Ritholtz argues inflation will be mostly transitory

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prioritarian
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Re: Ritholtz argues inflation will be mostly transitory

Post by prioritarian »

steve r wrote: Wed Nov 24, 2021 10:48 am Why do people continue to pour into a product that they know will provide them a negative real return? ... Simba data shows us that for 150 years bonds and ITT had a positive real return of 2.5 percentage point average.
The juxtaposition of these two comments is fascinating. The idea that someone could predict that the return of LTT, for example, will be negative over ~20+ years is patently absurd. Treasury yields are not constant and an increase in yield over the medium- to long-term wipes away price losses due to increasing yield. Secondly, a focus on "interest rates" and inflation oversimplifies returns that are also impacted by the yield curve, positive roll, and convexity.

Moreover, I don't invest in treasuries for their meager real return. I invest in treasury bonds because they hedge equities during market panics and are, historically, among the best non-synthetic diversifiers for portfolios with large amounts of equities.
Also, there are "bond" substitutes like iBond, paying off mortgage, CDs, cash, etc.
  • I bonds are a hardly even a rounding error for my portfolio.
  • 1% CD's and cash have an appreciably worse return than my ~2% SEC yield bond positions so the real question is why anyone with 10+ year investment timeline would "invest" in cash/CDs instead of longer duration bonds?
  • Mortgages are an illiquid leveraged bet on an asset with poor historical returns relative to equities and poor diversification characteristics.
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Re: Ritholtz argues inflation will be mostly transitory

Post by Zeno »

steve r wrote: Wed Nov 24, 2021 12:06 pm
Zeno wrote: Wed Nov 24, 2021 11:15 am
steve r wrote: Wed Nov 24, 2021 10:48 am Why do people continue to pour into a product that they know will provide them a negative real return?
I don't know that they will provide a negative real return over the time frames that matter to me. I don't know anything about the future.

We are 57 and 61. Within the SORR. AA 65/32/3. No TIPs; instead most of the "32" is in BND and the like.

I don't worry about the performance of individual components of our portfolio; instead, I care about how it performs in aggregate.

As to the aggregate performance of our portfolio, we are up 10x over the past 12 months. It sounds flippant and I don't mean it that way -- and subject to reevaluating our AA every few years or so as we age -- but I don't actually care whether BND is up, down, or sideways currently, and/or what it is forecast to do over the next month, year, decade, or half century. I don't believe in forecasts. BND is part of our passive, lazy portfolio that in aggregate is working hard for us, and that is good enough for us.
Would it change anything if I use the word expect. We do not know the future, but we do know the current yield and that as a very strong predictor of future returns for the next decade for primarily intermediate term products. I suspect not, your main point, as I take it, is that BND is only part of a larger picture. Fair point.

By 10x do you mean ten fold or ten percent? If ten fold, I am in the wrong lazy portfolio. :beer and very curious what the "3" is in 65 / 32 / "3".
I'm lazy and not a financial wizard, but the verb "expect" wouldn't change anything for us either. I have read too many Feynman books and watched too many Feynman videos, so I expect nothing about the future either. We have an AA. We rebalance within 5% bands. We check on our AA every year or two. And while I fret about the future, our boring portfolio has delivered for us, year after year. Could it all crash down a minute after I type this? Possibly. Again, I expect nothing about the future. All I know is the BH approach has worked for us for decades.

By "10x" I mean "ten times our anticipated expenses in retirement" (assuming we are only living on our portfolio; it doesn't include SS and thus is conservative). Our lazy, BH-esque portfolio has become an amoeba that just sits there and grows, while spitting off interest and dividends, month after month, quarter after quarter, year after year. It took us three decades to achieve this point, but it is a wonderful thing to behold having arrived at this destination.

An amoeba consists of three basic components: cytoplasm, plasma membrane and the nucleus. Our portfolio consists of the same three pieces: equity funds, bond funds, and cash. And just as I don't worry about what the cytoplasm alone is doing, I don't worry about what the bond funds alone are doing. As long as our amoeba is alive and thriving, we're fine.

The "3" is cash sitting in: (1) a boring savings account at the local bank; and (2) our settlement fund for our after-tax account at Vanguard.
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Re: Ritholtz argues inflation will be mostly transitory

Post by steve roy »

mikejuss wrote: Tue Nov 23, 2021 7:56 pm
nedsaid wrote: Tue Nov 23, 2021 5:32 pmIf Barry says inflation is transitory, run for the hills. :wink:
Is Barry not well-liked among the Bogleheads?
Me, I like Barry just fine. Good humored, and I find him more right than wrong most of the time.
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Re: Ritholtz argues inflation will be mostly transitory

Post by steve roy »

mikejuss wrote: Tue Nov 23, 2021 7:56 pm
nedsaid wrote: Tue Nov 23, 2021 5:32 pmIf Barry says inflation is transitory, run for the hills. :wink:
Is Barry not well-liked among the Bogleheads?
Me, I like Barry just fine. Good humored, and I find him more right than wrong most of the time.
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steve roy
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Re: Ritholtz argues inflation will be mostly transitory

Post by steve roy »

mikejuss wrote: Tue Nov 23, 2021 7:56 pm
nedsaid wrote: Tue Nov 23, 2021 5:32 pmIf Barry says inflation is transitory, run for the hills. :wink:
Is Barry not well-liked among the Bogleheads?
Me, I like Barry just fine. Good humored, and I find him more right than wrong most of the time.
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Re: Ritholtz argues inflation will be mostly transitory

Post by stan1 »

carolinaman wrote: Wed Nov 24, 2021 2:07 pm One thing many people tend to ignore is the psychology of inflation. Companies are now raising prices because it is almost expected by consumers since so many price increases have occurred, even though there is not a commensurate increase in costs by these companies. There is more to inflation that just supply and demand.
Or an opportunity to cut costs and raise profit margins:
- Proctor and Gamble now knows just how much people like Charmin over industrial one ply. Price will never drop down.

- Marriott and Hilton know that most people will accept not having daily maid service. Full staff never coming back.

- McDonalds slowly moving to self-serve kiosk only ordering. The registers are still there but unused. If someone asks for assistance at the register they are told self-serve kiosk and drive thru are the two choices. Stores remodeled so customers cannot see staff in kitchen. Full staff never coming back.

