this environment if my main reason for holding bonds is to offset the risks I take on the equity side.
Please share more of your reasoning about this.

I've been a big proponent of direct CDs since late 2010, but the benefits are not nearly as great now as they have been in recent years. The yield premiums over Treasuries of same maturities are much smaller, and it's very hard to find a good yield premium with a low early withdrawal penalty (EWP), like six months of interest on a 5-year CD.

For one-year maturities, Treasuries typically have had a slight advantage over new-issue brokered CDs lately, and in a taxable account, they're clearly superior if you have a high state tax rate. For example, I see 1-year Treasury rate at 2.09% at Fidelity, which translates into 2.35% taxable-equivalent yield (TEY) for me (8% marginal state, 27% marginal federal, not itemizing). You probably will get a couple basis points less for quantities of less than 100 (100,000 face value), but it still beats a 1-year CD. This is compared to 2.0% for new-issue 1-year CD.

You also might find better deals in AAA/AA munis in a taxable account. I've been buying mainly AA/AAA munis in the 4-month to 3-year range in taxable accounts. Fixed-income yield curves (CDs, Treasuries, Munis) all are reasonably steep out to three years, but taper off after that, which is why I'm not going past 3-year maturities much. Treasuries can be a better deal than munis, especially out to one year, in a high-tax state, unless you're willing to concentrate your muni holdings in higher-risk states, like Illinois.

An early withdrawal penalty is not so valuable for shorter maturities, and since there haven't been too many super-good direct CDs deals lately, I've been buying brokered CDs out to three year maturities in tax-advantaged accounts.

For those who want to keep things simple and keep maturities short, and who otherwise would use a rolling bond ladder, I see nothing wrong with short-term or limited-term bond funds, either muni, Treasury, or corporate, depending on location (taxable or tax-advantaged), and one's view on credit risk. These are holding mostly in what I consider to be the sweet range of the yield curve--one to three years.

Kevin
Thanks very much for the education. I haven't researched this anywhere near as thoroughly as you have and you're making me realize that rather than get fixated on CDs vs. bond funds I need to pay much closer attention to the average weighted duration of my holdings and to tax consequences.

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Re: Bubbles Everywhere

Post by KlangFool » Tue Feb 27, 2018 5:01 pm

OP,

As far as I can tell, Gold price is fairly reasonable now. You should buy some. As to why you listen to me? I have no idea.

KlangFool

boglesmind
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Re: Bubbles Everywhere

Post by boglesmind » Tue Feb 27, 2018 5:32 pm

steve roy wrote:
Mon Feb 26, 2018 5:39 pm
Todd says a lot of the same things (and says them multiple times) that other financial analysts are spouting: 1) markets are over-valued, 2) high valuations impact almost every asset class, and 3) a correction is coming (sometime). He just puts more top spin on his prediction for the size of the coming correction(s).

But hey! You can buy Todd's handy kit(s) for some actionable solutions to the looming financial disaster(s). Except ... most of the DIYers here already know what the actionable solutions are, things like shorter duration bonds (Bill Bernstein has been advocating short durations for years), shifting assets into less bubbly markets, putting more money in cash (etc.)

I don't disagree with anything the man says by way of analysis, but the breathlessness of his prose gives his article a teensy whiff of hucksterism. (And why would a self-respecting Boglehead buy Todd's information when it's already sitting on the forum and wiki free of charge?)
+1

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Earl Lemongrab
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Re: Bubbles Everywhere

Post by Earl Lemongrab » Wed Feb 28, 2018 11:53 am

220volt wrote:
Mon Feb 26, 2018 5:47 pm
It seems to me that everyone is fearful of this market. Everyone is predicting a crash. Isn't this time to be greedy?
If "everyone" actually thought a crash was imminent, then it would have already happened. That's because "everyone" would have sold their stocks to wait it out. But most people recognize that they don't know when crashes will happen.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: Bubbles Everywhere

Post by zaboomafoozarg » Wed Feb 28, 2018 3:28 pm

Rick Ferri wrote:
Tue Feb 27, 2018 2:07 pm
Kevin K wrote:
Mon Feb 26, 2018 7:12 pm
Switch from high volatility, high beta assets to
All of these, to one degree or another, are exactly the kinds of things respected FA's like Larry Swedroe and Rick Ferri have been recommending here for years.
Commodities? Alternatives?

