We’ve had similar thoughts that a recession is right around the corner. In late 2015 / early 2016, the US essentially experienced a corporate recession while the market tanked on oil and China fears. We thought then that things would start to get really interesting and some great buying opportunities would emerge. It did sort of for the public markets, which are up nearly 40% since Feb 2016 lows. It’s hard pill to swallow knowing that we missed a substantial run in the equity markets. However, valuations then and now look quite expensive. Private market valuations also really didn’t budge so we weren’t really ready to jump in.
You can thank central banks across the globe for propping up asset prices and staving off a more meaningful correction. BoJ is the #1 equity shareholder across many large Japanese firms now. ECB’s corporate bond binge. The Fed still being fairly accommodative. Despite all the rhetoric of cracking down on leverage, China’s central bank continues to inject liquidity into the system.
That all said, it’s hard to see where the distress will come from. Leverage hasn’t reached the dizzying heights of 2007 (though it is creeping up and underwriting standards are loosening; some sectors actually have higher financial leverage than before such as Energy and Utilities) and the economy is growing. Probably the biggest near-term risk is an unexpected spike in interest rates. I would pin a potential default wave from soaring Chinese debt as the next biggest potential shoe to drop.
It’s really difficult to time these things though. However, what you can do is not overpay for assets. As such, I’m mainly looking at idiosyncratic ideas where the risk is limited and I’m not paying a premium.
I don’t have much conviction on it, but I suspect the 60/40 allocation is going to be awful. I’m much more comfortable being long equities. If you want to talk about overdue bear markets, bonds certainly have had quite the run for quite some time. Owning the actual bonds is probably OK, but being exposed to anything that has to meet liquidity requirements of withdraws could be a nightmare
depends on what kind of bonds you’re talking about. HY, prefs and floaters got killed because they are risky assets. govies did very well. IG acted crazy because we thought the financial world was collapsing and that many IG companies were potentially insolvent. that quickly changed and IG got bid up over time. so in sum, bonds that act as a true portfolio anchor (govies) and risky assets acted as expected. IG was a little different than expected but not crazy compared to other market collapses. no liquidity issues in particular. risky assets were in freefall and i think the ETFs tracked that freefall fairly well.
there is no such thing as a bond bubble wrt to interest rates. anything with a maturity cannot be in a bubble wrt to interest rates. you have certainty of principle and you are making a bet of YTM which is certain, versus inflation, which is unknown. you can say that credit spreads are too thin and there is a bubble in risky bonds, similar to a bubble in other risky assets like stocks, but saying bonds are in a bubble because rates are low and you think they’re going to go up doesn’t make sense. i can get 2.5% guaranteed over 1 year versus inflation at less than 2%. how is this a bubble? unless we see an insane spike in inflation, it’s a guaranteed real return over a short period of time.
don’t let the bond “bubble” mantra make you take too much equity risk. govies and CDs remain effective in a portfolio.
What about an Auto ABS Credit Event? Record number of loans are in default, record number of cars also coming off leases. In regards to the US Economy itself? It’s only strengthening from here. Would need some type of Black Swan event. As mentioned in this thread, opportunity cost of holding cash and waiting probably would result in you missing out on further gains.
I’m not selling because I suck at timing these peaks and troughs. I’m ok with a modest average return over a long period. As long as it beats leaving my cash under the mattress.
Don’t get all excited about the recent multiple expansion. You don’t wanna long into Rome at the end. Lots of people are going to lose everything betting on America.
The bubble is now at 27X P/E! For a failed state entering its twilight years?? http://www.multpl.com
My China A-shares have been dominating, up up and more up every day.
Gonna get knocked down when the Ameri-bubble pops, but still the best place to be positioned. Oh, and I’m gonna laugh hard at BTC when the recession hits, a ponzi like that could only happen late-bull.
SOB! Is this the beginning of the end of the bull market? Yield Curve/Bond Market/Inflation/Global Macro nerds please come to this convo. I need insight please. Thanks!