- At restaurants waiters and bussers are the same person doing both. Some jobs never coming back.
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Re: Ritholtz argues inflation will be mostly transitory

Post by metacritic »

Why? I recall him as one of the few to truly anticipate and document the imminent housing crisis and it's longer term implications for a recession of extraordinary scope. I don't know too many others with his track record!
nedsaid wrote: Tue Nov 23, 2021 5:32 pm If Barry says inflation is transitory, run for the hills. :wink:

What makes me even more nervous is that he says "mostly." So two words here to parse, "mostly" whatever that means and "transitory" whatever that means. I suppose President Hindenburg at the Weimar Republic during the early 1930's said that inflation was transitory but don't worry, we got it under control. When people say not to worry, that is when I get worried. "Transitory" could take us out to the 2030's. :wink:
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Re: Ritholtz argues inflation will be mostly transitory

Post by steve r »

prioritarian wrote: Wed Nov 24, 2021 2:12 pm The idea that someone could predict that the return of LTT, for example, will be negative over ~20+ years is patently absurd. Treasury yields are not constant and an increase in yield over the medium- to long-term wipes away price losses due to increasing yield.
Tracking bond total returns over 20 years or with great precision might be a touch absurd.

But the reality is forecast of future bond total returns (as opposed to inflation or stock returns) is not that hard if you are simply trying to get "good enough" estimates -- the expected total return is very close to the starting yield. Increasing yields are offset by a decline in bond prices.

Here is a graph showing future treasury returns for 10 year treasuries rolled into to new bonds yearly (somewhat similar to what a bond fund does) tracks the current yield remarkably well.

Image

I have seen similar graphs for Barclays Aggregate Bond Index (but for shorter periods of time). I have not seen similar graphs for 20 or (better still) 30 years out.

OTOH (critiquing my own post), this thread is about inflation. Accurate inflation predictions are very hard as is prediction on "real" bond returns.
"It's much easier than most investors expect to get satisfactory investment returns and it is much more difficult than they expect to get better results than that." Benjamin Graham
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Re: Ritholtz argues inflation will be mostly transitory

Post by 02nz »

nedsaid wrote: Tue Nov 23, 2021 5:32 pm I suppose President Hindenburg at the Weimar Republic during the early 1930's said that inflation was transitory but don't worry, we got it under control.
OK I'm going to be pedantic and point out that it was the early 1920s, not 1930s, and Friedrich Ebert, not Hindenburg, was president at the time.
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Re: Ritholtz argues inflation will be mostly transitory

Post by nedsaid »

02nz wrote: Wed Nov 24, 2021 4:04 pm
nedsaid wrote: Tue Nov 23, 2021 5:32 pm I suppose President Hindenburg at the Weimar Republic during the early 1930's said that inflation was transitory but don't worry, we got it under control.
OK I'm going to be pedantic and point out that it was the early 1920s, not 1930s, and Friedrich Ebert, not Hindenburg, was president at the time.
Paul von Hindenburg was President of Germany from 1925-1934.
A fool and his money are good for business.
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Re: Ritholtz argues inflation will be mostly transitory

Post by 02nz »

nedsaid wrote: Wed Nov 24, 2021 4:24 pm
02nz wrote: Wed Nov 24, 2021 4:04 pm
nedsaid wrote: Tue Nov 23, 2021 5:32 pm I suppose President Hindenburg at the Weimar Republic during the early 1930's said that inflation was transitory but don't worry, we got it under control.
OK I'm going to be pedantic and point out that it was the early 1920s, not 1930s, and Friedrich Ebert, not Hindenburg, was president at the time.
Paul von Hindenburg was President of Germany from 1925-1934.
The hyperinflation happened in 1921-23, before Hindenburg took office. (Economic policy was in any case the domain of the chancellor, not the president.)
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Re: Ritholtz argues inflation will be mostly transitory

Post by nisiprius »

"Transitory" is now the polarizing word of the day, and the thought-leader factions are lining up fur' it and agin' it.

It's noise.

What specific actions should I prudently take, based on one authority's vaguely-expressed opinion that inflation will be "mostly transitory?"

I put more weight on the fact that my wife, who can remember the period around 1980, isn't alarmed (yet?), and says "just imagine, people thinking that this is high inflation."

P.S. When I was a kid, H. E. Harris always ran ads in the back of comic books offering cheap bags of "unsorted" postage stamps that might well contain who knows what extremely valuable stamps. And we could find out! All we needed to do was buy some of the stamp catalogs and perforation gauges they also sold. Yes, those bags were kind of neat.

They almost always contained a few Deutches Reich stamps from the hyperinflation era, and it was quite thrilling owning bits of paper worth milliardens of M's. The amount was shown both in words and numerically with all the zeroes. Never again have I seen and touched any financial instrument with that many zeroes on it.
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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prioritarian
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Re: Ritholtz argues inflation will be mostly transitory

Post by prioritarian »

steve r wrote: Wed Nov 24, 2021 4:00 pm
prioritarian wrote: Wed Nov 24, 2021 2:12 pm The idea that someone could predict that the return of LTT, for example, will be negative over ~20+ years is patently absurd. Treasury yields are not constant and an increase in yield over the medium- to long-term wipes away price losses due to increasing yield.
Tracking bond total returns over 20 years or with great precision might be a touch absurd.

But the reality is forecast of future bond total returns (as opposed to inflation or stock returns) is not that hard if you are simply trying to get "good enough" estimates -- the expected total return is very close to the starting yield. Increasing yields are offset by a decline in bond prices.

Here is a graph showing future treasury returns for 10 year treasuries rolled into to new bonds yearly (somewhat similar to what a bond fund does) tracks the current yield remarkably well.



I have seen similar graphs for Barclays Aggregate Bond Index (but for shorter periods of time). I have not seen similar graphs for 20 or (better still) 30 years out.

OTOH (critiquing my own post), this thread is about inflation. Accurate inflation predictions are very hard as is prediction on "real" bond returns.

I don't think your graph is showing total returns but maybe I'm mistaken.

Here is what total LTT bond returns look like over the last 20 years -- a period which included a ~5.5.% increase in inflation as well as a ~5% increase in Fed funds rates:

Image

Here is what total returns looked like for long bonds from 1981-2021 according to portfolio visualizer:


Image

Rolling 36 month returns:

Image

Rolling 36 month returns over a period of rising interest rates (which is what many seem to fear):

Image


I want to clarify that I'm not a LTT bond bull and think it's possible, even likely, that LTTs will have very poor returns for a number of years but I have a much longer investment horizon than a few years .
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Re: Ritholtz argues inflation will be mostly transitory

Post by steve r »

prioritarian wrote: Wed Nov 24, 2021 5:05 pmI want to clarify that I'm not a LTT bond bull and think it's possible, even likely, that LTTs will have very poor returns for a number of years but I have a much longer investment horizon than a few years .
I think we can agree on this point. For LTTs to outperform over the next decade, rates will need to come down.

To clarify, I thought I would share a similar graph (w/ earlier and end dates). It was created with the help of Mr. Bogle himself.

