10 year yields are nearing 3%. histroical data stretching to the cradle of fucking civilization had it at a median of 5%.
it was just 30 years ago when the 10 year was yielding 15%. Think we’ll ever have that lifetime opportunity? THOTS!?
idk but if it ever happens again im locking in some long term treasuries @ those rates
It will only happen if the country enters financial distress, like if there is a war or if the debt finally explodes. I can’t imagine any likely scenario where real interest rates reach 15%, so we would be talking about 20% inflation and stock prices down 50%.
Why would you want rates to be that high?
this is a base case for pa.
^lol.
when rates are high. risk free rate is high. so we dont have to take much risk to make a lot of money.
im guessing if it ever does, it’ll be minimum 10 yrs from now. and id be set. lol.
also what ohai said is very true. when rates are high, stock price are really low. great buying opportunity. plus high win rate since most the weak companies will probably have been murdered. lol
also inflation is a great way to reduce us debt. muahahaha. high rates will prolly screw us though. interest as a percent of budget right now is 8%, imagine if rates normalize. goes from 2.5 to 5. bam 16%. so yea social security is definitely going to get cut. lol
If there’s no wage inflation you’re still screwed. Not to mention all the people that have ARMs…
I hope you’re just trolling on that comment…Sure rfr might be 15% but that’s because the inflation is 14.7% so in real terms you’re still sh*t outta luck…Just look at the late 70s and early 80s…rates were high but inflation higher.
econ 101.
His posts clearly assume it is temporary and then ends. I don’t think he has thought about how that is a big assumption.
but you are assuming short term risk free is fixed which it isn’t. that shit runs in cycles.
Buying long term bonds locks in your rate. High rates cause inflation to drop it like its hot and the economy to slow. The federal reserve will then lower short term rates but your bond will still yield a lot. Paying you to wait, then when the opportunity presents itself as rates fall you can sell bonds and buy Stocks. Stocks at the same time will shoot the fuck up as rates fall. Which is why bonds were so lucrative back in the day. It’s risk free godliness based of pure math and cycles. A free lunch!!! I’m actually super excited to see how gundlach reacts to these rising rates. I want to see how he handles stocks.
Well I’m no Economist but when the inflation was high in the early 80s, I never heard or read any good things BUT according to you bring on the inflation!!! Let me lock them 30year T Bonds at 19% for 30 years!!!
so i looked at some articles and charts and what not at 5am to figure out what really happened…then I resorted to IM’ing one of my mentors who has been in finance for more than 30 years about the early 80s…
He said as in everything, hindsight is 20/20 and after the fact, everyone is an investment superstar…“with rates rising every month for the past few years…everyone who thought the inflation hike was over and bought bonds witnessed their value go down by 30-50% in matter of couple years…Now most were institutional buyers so when you’re value goes down by half, youre investors’ are up your ass crying out loud…so you sell - cut the losses - and buy newer bonds because after all you are a fixed income bond fund…or some have shorted…In the end, as with any investment cycle, very few actually hit “big.” Now not only you have duration to worry about but also reinvestment risk…Even if you timed your investment right, due to reinvestment risk, your total return per annual was only around 10%…”
He said same could be said of retail investors…while 5 year CDs were offering 10.5% a year this year…why lock in when next year the inflation is 13% or could go up to 18% as the “experts” suggest…so people were scared and debbie downers were everywhere from the “experts” on TV to articles… In the end, those that made it BIG towards the end of this cycle were also the ones who lost big in the beginning of the cycle…Of course no one wants to hear the beginning part…
Unless of course, you can time the market perfectly or have the stomach to sit for 6-7 years while your investments plunged 70% in value…which in the latter case you’d need some spectacular returns - 233% - just to break even on that particular investment.
yea market timing is hard. but i believe that you can ease into it. for example. given my age. and a 3% rfr for the 10 year. the optimal bond allocation (imo of course) is between 10 to 15%. i ran it using monte carlo with 10k simulations using shiller data. at 5% that’ll obviously adjust. and at 10%, etc etc.
the key is never to listen to experts but see what data has shown over a very long time period. know your odds. for example the probability that the stock market cagr for 30 years will yield above 20% is pretty much a never happened scenario. if risk free rate for a 30 year was making 21%/year, is it a good idea to ditch stocks and invest in bonds? most definitely yes. should you allocate 100% to bonds. prolly not, but lol if rates were ever that high, its not that crazy.
for the most part if rates were that high, smart people would not borrow, and the risk of default will prolly rise. i know its hard to imagine a situation where the us govt is a shithole country like zimbabwe. but well the roman empire did fall. just took them over 1000 years.
but yea very hard to predict how things go. for example, i would not have imagined 10 years ago that rates would remain this low. its absolutely mind boggling. but i know enough to understand that its absolutely retarded to own a 30 year bond.
i’ll top of it off with one of my favorite quotes:
There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know. Read more at: https://www.brainyquote.com/quotes/donald_rumsfeld_148142
the last one is the most deadly!