Nope, that’s not anything I ever recommended. That stuff is way to complex for me. I like Investments that pay dividends, interest and rental income. If it doesn’t pay cash, I’m not interested.

Rick
Core Four for life!

(OK I'll admit though, I cheated a little and have 5% in AQR's alternative style premia fund, QSPIX)

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Re: Bubbles Everywhere

Post by 3CT_Paddler » Wed Feb 28, 2018 4:25 pm

Rick Ferri wrote:
Tue Feb 27, 2018 2:07 pm
I like Investments that pay dividends, interest and rental income. If it doesn’t pay cash, I’m not interested.

Rick
Rick, are you saying that you have a preference for stocks that pay dividends vs stocks that don't pay dividends? TSM vs a dividend focused fund?

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Rick Ferri
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Re: Bubbles Everywhere

Post by Rick Ferri » Wed Feb 28, 2018 5:49 pm

The idea is to provide cash flow of some sort off the asset class. With stocks, it can take the form of dividends, buybacks and reinvestment. Similarly, a zero coupon bond does not pay cash but it has cash flow. In contrast, an ounce of gold remains an ounce of gold for thousands of years. It doesn’t pay out cash or become two ounces of gold.

Rick
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Re: Bubbles Everywhere

Post by LRonHalfelven » Wed Feb 28, 2018 5:58 pm

220volt wrote:
Mon Feb 26, 2018 5:47 pm
It seems to me that everyone is fearful of this market. Everyone is predicting a crash. Isn't this time to be greedy?
As Yoda almost said: Be greedy, or do not. There is no time.
"If you change your strategy frequently you don't really have one." --Garry Kasparov

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Re: Bubbles Everywhere

Post by hoops777 » Wed Feb 28, 2018 6:24 pm

220volt wrote:
Mon Feb 26, 2018 5:47 pm
It seems to me that everyone is fearful of this market. Everyone is predicting a crash. Isn't this time to be greedy?
Most definitely not
K.I.S.S........so easy to say so difficult to do.

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220volt
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Re: Bubbles Everywhere

Post by 220volt » Wed Feb 28, 2018 8:04 pm

hoops777 wrote:
Wed Feb 28, 2018 6:24 pm
220volt wrote:
Mon Feb 26, 2018 5:47 pm
It seems to me that everyone is fearful of this market. Everyone is predicting a crash. Isn't this time to be greedy?
Most definitely not
I was being mostly sarcastic considering Buffett's saying" Be fearful when everyone is greedy. Be greedy when everyone is fearful".

I think a complete way to say it would be: " Be fearful when everyone is greedy WHILE the market is up. Be greedy when everyone is fearful when the market is down".
"If I had only followed the advice of financial analysts in 2008, I'd have a million dollars today, provided I started with a hundred million dollars" - Jon Stewart

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Re: Bubbles Everywhere

Post by Valuethinker » Thu Mar 01, 2018 4:52 am

3CT_Paddler wrote:
Wed Feb 28, 2018 4:25 pm
Rick Ferri wrote:
Tue Feb 27, 2018 2:07 pm
I like Investments that pay dividends, interest and rental income. If it doesn’t pay cash, I’m not interested.

Rick
Rick, are you saying that you have a preference for stocks that pay dividends vs stocks that don't pay dividends? TSM vs a dividend focused fund?
Quite. Good point.

Should we prefer Apple to Alphabet (Google)? The former pays a dividend, the latter does not. They are both in the world's leading tech companies, but Apple is no longer controlled by the Founders, thus Steve Jobs' widow (presumably) is aligned with other investors in demanding a dividend. Google is still run by Sergey Brin and Larry Page, and they don't require a dividend from their investment-- but they know Google won't do something with shareholders' money of which they do not approve.