Image

Note the red line shows the yield in 2011 2012 was about 2 percent. VFITX (Vanguard Int. Term Government bond) 10 year average annual return did outperform through October ... 2.21%. This is not a perfect analogy.

Lastly, if anyone has seen this type of analysis for a longer 20 or 30 year bonds, I would love to see / read the link.
"It's much easier than most investors expect to get satisfactory investment returns and it is much more difficult than they expect to get better results than that." Benjamin Graham
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Re: Ritholtz argues inflation will be mostly transitory

Post by rockstar »

sycamore wrote: Wed Nov 24, 2021 7:19 am
rockstar wrote: Tue Nov 23, 2021 9:47 pm ...I'm maxing I Bonds, but that's about it. And I'm still negative real after taxes on those.
So you're reporting your I Bond interest every year and paying taxes on them? Curious why you decided to do that rather than defer reporting them until cashing in the I Bonds?
I'm not. I'm deferring until I redeem them. Then, I'll have to pay taxes at some unknown future rate. I have to pay taxes, so I'll eventually be negative real after taxes. It's not tax never.
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Re: Ritholtz argues inflation will be mostly transitory

Post by prioritarian »

steve r wrote: Wed Nov 24, 2021 5:54 pm
prioritarian wrote: Wed Nov 24, 2021 5:05 pmI want to clarify that I'm not a LTT bond bull and think it's possible, even likely, that LTTs will have very poor returns for a number of years but I have a much longer investment horizon than a few years .
I think we can agree on this point. For LTTs to outperform over the next decade, rates will need to come down.

To clarify, I thought I would share a similar graph (w/ earlier and end dates). It was created with the help of Mr. Bogle himself.

Image

Note the red line shows the yield in 2011 2012 was about 2 percent. VFITX (Vanguard Int. Term Government bond) 10 year average annual return did outperform through October ... 2.21%. This is not a perfect analogy.

Lastly, if anyone has seen this type of analysis for a longer 20 or 30 year bonds, I would love to see / read the link.
Google image search tells me that the above graph measures holding a single bond to maturity and reinvesting coupon returns while the total return of a bond ETF or mutual fund is also influenced by positive roll (market prices increase due to decreasing maturity and a positive yield curve), changes in yield over time due to turnover, and fluctuations in price due to interest rates (including the effects of convexity). :
Since 1926, he notes, the entry yield on the 10-year Treasury explains 92% of the annualized return an investor would have earned over the subsequent decade had he or she held the bond to maturity and reinvested the coupon payments at prevailing rates.
https://www.mymoneyblog.com/bogle-long- ... turns.html
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Re: Ritholtz argues inflation will be mostly transitory

Post by rockstar »

Charon wrote: Wed Nov 24, 2021 1:45 pm
rockstar wrote: Tue Nov 23, 2021 9:56 pm I'm not timing. I'm buying a bond when I can get a real return.
This is the literal definition of timing.
rockstar wrote: Tue Nov 23, 2021 9:56 pm Why would I buy a bond that gives me a negative real return pre-tax intentionally?
Bonds have a secondary market, which means their value can change regardless of the yield. So they could go up. You don't know. Just like you don't know about equities. Also, bonds cushion you when equities drop, which is the reason we all hold them. Equities have a higher expected return, so you're either arguing for a 100/0 AA all the time, or you don't understand why you hold bonds.
If that's the definition of timing, then rebalancing is timing. Changing ones AA is timing.

You assume that bonds will always cushion your fall in equities. You're also paying to do that right now with negative real yields. In order for this to make sense, you have gain more than you pay to protect. Otherwise, you're paying for expensive insurance, where you could use long dated put contracts to accomplish the same thing.

If bonds aren't going to provide you a return, why not use put contracts instead? What do you gain by holding bonds today?
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Re: Ritholtz argues inflation will be mostly transitory

Post by sycamore »

rockstar wrote: Wed Nov 24, 2021 6:40 pm
sycamore wrote: Wed Nov 24, 2021 7:19 am
rockstar wrote: Tue Nov 23, 2021 9:47 pm ...I'm maxing I Bonds, but that's about it. And I'm still negative real after taxes on those.
So you're reporting your I Bond interest every year and paying taxes on them? Curious why you decided to do that rather than defer reporting them until cashing in the I Bonds?
I'm not. I'm deferring until I redeem them. Then, I'll have to pay taxes at some unknown future rate. I have to pay taxes, so I'll eventually be negative real after taxes. It's not tax never.
Right, I just saw your "I'm still negative" rather than "I will be still negative".

Who knows, maybe you'll be in the 0% federal tax bracket when you report them? :-)
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Re: Ritholtz argues inflation will be mostly transitory

Post by steve r »

prioritarian wrote: Wed Nov 24, 2021 6:46 pm
steve r wrote: Wed Nov 24, 2021 5:54 pm
prioritarian wrote: Wed Nov 24, 2021 5:05 pmI want to clarify that I'm not a LTT bond bull and think it's possible, even likely, that LTTs will have very poor returns for a number of years but I have a much longer investment horizon than a few years .
I think we can agree on this point. For LTTs to outperform over the next decade, rates will need to come down.

To clarify, I thought I would share a similar graph (w/ earlier and end dates). It was created with the help of Mr. Bogle himself.

Image

Note the red line shows the yield in 2011 2012 was about 2 percent. VFITX (Vanguard Int. Term Government bond) 10 year average annual return did outperform through October ... 2.21%. This is not a perfect analogy.

Lastly, if anyone has seen this type of analysis for a longer 20 or 30 year bonds, I would love to see / read the link.
Google image search tells me that the above graph measures holding a single bond to maturity and reinvesting coupon returns while the total return of a bond ETF or mutual fund is also influenced by positive roll (market prices increase due to decreasing maturity and a positive yield curve), changes in yield over time due to turnover, and fluctuations in price due to interest rates (including the effects of convexity). :
Since 1926, he notes, the entry yield on the 10-year Treasury explains 92% of the annualized return an investor would have earned over the subsequent decade had he or she held the bond to maturity and reinvested the coupon payments at prevailing rates.
https://www.mymoneyblog.com/bogle-long- ... turns.html
Original source (you are correct, just dividends reinvested and no roll effect).
https://www.wsj.com/articles/SB10001424 ... 0382873584

The other graph I posted had roll effect, rebuying every year and annualized return -- I presume annualized means total of appreciation/depreciation plus interest earned -- but to save everyone time the article is less than clear.
https://lplresearch.com/2020/10/20/trea ... cally-low/

I have seen other graphs like this that I could probably post, but I think we can agree this particular portion of the conversation has sort of reached its limit. :beer
"It's much easier than most investors expect to get satisfactory investment returns and it is much more difficult than they expect to get better results than that." Benjamin Graham
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Re: Ritholtz argues inflation will be mostly transitory

