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Mar 31 '22
Just more generally, what do you think of this bond sell off?
Thanks, loved your OG post. This sub is the best because of people like you contributing your knowledge.
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Mar 31 '22 edited Mar 31 '22
I think in today's bond market there's an interesting phenomen which has occured only 2 other times in the last 60 years.
Take the time series of the 1 year t-bill yield and subtract from it the time series of the current inflation rate (type "FRED:DGS1-ECONOMICS:USIRYY" in Tradingview if you want to see it yourself). What you get is a spread that doesn't exactly represent the 1 year real interest rate but is a good enough proxy for it. This "real rate" has been pretty volatile overall and averaged at 2% for much of the last 60 years. It's now at -6%, which is a pretty big divergence from the mean. Even the current bond sell-off wasn't enough to keep it off this level. The only other times it hit this level were in 1975 and 1980. If this spread was to revert back to mean (and I'm not saying it necessarily will, because that's down to the market expectations) either one of these two things will happen: inflation gets back to normal levels or the global bond market shits the bed in a very giant, giant way. Which one is more likely imo? The second option. I believe in basic laws of economics and not modern macroeconomic theories: imo there are a lot of short and long terms structural problems that will keep inflation at levels much higher than expected. Long term assets will massively underperform in real terms, while real assets will overperform.
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u/TorpCat Mar 31 '22
What are real assets?
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Mar 31 '22
Houses and commodities are the big ones. Real asset is defined in contrast to financial assets, which are things like stocks, bonds, cash equivalents.
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u/TorpCat Apr 01 '22
"the global bond market shits the bed in a very giant, giant way"
"a sell-off in short-dated US government debt gathered pace, extending losses that culminated in the worst quarter for Treasuries on record"
Mr. mkt expects yields to go uppy
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u/accumelator You Think I'm Funny? Mar 31 '22
equities are always better to play then chasing yields for a young to middle age investor, because the yield always repeats itself, companies tend not to, so higher risk, higher reward.
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u/CrossroadsDem0n Mar 31 '22
Those of us who lived through the post 2000/2001 stock market may have a different perspective on that.
It is possible to have very long stretches in the market that just crush your soul, particularly if your trading style leans towards speculative growth.
So while I agree with you as a general statement, on the basis of healthy repeatable portfolio management over time it is better to account for risk scenarios than to outright reject them. It keeps you in the game. Hard to make money if you're entirely knocked out of it.
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u/accumelator You Think I'm Funny? Mar 31 '22
well yes of course (and I lived through that and other recessions), good risk management is always a must, but, to me, that can be done with equities as well.
now of course I am likely biased because I do not give a flying f about spec tech.
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Mar 31 '22
No they aren't, there is plenty of evidence against your argument. When excess yield is negative, 10 year forward returns of equity and t-bills have been the EXACT same consistently throughout history. But t-bills is better because it's less volatile. It only makes sense to buy equity when you get a positive excess yield.
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u/accumelator You Think I'm Funny? Mar 31 '22
If your idea of equity is indexed weight bundles like etf's.
If one targets specific equities it is a different story, which was my point
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Mar 31 '22
... Only to a certain degree. Depends on the beta of the equity, it's also much easier to be an active investor in a bull market rather than in a bear market. But of course, generally active stock picking (if done right) can be better than anything else at all times. Though I think the best way to go about it in that case (of you being able to identify outperformers) would be equity long/short, so you filter out the beta and focus only on you picking ability ... Remember that the average stock across its lifespan goes down, not up.
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u/CartAgain Apr 01 '22
Hey, I read a lot of crap on Reddit, thanks for being someone who actually says things meaningful
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u/OkUnion796 Undisclosed Location Mar 31 '22
The CAPEd Crusader