Over to Berkshire Hathaway. It is more like Google than it is like Apple (or Microsoft) in this regard.

I can see the case for avoiding Amazon or Netflix (or even Google and Facebook) but Berkshire Hathaway?

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Re: Bubbles Everywhere

Post by hudson » Thu Mar 01, 2018 6:05 am

Kevin M wrote:
Tue Feb 27, 2018 2:33 pm
Kevin K wrote:
Mon Feb 26, 2018 7:12 pm
As for bonds, my conclusion after reading his article is that CD's make a whole lot more sense than bond funds in this environment if my main reason for holding bonds is to offset the risks I take on the equity side.
Please share more of your reasoning about this.

I've been a big proponent of direct CDs since late 2010, but the benefits are not nearly as great now as they have been in recent years. The yield premiums over Treasuries of same maturities are much smaller, and it's very hard to find a good yield premium with a low early withdrawal penalty (EWP), like six months of interest on a 5-year CD.

For one-year maturities, Treasuries typically have had a slight advantage over new-issue brokered CDs lately, and in a taxable account, they're clearly superior if you have a high state tax rate. For example, I see 1-year Treasury rate at 2.09% at Fidelity, which translates into 2.35% taxable-equivalent yield (TEY) for me (8% marginal state, 27% marginal federal, not itemizing). You probably will get a couple basis points less for quantities of less than 100 (100,000 face value), but it still beats a 1-year CD. This is compared to 2.0% for new-issue 1-year CD.

You also might find better deals in AAA/AA munis in a taxable account. I've been buying mainly AA/AAA munis in the 4-month to 3-year range in taxable accounts. Fixed-income yield curves (CDs, Treasuries, Munis) all are reasonably steep out to three years, but taper off after that, which is why I'm not going past 3-year maturities much. Treasuries can be a better deal than munis, especially out to one year, in a high-tax state, unless you're willing to concentrate your muni holdings in higher-risk states, like Illinois.

An early withdrawal penalty is not so valuable for shorter maturities, and since there haven't been too many super-good direct CDs deals lately, I've been buying brokered CDs out to three year maturities in tax-advantaged accounts.

For those who want to keep things simple and keep maturities short, and who otherwise would use a rolling bond ladder, I see nothing wrong with short-term or limited-term bond funds, either muni, Treasury, or corporate, depending on location (taxable or tax-advantaged), and one's view on credit risk. These are holding mostly in what I consider to be the sweet range of the yield curve--one to three years.

Kevin
Kevin K...I vote with you on CDs; but I don't have a problem with high quality, low cost intermediate funds.
Kevin M...thanks for the useful for up to 3 years! What's your take on longer maturities?

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Re: Bubbles Everywhere

Post by Rick Ferri » Thu Mar 01, 2018 8:21 am

Valuethinker, you didn’t read my response above. Here it is again

The idea is to provide cash flow of some sort off the asset class. With stocks, it can take the form of dividends, buybacks and reinvestment. Similarly, a zero coupon bond does not pay cash but it has cash flow. In contrast, an ounce of gold remains an ounce of gold for thousands of years. It doesn’t pay out cash or become two ounces of gold.

A quarry produces income. A pile of rocks remains a pile of rocks. I’ll buy the quarry, not the rocks.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Kevin M
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Re: Bubbles Everywhere

Post by Kevin M » Thu Mar 01, 2018 2:47 pm

hudson wrote:
Thu Mar 01, 2018 6:05 am
Kevin M...thanks for the useful for up to 3 years! What's your take on longer maturities?
As I mentioned, the yield curve tapers off significantly after three year maturities, so that's mostly as far out as I'm going now. I'm generally looking for 20 basis points of taxable-equivalent yield per extra year of maturity. Looking just at new-issue CDs at Vanguard, we see:

2.00% - 1-year
2.50% - 2-year
2.70% - 3-year
2.85% - 5-year (2.90% at Fidelity)

So if you use 1.50% as the 0-year rate, as you'd get in prime money market or a no-penalty CD at Ally, you're getting 50 basis points for extending to one year, another 50 for extending to two years, and 20 for extending to three years, but you only get an extra 15-20 bps for extending an additional two years to five years. So you get the most reward for going out to two years, and just barely enough to go to three (although I just got a small quantity of 3-year CDs on the secondary market at 2.867% after commission, and saw 2.772% secondary 3-year today).