Post by VaR »

carolinaman wrote: Wed Nov 24, 2021 2:07 pm One thing many people tend to ignore is the psychology of inflation. Companies are now raising prices because it is almost expected by consumers since so many price increases have occurred, even though there is not a commensurate increase in costs by these companies. There is more to inflation that just supply and demand.
I take solace in the fact that corporate margins are at highs. I wonder how much of the CPI increase that isn't due to energy and the housing bubble is due to expanding profit margins?
https://insight.factset.com/sp-500-is-r ... 008-for-q3
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Re: Ritholtz argues inflation will be mostly transitory

Post by JackoC »

prioritarian wrote: Wed Nov 24, 2021 5:05 pm
steve r wrote: Wed Nov 24, 2021 4:00 pm
prioritarian wrote: Wed Nov 24, 2021 2:12 pm The idea that someone could predict that the return of LTT, for example, will be negative over ~20+ years is patently absurd. Treasury yields are not constant and an increase in yield over the medium- to long-term wipes away price losses due to increasing yield.
Tracking bond total returns over 20 years or with great precision might be a touch absurd.

But the reality is forecast of future bond total returns (as opposed to inflation or stock returns) is not that hard if you are simply trying to get "good enough" estimates -- the expected total return is very close to the starting yield. Increasing yields are offset by a decline in bond prices.
I don't think your graph is showing total returns but maybe I'm mistaken.

I want to clarify that I'm not a LTT bond bull and think it's possible, even likely, that LTTs will have very poor returns for a number of years but I have a much longer investment horizon than a few years .
It's really not a matter of graphs of past bond return, which are entirely irrelevant to expected return now. There is no reason to set the expected return on riskless bond investing higher than yield on today's curve to the investment horizon. And even if that's past 30 yrs, no reason to think that if the US govt issued a 50 yr TIPS it would have a greatly higher yield than the 30 yr TIPS. The expected return of riskless investing is <0% real pre tax to the horizon. We're just kidding ourselves with arguments like 'but in the future bond yield could go back up'. They could also go further down. If the market is at all efficient and it was clear the 'very long run' expected return *now* (past again irrelevant) on bonds was significant positive real...very long term rates now would go to positive yields. Or at least the forward rates on the TIPS curve starting 10 or 20 yrs out would go to significant positive, they aren't.

There is some degree of validity in looking at forward interest rates for money one would only invest in the future, not by timing but I mean with money you don't yet have. The expected return on that money is best estimated by forward rates on today's curve, and since eg. the 30 yr TIPS has a significantly less negative yield than the 10 yr TIPS the forward rate '10x30' isn't very negative. But it still isn't remotely near where bond expected real returns used to be.

And therefore one should think through the fallacy, I believe it is, of assuming one would never invest for a negative real return. The need, if any, for low risk assets in your portfolio is not a defined function of expected return. This is admitted in 'I don't invest in bonds for their great return'. Thinking through the implication of that sentence makes it clear there's no arbitrary cut off at 0% real return where 'bonds no long make sense'. They are only sensible or not compared to what you can get *now* on other investments, your future goals and risk tolerance. The expected return doesn't factor in directly.

And those investing mainly in taxable have been investing in safe assets at negative after tax expected real return (the only return that matters in taxable) for years. The fact that the realized after tax real return might have turned out positive (though didn't necessarily) for bonds sold prior to maturity, because of falling rates, doesn't affect the past decision. I knew years ago that at my tax bracket safe investments had negative after tax real expected return. That was not a rational reason to shift to 100% risk assets (there could be good reasons to have that allocation, but the level of bond yields would not would not automatically dictate it, and as I mentioned before, the seeming assumption by some that stock expected return hasn't declined just as much as bond yields have, or perhaps more, is a questionable one also).
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Re: Ritholtz argues inflation will be mostly transitory

Post by prioritarian »

JackoC wrote: Fri Nov 26, 2021 12:24 pm
prioritarian wrote: Wed Nov 24, 2021 5:05 pm
steve r wrote: Wed Nov 24, 2021 4:00 pm
prioritarian wrote: Wed Nov 24, 2021 2:12 pm The idea that someone could predict that the return of LTT, for example, will be negative over ~20+ years is patently absurd. Treasury yields are not constant and an increase in yield over the medium- to long-term wipes away price losses due to increasing yield.
Tracking bond total returns over 20 years or with great precision might be a touch absurd.

But the reality is forecast of future bond total returns (as opposed to inflation or stock returns) is not that hard if you are simply trying to get "good enough" estimates -- the expected total return is very close to the starting yield. Increasing yields are offset by a decline in bond prices.
I don't think your graph is showing total returns but maybe I'm mistaken.

I want to clarify that I'm not a LTT bond bull and think it's possible, even likely, that LTTs will have very poor returns for a number of years but I have a much longer investment horizon than a few years .
It's really not a matter of graphs of past bond return, which are entirely irrelevant to expected return now. There is no reason to set the expected return on riskless bond investing higher than yield on today's curve to the investment horizon. And even if that's past 30 yrs, no reason to think that if the US govt issued a 50 yr TIPS it would have a greatly higher yield than the 30 yr TIPS. The expected return of riskless investing is <0% real pre tax to the horizon. We're just kidding ourselves with arguments like 'but in the future bond yield could go back up'. They could also go further down. If the market is at all efficient and it was clear the 'very long run' expected return *now* (past again irrelevant) on bonds was significant positive real...very long term rates now would go to positive yields. Or at least the forward rates on the TIPS curve starting 10 or 20 yrs out would go to significant positive, they aren't.

There is some degree of validity in looking at forward interest rates for money one would only invest in the future, not by timing but I mean with money you don't yet have. The expected return on that money is best estimated by forward rates on today's curve, and since eg. the 30 yr TIPS has a significantly less negative yield than the 10 yr TIPS the forward rate '10x30' isn't very negative. But it still isn't remotely near where bond expected real returns used to be.

And therefore one should think through the fallacy, I believe it is, of assuming one would never invest for a negative real return. The need, if any, for low risk assets in your portfolio is not a defined function of expected return. This is admitted in 'I don't invest in bonds for their great return'. Thinking through the implication of that sentence makes it clear there's no arbitrary cut off at 0% real return where 'bonds no long make sense'. They are only sensible or not compared to what you can get *now* on other investments, your future goals and risk tolerance. The expected return doesn't factor in directly.