Yeah you can ease into it which in the end you will make money but as I said above from one of my mentors, it was not a blockbuster returns because you’ve been easing into it for the entire duration of the cycle - from absolute bust to riches - averaging it out to long term returns…(my writing in bold in the above statement)…
nerdy, the problem with the specific phase you’re talking about is that your money has to be invested in something.
lets use 1976 to 1982 as an example, if inflation goes from 7% to 14%, equities get killed (US equities were basically flat from 1976 to 1982 in nominal terms and down ~50% in real terms over six years ). so you’d be vomiting everywhere if you own equities. if you own cash, savings accounts lag inflation significantly so you’d be down in real terms if you went with the no duration, no credit risk option. if you want a real yield and actually want to protect your capital over time, you need to take on any duration which guarantees you lose money as inflation rises. trust me, if rates go from 7% to 10% and you own 30-day treasuries, you will be tempted to extend your duration at 10%, only to see rates go to 14% and you take a big paper loss. OR, equities will trade at 7x earnings and you’ll go, why buy bonds at 14% when i can buy equities that can pass on at least some inflation and have an earnings yield of 14%?
in order to maximally benefit from a rise in inflation and interest rates, you’d have to hold cash and accept a real return of zero or less in the chance that you’ll call the ultimate top of the cycle and lock in what? a 10 year real return on your bonds of ~10%? this seems extremely risky relative to being balanced in low return times and realizing maybe 3%-4% real and going all-in equities when earnings yields are historically attractive, or in today’s world, at least at their historical average (8%-10% real).
i understand what you are saying but we are going in circles.
if rates are near the historic low and rising like now, i would want stocks. and avoid long term bonds. i prolly will still own less than 2 yr bonds or cash, since cash yields about the same as a 2 yr anywho.
if rates are in the median and rates could go either or i will prolly own a 10/5 year bond. with a greater allocation
if rates are high like 14%, i would buy a 30 year bond and lock it in at an even higher allocation. i’ll take the duration risk. because i feel that inflation and rates will fall eventually.
but you are right. depending on the earnings yield and the growth of the stocks, i may switch over. it all depends on where everything stands.
when inflation is high you really see who the winners are cuz the fed will raise rates. the winners can keep up with inflation. the losers will prolly be levered and have to relever again at higher rates. so they are going to get screwedddd.
I worked for a broker in college who put people in long term cds when rates started a downward trend. He got a lot of props for it, but it was a gamble
Matt Likes Analysis…like your name your post was good mate…Similar to my post which basically means in the end you’re screwed.
Nerdy, best way is to just ask any bond guys in their 50s or 60s or any PMs who are old enough and ask them what really happened in those years.
does it sound something like this:
https://www.investopedia.com/articles/economics/09/1970s-great-inflation.asp
In the winters of 1972 and 1973, Burns began to worry about inflation. In 1973, inflation more than doubled to 8.8%. Later in the decade, it would go to 12%. By 1980, inflation was at 14%. Was the United States about to become a Weimar Republic? Some actually thought that the great inflation was a good thing. (For more information, read our Tutorial on Inflation.)
The Bottom Line
It would take another Fed chairman and a brutal policy of tight money, including the acceptance of a recession before inflation would return to low single digits. But, in the meantime, the U.S. would endure jobless numbers that exceeded 10%. Millions of Americans were angry by the late 1970s and early 1980s.
Yet few remember Burns, who in his memoirs, “Reflections of an Economic Policy Maker (1969-1978),” blames others for the great inflation without mentioning the disastrous monetary expansion. Nixon doesn’t even mention this central bank episode in his memoirs. Many people who remember this terrible era blame it all on the Arab countries and oil pricing. Still, the Wall Street Journal, in reviewing this period in January 1986, said, “OPEC got all the credit for what the U.S. had mainly done to itself.”