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Weekend reading: The coming massacre in bonds (or bond punditry)

Weekend reading

Good reads from around the Web.

A post of the week. Here’s Josh Brown at The Reformed Broker warning about an inevitable crash in the bond market:

I’m going to say this here and now for posterity and I hope you bookmark it:

There’s going to be such a brutal bond investor slaughter at some point over the next decade that the streets of Boston’s mutual fund district will run red with blood, the skies will be shot through with the lightning and thunder of unexpected capital losses and those who manage to survive will envy the dead.

Now a slaughter in bonds will not look like an equity market crash, the volatility characteristics are different and bonds eventually mature. But in some ways it will feel much worse than a stock crash because the money parked in bonds is thought of as low or no-risk.

The fixed income guys know what’s going to happen, too. Why do you think the Bond Kings at PIMCO and DoubleLine are pushing into equity funds? They’re getting three-year track records under their belts for when the big switch comes.

One reason Josh Brown is an excellent writer and pundit is because he doesn’t prevaricate. It may not be good advice – I have no idea about his track record, either way – but it grabs you right in your special interests.

In contrast, while I happen to think Brown is likely right about bonds, I’d feel duty bound to caveat it with warnings about deflation, Japan, market timing, and 20-year bear markets.

In fact, I already did. Some of my readers may have ended up wiser for it, but I suspect a few of them ended up asleep.

Brown’s is the strategy of a Wall Street professional. If he’s right, he can point to his prediction for years to come. If he’s wrong, nobody will ever remember – maybe not even Josh Brown, thanks to hindsight bias.

Perhaps even Google will forget his page eventually.

It’s a great post – and I think likely a good call – but it’s not necessarily correct.

Remember that. Even if posterity does prove him right.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: A review in The Guardian singles out the Virgin’s Little Rock Access Account as among the best children’s savings accounts. It pays 3%.

Mainstream media money

Highlights from the wall of noise…

Passive investing

  • Passive versus active management – Telegraph
  • Vanguard rails against iShares’ new ETFs – Barrons

Active investing

  • Cashing in on the UK dividend boom – FT
  • Ted Wechsler: The next Warren Buffett? – Bloomberg
  • The rich are bailing out of hedge funds – Reuters

Other stuff worth reading

  • Merryn: The cost of growing old frugally – FT
  • New rules on interest-only mortgages – Telegraph
  • Beware of structured products – The Independent
  • Flash crash postmortem: How liquidity collapses – The Economist
  • Fear is good business these days – Yahoo
  • Ask a banker: What is a derivative? – NPR
  • The Zeitgeist Investor [Podcast featuring Tim]Motley Fool
  • Not enough water on Earth for us all to eat meat – Live Science

Book (reader) of the week: Amazon’s gorgeous new Kindle Fire HD readers are now shipping. I still prefer my old-fashioned Kindle, but whatever model you prefer, these e-readers are clearly the future of books.

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{ 10 comments… add one }
  • 1 Miserly Investor October 27, 2012, 12:41 pm

    I really think The Reformed Broker should stop holding back though and tell us all what he really thinks 🙂 He is most probably going to be proven correct at some stage, and as regards timing it reminds me of the old classic from Buffett: “They are dancing in a room in which the clocks have no hands.”

  • 2 Rob October 27, 2012, 4:27 pm

    The equity market puts AstraZeneca on a PE of 7. In other words, it puts no value on any earrings more than seven years out.

    That though has not stopped it issuing a bond yielding 4% with a maturity of 30 years.

    It begs the question of whether equit markets are too gloomy or bond investors too optimistic?

  • 3 gadgetmind October 27, 2012, 5:29 pm

    The bond funds buy bonds because people keep piling money into bond funds; such is the nature of open-ended funds!

    However, the close-ended multi-asset ITs are also holding bonds (mainly corporate and index-linked sovereigns), which gives some hope. Or at least it did until one of them (Ruffer?) said that holdings gilts right now was dangerous but not holding them was suicide.