And those investing mainly in taxable have been investing in safe assets at negative after tax expected real return (the only return that matters in taxable) for years. The fact that the realized after tax real return might have turned out positive (though didn't necessarily) for bonds sold prior to maturity, because of falling rates, doesn't affect the past decision. I knew years ago that at my tax bracket safe investments had negative after tax real expected return. That was not a rational reason to shift to 100% risk assets (there could be good reasons to have that allocation, but the level of bond yields would not would not automatically dictate it, and as I mentioned before, the seeming assumption by some that stock expected return hasn't declined just as much as bond yields have, or perhaps more, is a questionable one also).
I don't invest in bonds held to maturity. I invest in long treasury ETFs/mutual funds that have returns that are also dependent on roll down and on demand/liquidity. Forward rate curves of a particular bond or other estimates of interest-based returns do not capture the total return of positions comprised of multiple bonds of different maturity (e.g. a ladder or an ETF/mutual fund). I agree that there is nothing magical about negative real returns that would cause me to discard bonds for an alternative asset that lacks a long-term track record of diversifying equities.

I'm definitely not making any assumptions about expected returns of US equities and hold an equity portfolio that includes non-US stock to diversify this risk.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

PS: I suspect that some here may not be familiar with the term: "positive roll". It does not refer to reinvestment of coupon payments but rather the roll down return of funds/ETFs that continuously sell bonds as they mature:

https://www.investopedia.com/terms/r/rolldownreturn.asp
Northern Flicker
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Re: Ritholtz argues inflation will be mostly transitory

Post by Northern Flicker »

Whakamole wrote: Wed Nov 24, 2021 11:01 am If inflation is transitory, does this mean Dollar Tree items will be back to costing a dollar once this is over?
No, it means future increases will be in line with the future inflation rate, although dollar tree prices could fall back to $1.00.

What is the annualized inflation rate for dollar tree goods over the last 10 years?
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
JackoC
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Re: Ritholtz argues inflation will be mostly transitory

Post by JackoC »

prioritarian wrote: Mon Nov 29, 2021 12:23 am
JackoC wrote: Fri Nov 26, 2021 12:24 pm
prioritarian wrote: Wed Nov 24, 2021 5:05 pm
steve r wrote: Wed Nov 24, 2021 4:00 pm
prioritarian wrote: Wed Nov 24, 2021 2:12 pm The idea that someone could predict that the return of LTT, for example, will be negative over ~20+ years is patently absurd. Treasury yields are not constant and an increase in yield over the medium- to long-term wipes away price losses due to increasing yield.
Tracking bond total returns over 20 years or with great precision might be a touch absurd.

But the reality is forecast of future bond total returns (as opposed to inflation or stock returns) is not that hard if you are simply trying to get "good enough" estimates -- the expected total return is very close to the starting yield. Increasing yields are offset by a decline in bond prices.
I don't think your graph is showing total returns but maybe I'm mistaken.

I want to clarify that I'm not a LTT bond bull and think it's possible, even likely, that LTTs will have very poor returns for a number of years but I have a much longer investment horizon than a few years .
It's really not a matter of graphs of past bond return, which are entirely irrelevant to expected return now. There is no reason to set the expected return on riskless bond investing higher than yield on today's curve to the investment horizon. And even if that's past 30 yrs, no reason to think that if the US govt issued a 50 yr TIPS it would have a greatly higher yield than the 30 yr TIPS. The expected return of riskless investing is <0% real pre tax to the horizon. We're just kidding ourselves with arguments like 'but in the future bond yield could go back up'. They could also go further down. If the market is at all efficient and it was clear the 'very long run' expected return *now* (past again irrelevant) on bonds was significant positive real...very long term rates now would go to positive yields. Or at least the forward rates on the TIPS curve starting 10 or 20 yrs out would go to significant positive, they aren't.

There is some degree of validity in looking at forward interest rates for money one would only invest in the future, not by timing but I mean with money you don't yet have. The expected return on that money is best estimated by forward rates on today's curve, and since eg. the 30 yr TIPS has a significantly less negative yield than the 10 yr TIPS the forward rate '10x30' isn't very negative. But it still isn't remotely near where bond expected real returns used to be.

And therefore one should think through the fallacy, I believe it is, of assuming one would never invest for a negative real return. The need, if any, for low risk assets in your portfolio is not a defined function of expected return. This is admitted in 'I don't invest in bonds for their great return'. Thinking through the implication of that sentence makes it clear there's no arbitrary cut off at 0% real return where 'bonds no long make sense'. They are only sensible or not compared to what you can get *now* on other investments, your future goals and risk tolerance. The expected return doesn't factor in directly.

And those investing mainly in taxable have been investing in safe assets at negative after tax expected real return (the only return that matters in taxable) for years. The fact that the realized after tax real return might have turned out positive (though didn't necessarily) for bonds sold prior to maturity, because of falling rates, doesn't affect the past decision. I knew years ago that at my tax bracket safe investments had negative after tax real expected return. That was not a rational reason to shift to 100% risk assets (there could be good reasons to have that allocation, but the level of bond yields would not would not automatically dictate it, and as I mentioned before, the seeming assumption by some that stock expected return hasn't declined just as much as bond yields have, or perhaps more, is a questionable one also).
I don't invest in bonds held to maturity. I invest in long treasury ETFs/mutual funds that have returns that are also dependent on roll down and on demand/liquidity. Forward rate curves of a particular bond or other estimates of interest-based returns do not capture the total return of positions comprised of multiple bonds of different maturity (e.g. a ladder or an ETF/mutual fund). I agree that there is nothing magical about negative real returns that would cause me to discard bonds for an alternative asset that lacks a long-term track record of diversifying equities.

I'm definitely not making any assumptions about expected returns of US equities and hold an equity portfolio that includes non-US stock to diversify this risk.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

PS: I suspect that some here may not be familiar with the term: "positive roll". It does not refer to reinvestment of coupon payments but rather the roll down return of funds/ETFs that continuously sell bonds as they mature:

https://www.investopedia.com/terms/r/rolldownreturn.asp
An additional return from 'positive roll' relies on a positive term premium. Which means that the forward rate on today's curve between calendar dates A and B is higher than the market's actual expectation of the spot rate from A to B when date A becomes spot. But lately various analytic models which estimate the expected term premium find it to be near zero, for example the NY Fed's ACM model, whose output can be tracked here:
https://www.newyorkfed.org/research/dat ... remia.html

IOW I was not neglecting the possibility of 'positive roll', just not cluttering up my post further by discussing that possibility but then noting the term premium now appears to be zero-ish in which case expected 'positive roll' from now is also zero-ish.
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prioritarian
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Re: Ritholtz argues inflation will be mostly transitory

Post by prioritarian »

JackoC wrote: Mon Nov 29, 2021 10:41 am
prioritarian wrote: Mon Nov 29, 2021 12:23 am
JackoC wrote: Fri Nov 26, 2021 12:24 pm
prioritarian wrote: Wed Nov 24, 2021 5:05 pm
steve r wrote: Wed Nov 24, 2021 4:00 pm

Tracking bond total returns over 20 years or with great precision might be a touch absurd.