For Treasuries, the yield curve is very steep from 0 to 1 year, and you don't get quite 20 bps per year for extending to 2 or 3 years--closer to 15 bps. In a tax-advantaged account, CDs are higher yielding than Treasuries beyond one year, but in a taxable account, Treasuries are very close to CDs at my tax rates as of today. From three to five years, the yield curve tapers to about 10 bps per year, so similar to CDs.

I'm holding my intermediate-term bond funds, but am not adding new money to maturities much beyond three years at this point.

Kevin
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hudson
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Re: Bubbles Everywhere

Post by hudson » Fri Mar 02, 2018 7:41 am

Kevin M wrote:
Thu Mar 01, 2018 2:47 pm
hudson wrote:
Thu Mar 01, 2018 6:05 am
Kevin M...thanks for the useful for up to 3 years! What's your take on longer maturities?
As I mentioned, the yield curve tapers off significantly after three year maturities, so that's mostly as far out as I'm going now. I'm generally looking for 20 basis points of taxable-equivalent yield per extra year of maturity. Looking just at new-issue CDs at Vanguard, we see:

2.00% - 1-year
2.50% - 2-year
2.70% - 3-year
2.85% - 5-year (2.90% at Fidelity)

So if you use 1.50% as the 0-year rate, as you'd get in prime money market or a no-penalty CD at Ally, you're getting 50 basis points for extending to one year, another 50 for extending to two years, and 20 for extending to three years, but you only get an extra 15-20 bps for extending an additional two years to five years. So you get the most reward for going out to two years, and just barely enough to go to three (although I just got a small quantity of 3-year CDs on the secondary market at 2.867% after commission, and saw 2.772% secondary 3-year today).

For Treasuries, the yield curve is very steep from 0 to 1 year, and you don't get quite 20 bps per year for extending to 2 or 3 years--closer to 15 bps. In a tax-advantaged account, CDs are higher yielding than Treasuries beyond one year, but in a taxable account, Treasuries are very close to CDs at my tax rates as of today. From three to five years, the yield curve tapers to about 10 bps per year, so similar to CDs.

I'm holding my intermediate-term bond funds, but am not adding new money to maturities much beyond three years at this point.

Kevin
Thanks Kevin!
So the 3 year brokered CD is the sweet spot?
Intermediate bond funds aren't bad...like Vanguard's muni, VWIUX...currently distributing around 2.8%.
Maybe part of your thinking is that interest rates will rise?

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Re: Bubbles Everywhere

Post by Kevin M » Fri Mar 02, 2018 12:31 pm

hudson wrote:
Fri Mar 02, 2018 7:41 am
Thanks Kevin!
So the 3 year brokered CD is the sweet spot?
I wouldn't call it the sweet spot--more like 1-3 years is the sweet range of the yield curve, with 1-2 years giving you the most reward for extending maturity. I've been buying munis, Treasuries and CDs throughout that range.
Intermediate bond funds aren't bad...like Vanguard's muni, VWIUX...currently distributing around 2.8%.
I am holding my intermediate-term bond funds, but not adding much if anything to them. Most recent VWIUX distribution yield is 2.87%, but the SEC yield at 2.34% is more relevant in comparing to yields (to maturity) for individual bonds. For me that's a taxable-equivalent yield of about 3.3%, and I've gotten TEYs of more than 3% with some AA 3-year munis, so it's not worth it to me to extend duration to 5.2 years for the extra yield with most new money.
Maybe part of your thinking is that interest rates will rise?
I never pretend to be able to predict interest rates, but in general I want to be rewarded sufficiently for taking more term risk, since interest rates could increase (and they certainly have been increasing in recent months). This is why I'd prefer a minimum of 20 bps per year of extra maturity to take the extra term risk.

