Monday, January 21, 2013

Apocalyptic Talk Has Limited Use

I've decided to cut back my consumption of zerohedge for the same reason I stopped reading Mish Shedlock a while back: it's a one-trick pony with limited advisory benefits.

While Googling "what will happen when the bond bubble bursts," I came across a 2010 post on Zerohedge that claimed the bond implosion was imminent. It breathlessly talked about how the Fed was blowing another bubble by purchasing all available Treasuries. That drives bond investors further afield, bringing down rates of all grades of bonds, including junk. Rates being a measure of risk, there are now gobs of money invested in bonds that are mispriced for their risk, thanks to the Fed printing money. That was 2010.

And the beat has gone on.

For me, financial sites have two purposes: general education and investment advice. Zerohedge has reached the end of its lifespan for me as a source of general education and, like Mish, it's never been a good place for near-term investment advice. Doom-mongers rarely are.

I'll still read it from time to time because it posts news articles (almost always bad) that are hard to find elsewhere. In the meantime, I'm wandering around trying to find the answer to my original question: what happens when a bond bubble bursts? My best hit so far is this piece in Forbes from which I recommend these tidbits.
To be flexible and tactical means to temporarily accept the mundane results that are available in a portfolio that has a low risk of capital loss, and that is liquid (“liquid” meaning you can convert any part of it to cash quickly and cheaply). At present, that means to turn the 65/35 portfolio on its head and have less stocks and more bonds. Importantly, the bonds cannot be long-term bonds; short and medium-term only since they have lower risk and greater liquidity.

The objective of this approach is to wait for one or another asset type to become cheap...

The caveat in all these suggestions is that investors must be caution about taking too much risk to in order to eek out a little extra return. The old parable about trying to squeeze blood from a stone comes to mind. In the case, the only blood you’ll find coming out may be your own.
That's useful information. I still firmly believe things are highly unstable and the size of the correction grows as the central banks print money, but instead of just being panic talk, it's useful and actionable.

A 1-year chart of the S&P 500. Not quite the apocalypse Zerohedge and Mish have predicted.


tim eisele said...

Yep. Yelling "Wolf, Wolf!" gets diminishing returns every time the wolf doesn't show. It's best to save it for when you're pretty sure you've got the real thing.

W.C. Varones said...

Bubbles often last far longer than reasonable people expect.

That doesn't negate the wisdom of people who see the bubbles forming.

It was prudent to avoid real estate in 2004 because it was overvalued, even though, in hindsight, it kept going a few more years.

ZeroHedge is correct about the bond bubble. Will it take two, five, ten more years to play out? Who knows, but you don't sit on a time bomb just because you can't read the timer.

And even though the bond bubble hasn't yet burst, it has been extremely profitable since 2010 to avoid bonds and instead hold stocks and gold (chart).

W.C. Varones said...

Couple other things:

1) That ZH piece was a guest post by Graham Summers, who is more excitable and less insightful than most at ZH, and a bit of a huckster.

2) I wouldn't count on a big correction in stocks because they are priced in dollars. I agree long-term REAL returns are likely to be muted, but with the Fed printing a trillion dollars a year, it's likely that many asset classes will not experience significant NOMINAL price declines.

In other words, waiting in cash or short-term bonds could just give you a long, slow erosion of your purchasing power as stocks, commodities, and real estate do better.

My rule of thumb is any money you need in the next 3 - 5 years should be in cash / short-term bonds / CDs. Everything else should be in long-term, inflation-participating assets like stocks, commodities, and real estate.

Jeff Burton said...

There is no escape. Leviathan will get what it wants.

Doo Doo Econ said...

I am with WCV here. Further, my best guess is that real estate is the target of monetary easing policy and will be the most inflated asset. I repeat myself, sometimes.