But the reality is forecast of future bond total returns (as opposed to inflation or stock returns) is not that hard if you are simply trying to get "good enough" estimates -- the expected total return is very close to the starting yield. Increasing yields are offset by a decline in bond prices.
I don't think your graph is showing total returns but maybe I'm mistaken.

I want to clarify that I'm not a LTT bond bull and think it's possible, even likely, that LTTs will have very poor returns for a number of years but I have a much longer investment horizon than a few years .
It's really not a matter of graphs of past bond return, which are entirely irrelevant to expected return now. There is no reason to set the expected return on riskless bond investing higher than yield on today's curve to the investment horizon. And even if that's past 30 yrs, no reason to think that if the US govt issued a 50 yr TIPS it would have a greatly higher yield than the 30 yr TIPS. The expected return of riskless investing is <0% real pre tax to the horizon. We're just kidding ourselves with arguments like 'but in the future bond yield could go back up'. They could also go further down. If the market is at all efficient and it was clear the 'very long run' expected return *now* (past again irrelevant) on bonds was significant positive real...very long term rates now would go to positive yields. Or at least the forward rates on the TIPS curve starting 10 or 20 yrs out would go to significant positive, they aren't.

There is some degree of validity in looking at forward interest rates for money one would only invest in the future, not by timing but I mean with money you don't yet have. The expected return on that money is best estimated by forward rates on today's curve, and since eg. the 30 yr TIPS has a significantly less negative yield than the 10 yr TIPS the forward rate '10x30' isn't very negative. But it still isn't remotely near where bond expected real returns used to be.

And therefore one should think through the fallacy, I believe it is, of assuming one would never invest for a negative real return. The need, if any, for low risk assets in your portfolio is not a defined function of expected return. This is admitted in 'I don't invest in bonds for their great return'. Thinking through the implication of that sentence makes it clear there's no arbitrary cut off at 0% real return where 'bonds no long make sense'. They are only sensible or not compared to what you can get *now* on other investments, your future goals and risk tolerance. The expected return doesn't factor in directly.

And those investing mainly in taxable have been investing in safe assets at negative after tax expected real return (the only return that matters in taxable) for years. The fact that the realized after tax real return might have turned out positive (though didn't necessarily) for bonds sold prior to maturity, because of falling rates, doesn't affect the past decision. I knew years ago that at my tax bracket safe investments had negative after tax real expected return. That was not a rational reason to shift to 100% risk assets (there could be good reasons to have that allocation, but the level of bond yields would not would not automatically dictate it, and as I mentioned before, the seeming assumption by some that stock expected return hasn't declined just as much as bond yields have, or perhaps more, is a questionable one also).
I don't invest in bonds held to maturity. I invest in long treasury ETFs/mutual funds that have returns that are also dependent on roll down and on demand/liquidity. Forward rate curves of a particular bond or other estimates of interest-based returns do not capture the total return of positions comprised of multiple bonds of different maturity (e.g. a ladder or an ETF/mutual fund). I agree that there is nothing magical about negative real returns that would cause me to discard bonds for an alternative asset that lacks a long-term track record of diversifying equities.

I'm definitely not making any assumptions about expected returns of US equities and hold an equity portfolio that includes non-US stock to diversify this risk.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

PS: I suspect that some here may not be familiar with the term: "positive roll". It does not refer to reinvestment of coupon payments but rather the roll down return of funds/ETFs that continuously sell bonds as they mature:

https://www.investopedia.com/terms/r/rolldownreturn.asp
An additional return from 'positive roll' relies on a positive term premium. Which means that the forward rate on today's curve between calendar dates A and B is higher than the market's actual expectation of the spot rate from A to B when date A becomes spot. But lately various analytic models which estimate the expected term premium find it to be near zero, for example the NY Fed's ACM model, whose output can be tracked here:
https://www.newyorkfed.org/research/dat ... remia.html

IOW I was not neglecting the possibility of 'positive roll', just not cluttering up my post further by discussing that possibility but then noting the term premium now appears to be zero-ish in which case expected 'positive roll' from now is also zero-ish.
JackoC, I separated that from the rest of the post because I could tell from your post that you were familiar with roll down. Because I do not invest for the short term, I'm not concerned about low term premia linked to a pandemic-associated economic crisis. (I expect the yield curve slope to become more positive as the US economy recovers.)

Do I wish LTTs had higher interest rates -- of course, and for many reasons. Do I believe there is another enormously liquid investment that functions as a better equity diversifier than LTT (or leveraged medium duration) -- nope.
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HanSolo
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Re: Ritholtz argues inflation will be mostly transitory

Post by HanSolo »

prioritarian wrote: Mon Nov 29, 2021 11:42 am Do I wish LTTs had higher interest rates -- of course, and for many reasons. Do I believe there is another enormously liquid investment that functions as a better equity diversifier than LTT (or leveraged medium duration) -- nope.
The above is why I got into LTT around the end of 1Q (VUSUX, avg. share price $12.16). It's up so far, which is nice, but that's not the main reason to be in it.

Regarding "transitory"... I commented elsewhere about restaurant pricing near me being up quite a bit more than CPI. Last weekend, I went to another restaurant and found their turkey sandwich priced 35% higher than a month ago (their old prices are still on their website, which makes it easy to see the stark comparison). Plus, they added a sneaky surcharge for one of the bread choices (listed on the menu with no surcharge indicated, and not previously having one). Since that's my usual bread choice, the same sandwich now costs me 50% more than earlier this year.

So it appears to me that, for some businesspeople, "transitory" means "let's raise prices as much as we possibly can right now, so we can lock them in while the inflation story is rampant, because it won't be as easy to get away with it after that story dies down... dang the CPI, full speed ahead!"
VBIAX and chill (in taxable)
EdNorton
Posts: 325
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Re: Ritholtz argues inflation will be mostly transitory

Post by EdNorton »

printer86 wrote: Wed Nov 24, 2021 9:16 am
nedsaid wrote: Tue Nov 23, 2021 9:52 pm
Jeremy Seigel predicted 20% inflation over about 3 years, I think that is a high estimate but so far he has been right. Pudding cups which cost $1 for years are right now $1.33. Food costs for me haven't gone up much yet, but I am starting to see things creep up here and there.
You seem to be referring to much followed growth in PCI...Pudding Cup Indicator.
Best post of day. Surprised nobody else commented on this post.
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Whakamole
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Re: Ritholtz argues inflation will be mostly transitory

Post by Whakamole »

HanSolo wrote: Tue Nov 30, 2021 3:03 am
prioritarian wrote: Mon Nov 29, 2021 11:42 am Do I wish LTTs had higher interest rates -- of course, and for many reasons. Do I believe there is another enormously liquid investment that functions as a better equity diversifier than LTT (or leveraged medium duration) -- nope.
The above is why I got into LTT around the end of 1Q (VUSUX, avg. share price $12.16). It's up so far, which is nice, but that's not the main reason to be in it.