Kevin
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Re: Bubbles Everywhere

Post by hudson » Sat Mar 03, 2018 11:14 am

Kevin M wrote:
Fri Mar 02, 2018 12:31 pm
and I've gotten TEYs of more than 3% with some AA 3-year munis, so it's not worth it to me to extend duration to 5.2 years for the extra yield with most new money.
Kevin
Thanks Kevin M! Useful information!
Where can I kick the tires on the AA 3-year munis?

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Re: Bubbles Everywhere

Post by Kevin M » Sat Mar 03, 2018 1:54 pm

hudson wrote:
Sat Mar 03, 2018 11:14 am
Thanks Kevin M! Useful information!
Where can I kick the tires on the AA 3-year munis?
Where do you have brokerage accounts?

Between Vanguard and Fidelity, I've found Fidelity to generally have better prices for munis. Also, commision is $1 per bond (1,000 face value) at Fidelity for all customers, while at Vanguard it's $2 per bond unless you are at least Voyager Select ($500K in) Vanguard products).

Generally I've seen the highest yielding AA (or AA-) for Illinois, I assume because of the state's financial issues. You'll also see highest yields on bonds with extraordinary redemption (ER), but I set my search criteria to Call Protected (no calls), which filters out the ER bonds too. I also set Sinking fund protection in my criteria. I also see Connecticut municipalities among the highest yielding bonds. You have to accept lower yields if you don't want to concentrate in one or two states. For example, the highest non-callable 3-year yield I see at Fidelity is 2.351 (before commission) for an IL bond. I see a CT bond at 2.125%, and other than more IL bonds, the next highest yield is 2.000% for an IN bond.

Once you drop down to the lower Muni yields, you may find that Treasuries are competitive if you are in a high tax state.

Kevin
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Re: Bubbles Everywhere

Post by hudson » Sat Mar 03, 2018 3:47 pm

Kevin M wrote:
Sat Mar 03, 2018 1:54 pm
hudson wrote:
Sat Mar 03, 2018 11:14 am
Thanks Kevin M! Useful information!
Where can I kick the tires on the AA 3-year munis?
Where do you have brokerage accounts?

Between Vanguard and Fidelity, I've found Fidelity to generally have better prices for munis. Also, commision is $1 per bond (1,000 face value) at Fidelity for all customers, while at Vanguard it's $2 per bond unless you are at least Voyager Select ($500K in) Vanguard products).

Generally I've seen the highest yielding AA (or AA-) for Illinois, I assume because of the state's financial issues. You'll also see highest yields on bonds with extraordinary redemption (ER), but I set my search criteria to Call Protected (no calls), which filters out the ER bonds too. I also set Sinking fund protection in my criteria. I also see Connecticut municipalities among the highest yielding bonds. You have to accept lower yields if you don't want to concentrate in one or two states. For example, the highest non-callable 3-year yield I see at Fidelity is 2.351 (before commission) for an IL bond. I see a CT bond at 2.125%, and other than more IL bonds, the next highest yield is 2.000% for an IN bond.

Once you drop down to the lower Muni yields, you may find that Treasuries are competitive if you are in a high tax state.

Kevin
Thanks Kevin!
I'm with Vanguard...I'll start looking. Thanks for the hints!
With individual munis, I've always been warned about the secret haircut; do you see that?

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Re: Bubbles Everywhere

Post by Kevin M » Sat Mar 03, 2018 7:55 pm

hudson wrote:
Sat Mar 03, 2018 3:47 pm
With individual munis, I've always been warned about the secret haircut; do you see that?
Well, you're not going to get dealer prices, and the bid/ask spread is going to be larger than Treasuries. But, I usually find the best prices/yields at Fidelity and Vanguard are for the smallest quantities, like 5 or 10 bonds. So this is consistent with what I think Larry Swedroe has said about good deals for smaller quantities. You can look at recent trades to get a sense as to whether the price you're paying is fair or not. The dealers are definitely making a good profit, and you can see how much lower prices customers are getting for selling compared to buying.