    Other than things like NS&I linkers, nothing is even close to safe, so my approach now is to hold lots of different stuff.

  • 4 Herbert October 27, 2012, 6:36 pm

    Ok. Here’s another one. At some time in the next decade some equities will be higher than they are today. I will be swimming in the glory of success at some time in the future.

    On a serious note, if he had said next week or even next year and was right I’d be impressed. Otherwise law of averages and plain old reversion to the mean and subsequent over reaction mean he will probably be right. That’s not clever though.

  • 5 gadgetmind October 27, 2012, 6:51 pm

    The real question is “What percentage of bonds should I be holding and which ones?”

    My view is to always avoid what the herd are buying and to buy what the herd are avoiding. I’ve recently done well from bank debt, financial equities, and anything in Europe, particularly property and (gasp) bank debt.

    I still hold bonds, and can’t see any reason to sell them in a panic, but I’m certainly not adding right now.

    And all of this from someone who’s mostly passive!

  • 6 David Stuart October 28, 2012, 2:03 pm

    So 60/40 rule which on ave 5% a year returns is bunkum?

  • 7 The Investor October 29, 2012, 11:53 am

    Thanks for your comments everyone.

    @Miserly Investor — Yes, I wrote similar views in late 2008 about bonds when very short-term US Treasuries first dipped negative. Unthinkable at the time, yet US bonds have continued to perform strongly for most periods since then. Still, I suspect his view is likely more right than wrong.

    @GadgetMind — I’ve been buying the new retail bonds as they’ve been issued, and selling the odd one, too. I think yields will likely come down there (in most scenarios where gilt yields stay low — not in a meltdown, clearly!) and I like the lack of dealing fees.

    @Herbert — Well, trillions of dollars has flowed into bond funds over the past year or two, so there’s a lot of money that’s being even less clever potentially. Also, if he’d said bonds were going to fall next week or even next month, I’d personally have thought he was an idiot. Nobody can be sure of that (absent something concrete, like the US Fed raising interest rates).

    @David Stuart — Not sure what aspect of that allocation you’re pondering as bunkem (or where the 5% comes from?) but a 40% allocation of bonds falling in price is not incompatible with making good returns, if the 60% of the equities rises accordingly, which arguably could be what would happen over the medium term (as bonds would presumably fall as rates were rising in response to better economic news and ‘animal spirits’).

  • 8 john November 29, 2012, 3:03 pm

    What do you think of the Halifax Kids Fixed Saver account (5 years) that pays 4.2%? My mother insists that is the best place for putting some money away for my daughter and yet at 3 she’s probably not going to need any major amount of monies till she is 18 (education, driving lessons, car etc). How can I persuade my mother that in a 15 year timeframe she would be better off putting money into a low fee index tracker?

  • 9 The Investor November 29, 2012, 7:17 pm

    @John — I feel your pain, and in fact would not fight your mother. I’ve suggested friends put money into equity-based Junior ISAs and trusts, and they’ve had my head over any wobble. If I had a child it’d be 100% equities from day one with my money, but you might just need to think of this as some of your safe money and invest your own cash more aggressively elsewhere, or similar!

  • 10 john November 29, 2012, 7:42 pm

    True but it turns out that the fixed interest account is the same as inflation at 2.6%. Seems a bit daft but there we go. I think my mother’s aversion to the stock market is a little bit irrational. She won’t be the only one. So it looks like a low cost global tracker 100% equity should be my priority and maybe I should add a global bond fund once they have tanked or come off the boil? With my state retirement in about 20 years perhaps I can appropriate funds accordingly with that goal in mind through just one or two funds (Vanguard Life Strategy 100% for one) and syphon off an amount in 15 years should my daughter have any major requirements e.g education and a set up for property deposit (27 yrs) and her own retirement (60yrs+). My only concern is making it all tax effective i.e means tested for education. I guess an isa in my name will penalise my daughter in 15 years should we reach an amount that excludes her from any govt assistance and thus mean more monies will be taken away from my own intended retirement figure. Any ideas?

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