Regarding "transitory"... I commented elsewhere about restaurant pricing near me being up quite a bit more than CPI. Last weekend, I went to another restaurant and found their turkey sandwich priced 35% higher than a month ago (their old prices are still on their website, which makes it easy to see the stark comparison). Plus, they added a sneaky surcharge for one of the bread choices (listed on the menu with no surcharge indicated, and not previously having one). Since that's my usual bread choice, the same sandwich now costs me 50% more than earlier this year.

So it appears to me that, for some businesspeople, "transitory" means "let's raise prices as much as we possibly can right now, so we can lock them in while the inflation story is rampant, because it won't be as easy to get away with it after that story dies down... dang the CPI, full speed ahead!"
Alternatively, it costs more to make the sandwich due to increased costs incurred by business operations (not just the turkey and bread but also labor, insurance, taxes, etc.), and the CPI isn't accurate for the price of restaurant food. This is what I've found - prices for food in general, at the grocery store and at restaurants has gone up faster than official CPI. I doubt everyone, including the teriyaki place near me with "specials" in the $12+ range, are colluding to raise prices across the board.

Perhaps the CPI overweights iPads or something that has gone down in price because it's imported from developing countries with cheap labor.
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Sandtrap
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Re: Ritholtz argues inflation will be mostly transitory

Post by Sandtrap »

nedsaid wrote: Tue Nov 23, 2021 5:32 pm If Barry says inflation is transitory, run for the hills. :wink:

What makes me even more nervous is that he says "mostly." So two words here to parse, "mostly" whatever that means and "transitory" whatever that means. I suppose President Hindenburg at the Weimar Republic during the early 1930's said that inflation was transitory but don't worry, we got it under control. When people say not to worry, that is when I get worried. "Transitory" could take us out to the 2030's. :wink:
Well said.
Good points.

Conversational and Journalistic "dis claimers":
Mostly . . .
For the most part . . .
It can be said . . .
We project . . .
Data suggests. . .

Phrases that do not reassure me, at all:
Don't worry . . .
I got it covered . . .
I'm sure everything will turn out fine . . .
I know what I'm talking about . . .
Your money is safe with me (us). . . :shock: :shock:

j :D
Wiki Bogleheads Wiki: Everything You Need to Know
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Sandtrap
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Re: Ritholtz argues inflation will be mostly transitory

Post by Sandtrap »

Linked article graph by "KPMG".
Image
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nedsaid
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Re: Ritholtz argues inflation will be mostly transitory

Post by nedsaid »

Sandtrap wrote: Tue Nov 30, 2021 8:03 am
nedsaid wrote: Tue Nov 23, 2021 5:32 pm If Barry says inflation is transitory, run for the hills. :wink:

What makes me even more nervous is that he says "mostly." So two words here to parse, "mostly" whatever that means and "transitory" whatever that means. I suppose President Hindenburg at the Weimar Republic during the early 1930's said that inflation was transitory but don't worry, we got it under control. When people say not to worry, that is when I get worried. "Transitory" could take us out to the 2030's. :wink:
Well said.
Good points.

Conversational and Journalistic "dis claimers":
Mostly . . .
For the most part . . .
It can be said . . .
We project . . .
Data suggests. . .

Phrases that do not reassure me, at all:
Don't worry . . .
I got it covered . . .
I'm sure everything will turn out fine . . .
I know what I'm talking about . . .
Your money is safe with me (us). . . :shock: :shock:

j :D
Inflation is sort of, you know, kind of, maybe, all other things being equal, the thing is, mostly or almost mostly, transitory, whatever that means.

On some late night commercial, I can imagine that you can buy for $19.99 the "transitory" rubber band, the most elastic rubber bank ever invented. You can stretch it, you can twist it, you can put it under all kinds of stress, and redefine it beyond all recognition but it will not break! Buy now, tomorrow the price goes up to "only" $24.99. Operators are standing by. The rubber band is transitory, the price is not.
A fool and his money are good for business.
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Sandtrap
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Re: Ritholtz argues inflation will be mostly transitory

Post by Sandtrap »

nedsaid wrote: Tue Nov 30, 2021 8:49 am
Sandtrap wrote: Tue Nov 30, 2021 8:03 am
nedsaid wrote: Tue Nov 23, 2021 5:32 pm If Barry says inflation is transitory, run for the hills. :wink:

What makes me even more nervous is that he says "mostly." So two words here to parse, "mostly" whatever that means and "transitory" whatever that means. I suppose President Hindenburg at the Weimar Republic during the early 1930's said that inflation was transitory but don't worry, we got it under control. When people say not to worry, that is when I get worried. "Transitory" could take us out to the 2030's. :wink:
Well said.
Good points.

Conversational and Journalistic "dis claimers":
Mostly . . .
For the most part . . .
It can be said . . .
We project . . .
Data suggests. . .

Phrases that do not reassure me, at all:
Don't worry . . .
I got it covered . . .
I'm sure everything will turn out fine . . .
I know what I'm talking about . . .
Your money is safe with me (us). . . :shock: :shock:

j :D
Inflation is sort of, you know, kind of, maybe, all other things being equal, the thing is, mostly or almost mostly, transitory, whatever that means.

On some late night commercial, I can imagine that you can buy for $19.99 the "transitory" rubber band, the most elastic rubber bank ever invented. You can stretch it, you can twist it, you can put it under all kinds of stress, and redefine it beyond all recognition but it will not break! Buy now, tomorrow the price goes up to "only" $24.99. Operators are standing by. The rubber band is transitory, the price is not.
lol
perfect metaphor!

thanks
j :D
Wiki Bogleheads Wiki: Everything You Need to Know
JackoC
Posts: 2840
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Re: Ritholtz argues inflation will be mostly transitory

Post by JackoC »

prioritarian wrote: Mon Nov 29, 2021 11:42 am
JackoC wrote: Mon Nov 29, 2021 10:41 am
prioritarian wrote: Mon Nov 29, 2021 12:23 am
JackoC wrote: Fri Nov 26, 2021 12:24 pm
prioritarian wrote: Wed Nov 24, 2021 5:05 pm
I don't think your graph is showing total returns but maybe I'm mistaken.