If I see that the price being asked is much higher than a recent price a customer paid, I'll probably pass. But I'm also comparing to the taxable-equivalent yields (TEYs) the munis are offering compared to CDs or Treasuries, so whether or not the price looks fair compared to other transactions, what matters more is the value compared to alternatives available to me.

Kevin
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Re: Bubbles Everywhere

Post by abuss368 » Sun Mar 04, 2018 3:17 pm

Rick Ferri wrote:
Tue Feb 27, 2018 2:07 pm
I like Investments that pay dividends, interest and rental income. If it doesn’t pay cash, I’m not interested.

Rick
Hi Rick -

Great advice and one that I have learned to appreciate much more over time.

Best.
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Re: Bubbles Everywhere

Post by abuss368 » Sun Mar 04, 2018 3:19 pm

Rick Ferri wrote:
Thu Mar 01, 2018 8:21 am
Valuethinker, you didn’t read my response above. Here it is again

The idea is to provide cash flow of some sort off the asset class. With stocks, it can take the form of dividends, buybacks and reinvestment. Similarly, a zero coupon bond does not pay cash but it has cash flow. In contrast, an ounce of gold remains an ounce of gold for thousands of years. It doesn’t pay out cash or become two ounces of gold.

A quarry produces income. A pile of rocks remains a pile of rocks. I’ll buy the quarry, not the rocks.
Remember when Warren Buffett also discussed this exact point in an annual report a few years ago? Mr. Buffett avoids commodities as well.

Thanks Rick!
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Re: Bubbles Everywhere

Post by hudson » Sun Mar 04, 2018 3:58 pm

Kevin M wrote:
Sat Mar 03, 2018 7:55 pm
hudson wrote:
Sat Mar 03, 2018 3:47 pm
With individual munis, I've always been warned about the secret haircut; do you see that?
Well, you're not going to get dealer prices, and the bid/ask spread is going to be larger than Treasuries. But, I usually find the best prices/yields at Fidelity and Vanguard are for the smallest quantities, like 5 or 10 bonds. So this is consistent with what I think Larry Swedroe has said about good deals for smaller quantities. You can look at recent trades to get a sense as to whether the price you're paying is fair or not. The dealers are definitely making a good profit, and you can see how much lower prices customers are getting for selling compared to buying.

If I see that the price being asked is much higher than a recent price a customer paid, I'll probably pass. But I'm also comparing to the taxable-equivalent yields (TEYs) the munis are offering compared to CDs or Treasuries, so whether or not the price looks fair compared to other transactions, what matters more is the value compared to alternatives available to me.

Kevin
Thanks Kevin! I'll take a look tomorrow.

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Re: Bubbles Everywhere

Post by uberational44 » Sun Mar 04, 2018 5:11 pm

If you pull out a graph of stock market performance over very long periods of time - it goes up over time

If you need your cash in the short to medium term, you shouldn't be in stocks.

But if you are investing for the long-term, it really doesn't matter how the market is valued...
Marketeer investing as a hobby. Interested in modern takes on value investing, passive investing and general contrarianism.

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Re: Bubbles Everywhere

Post by willthrill81 » Sun Mar 04, 2018 5:16 pm

Todd's logic seems very sound to me and, as noted by others in this thread, largely echos what many other 'experts' have been saying for a while now: equities are highly valued (I don't like the term 'overvalued' because this can only be potentially known in hindsight), bonds have a real yield close to zero, and interest rates are rising. Historically, that's a bad combination for investors, regardless of their AA.

Anything can happen, and Todd admits this, but the 'historic odds' are that returns over the next decade or so will be poor across the board for equities and bonds. We might see the markets move sideways for a long time, or we might see a bear market that doesn't recover for a long time.

Regardless, I'm glad that I'm a trend follower who has some downside protection and 15-20 years before my planned retirement.
“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: Bubbles Everywhere

Post by itstoomuch » Mon Mar 05, 2018 1:10 am

Since we have no more human capital and deep into retirement,,,,I gave up potential upside for a secure floor. As secure as practicable. Only time will tell. :confused
I've tried to diversify asset classes, create different buckets, create income streams, isolate from each other. :annoyed
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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