I want to clarify that I'm not a LTT bond bull and think it's possible, even likely, that LTTs will have very poor returns for a number of years but I have a much longer investment horizon than a few years .
It's really not a matter of graphs of past bond return, which are entirely irrelevant to expected return now. There is no reason to set the expected return on riskless bond investing higher than yield on today's curve to the investment horizon. And even if that's past 30 yrs, no reason to think that if the US govt issued a 50 yr TIPS it would have a greatly higher yield than the 30 yr TIPS. The expected return of riskless investing is <0% real pre tax to the horizon. We're just kidding ourselves with arguments like 'but in the future bond yield could go back up'. They could also go further down. If the market is at all efficient and it was clear the 'very long run' expected return *now* (past again irrelevant) on bonds was significant positive real...very long term rates now would go to positive yields. Or at least the forward rates on the TIPS curve starting 10 or 20 yrs out would go to significant positive, they aren't.

There is some degree of validity in looking at forward interest rates for money one would only invest in the future, not by timing but I mean with money you don't yet have. The expected return on that money is best estimated by forward rates on today's curve, and since eg. the 30 yr TIPS has a significantly less negative yield than the 10 yr TIPS the forward rate '10x30' isn't very negative. But it still isn't remotely near where bond expected real returns used to be.

And therefore one should think through the fallacy, I believe it is, of assuming one would never invest for a negative real return. The need, if any, for low risk assets in your portfolio is not a defined function of expected return. This is admitted in 'I don't invest in bonds for their great return'. Thinking through the implication of that sentence makes it clear there's no arbitrary cut off at 0% real return where 'bonds no long make sense'. They are only sensible or not compared to what you can get *now* on other investments, your future goals and risk tolerance. The expected return doesn't factor in directly.

And those investing mainly in taxable have been investing in safe assets at negative after tax expected real return (the only return that matters in taxable) for years. The fact that the realized after tax real return might have turned out positive (though didn't necessarily) for bonds sold prior to maturity, because of falling rates, doesn't affect the past decision. I knew years ago that at my tax bracket safe investments had negative after tax real expected return. That was not a rational reason to shift to 100% risk assets (there could be good reasons to have that allocation, but the level of bond yields would not would not automatically dictate it, and as I mentioned before, the seeming assumption by some that stock expected return hasn't declined just as much as bond yields have, or perhaps more, is a questionable one also).
I don't invest in bonds held to maturity. I invest in long treasury ETFs/mutual funds that have returns that are also dependent on roll down and on demand/liquidity. Forward rate curves of a particular bond or other estimates of interest-based returns do not capture the total return of positions comprised of multiple bonds of different maturity (e.g. a ladder or an ETF/mutual fund). I agree that there is nothing magical about negative real returns that would cause me to discard bonds for an alternative asset that lacks a long-term track record of diversifying equities.

I'm definitely not making any assumptions about expected returns of US equities and hold an equity portfolio that includes non-US stock to diversify this risk.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

PS: I suspect that some here may not be familiar with the term: "positive roll". It does not refer to reinvestment of coupon payments but rather the roll down return of funds/ETFs that continuously sell bonds as they mature:

https://www.investopedia.com/terms/r/rolldownreturn.asp
An additional return from 'positive roll' relies on a positive term premium. Which means that the forward rate on today's curve between calendar dates A and B is higher than the market's actual expectation of the spot rate from A to B when date A becomes spot. But lately various analytic models which estimate the expected term premium find it to be near zero, for example the NY Fed's ACM model, whose output can be tracked here:
https://www.newyorkfed.org/research/dat ... remia.html

IOW I was not neglecting the possibility of 'positive roll', just not cluttering up my post further by discussing that possibility but then noting the term premium now appears to be zero-ish in which case expected 'positive roll' from now is also zero-ish.
JackoC, I separated that from the rest of the post because I could tell from your post that you were familiar with roll down. Because I do not invest for the short term, I'm not concerned about low term premia linked to a pandemic-associated economic crisis. (I expect the yield curve slope to become more positive as the US economy recovers.)

Do I wish LTTs had higher interest rates -- of course, and for many reasons. Do I believe there is another enormously liquid investment that functions as a better equity diversifier than LTT (or leveraged medium duration) -- nope.
If you look at ACM's output (and other term structure models give broadly similar results) the decline in term premium doesn't seem related to the COVID crisis, it's been zero to negative per ACM now for several years. I don't see a reason to set my expected term premium at other than zero if analytical models are saying it's around zero. It could return to a positive; it could also be a long term trend where it goes to and stays negative. It's IMO rather like when people talk about 'when rates go back to normal'. There's no reason to think there's an expected trend back to 'normal' vs. even going even further from normal. Today's market expectation is the best estimate of expected return in 'riskless', including both the level of the yield curve and the read out of term premium now IMO.
BabaWawa
Posts: 328
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Re: Ritholtz argues inflation will be mostly transitory

Post by BabaWawa »

Great, more excuses for Bogleheads to make active decisions to move in and out of bonds and TIPS.
Note to new investors here: post your personal situation, get great advice on asset allocation and portfolio composition, then delete your BH account, stay the course and never look back.
protagonist
Posts: 7375
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Re: Ritholtz argues inflation will be mostly transitory

Post by protagonist »

Ritholtz is as clueless as anybody else.

Ignore financial porn. Nobody can accurately predict the future of complex nonlinear systems.
Carol88888
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Re: Ritholtz argues inflation will be mostly transitory

Post by Carol88888 »

I don't know what inflation will be in the future and neither does anyone else. I but see something happening today that I believe will stick around awhile and that is inflation in the healthcare sector.

Although social security added a cola of 5.9% for next year, this gets totally eaten up by an increase in Part B Medicare premiums of 14.5%.

Our aging population and the plethora of new, expensive drugs and treatments makes me believe this is a trend bound to continue.

Similarly, I believe the transition to renewable fuels will be costly for years to come. It will require the investment in costly new technologies before they can possibly pay for themselves.
MarkBarb
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Re: Ritholtz argues inflation will be mostly transitory

Post by MarkBarb »

Whakamole wrote: Wed Nov 24, 2021 11:01 am If inflation is transitory, does this mean Dollar Tree items will be back to costing a dollar once this is over?
That's not what economists mean when they refer to inflation as being "transitory." They mean that inflation will not continue to be above its normal levels for an extended period of time. They do not mean that it will be followed by a deflation. If prices rise from $1 to $1.25 during a year and then stay at $1.25 for several years, that is inflation that was "transitory."
Northern Flicker
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Re: Ritholtz argues inflation will be mostly transitory

Post by Northern Flicker »

The inflation measure is an aggregate measure. In any period some things may deflate while others inflate. If cars and energy were stripped out of the October report, it would have barely made the news. When car dealers stop asking for a premium over MSRP, there probably will be a monthly year-over-year report showing deflation in car prices. Food and energy prices are generally volatile as well.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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