Kate Welling does great interviews. (I spoke with her in June of 2009). A few weeks ago, she interviewed Michael Belkin, who is not well known to the public, but is widely respected by the institutional side. To understand why, see our Quote of the Day from July 29th, 2008.
Belkin points out that, despite what so many people claim, following the freefall last year, the bubble is not in stocks. And as we have shown previously, after major secular bear markets, you should expect a substantial bounce.
The bubble, Belkin argues persuasively, is in bonds. QE policies driving rates to zero percent, and despite the low rates, investors have poured cash into bonds.
Here’s a brief excerpt:
Where my views are probably different than what some of the higher profile names are currently saying is that I'm not pointing to the equity market now as the source of a bubble or of malinvestment, in Austrian terms.
If not the stock market, where are you pointing?
At the bond market. Specifically, since the March 20, 2009 turning point in the equities market, if you look at the AMG weekly data on inflows into ETFs and mutual funds,bond fund flows have been positive every week and have averaged $4 billion a week. There hasn't been a single down week. But meanwhile, for equities funds, there's been a completely different pattern. They've been down two weeks, up one week, then down, up four weeks, down five weeks "”and the average inflow is only $500 million a week.
Just barely positive?
Yes, at last count only $24 billion had gone into all kinds of equities funds over this entire recovery rally, versus $178 billion into bond funds. I've been looking at this for quite a while and sort of scratching my head and wondering what was going on. But finally it just occurred to me. They're buying bonds. It's rather obvious. I think what has happened is that the thepublic in previous cycles bought emerging market funds or internet stocks or whatever, when the Fed would lower interest rates to an artificially low level, thereby penalizing people on their savings. So right now, for instance, I have friends who inherited a lot of money and I'm an informal advisor to them, not a paid advisor. They keep asking me, what do I do now? They were investing in CDs, that were parceled out to a lot of different banks on which they were making 2, 3, 4%. But now they're maturing and the banks are offering, like, nothing. So they are asking, what do we do, what do we do? They need the yield; they need income; they don't want to lose the nominal principal. What to do? What to do?
Belkin’s time series regression analysis analysis is not only data driven, but he is alsoaware of historical predecessors. I find his argument that Bonds are at greater risk than stocks to bevery counter-intuitive, contrary — and compelling.
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> Source: Still Bullish listeningin VOLUME 12, ISSUE 2 Weedon@Welling, JANUARY 22, 2010 http://welling.weedenco.com/
the recent, relative, trend of investing in Bonds v. Stocks is good to note..
though, this ‘chasing yield’-Story has “Stupid.”, written all over it..
esp. w/ this: “They need the yield; they need income; they don't want to lose the nominal principal.”–caveat thrown in..
what about: “If you want Yield, you get Risk with that”, haven’t We, yet, learned?
People could make this whole ‘hunt for Yield’-thing, a whole lot, easier, if they bothered to Understand what Buy-Writes/Covered Call-writing was, and that it, too, applies, beyond Equities, to Bonds, and, even, other Commodities..
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Covered+Call+writing+for+Income
It, just, ain’t that difficult..saying nothing, of course, of those Bond-holders, in Muni-land/High-Yield-ville, that are fixin’ to get their Faces ripped-off..
Your average baby boomer is 55. Where do you think she is going to stick her retirement money?
given how the street is carry trading their way out of this mess, jumping on a extremely positive carry trade built on fed guarantees of everything really, this is not too surprising. A contrary call, absolutely but one blogs have been discussing for months now, including mine at urbandigs and Mish recently had a piece on this after I think CAPLERS talked about investing in high yield bonds.
Just take a look at HYG and LQD for an etf viewpoint of how high yield and investment grade bonds have fared in the past 11 months. HY especially. All in the search for yield! The carry trade works until it doesnt anymore and the road to perdition is full of positive carry! One more reason why a dollar rally might happen, even in the face of everyone bearish on the greenback. One could argue we saw hints of this 2 weeks ago with dollar rallying, equities tumbling, vix flying and selling volume surging…
The risk is getting to be way too high to find that great yield lately!
“Your average baby boomer is 55. Where do you think she is going to stick her retirement money?”
after bonds collapse? I say cash, stocks, part gold, and real estate
If the financial politics (Japanese style face-saving for Banks) we’re getting from the toxic axis of evil betwixt FED and Congress can be considered a BS storm or SStorm, then Cash is the only refuge since there is no real way to make it. They are printing it to fill the Bank Black Holes but not fast enough and the Banks are using it for spackle on their hulls; ’till then it’s Deflation and All being net short Cash from a credit-starved non-Quality manufacturing base economy and beached-whale financial services industry product. Bubble-protection/sail-trimming includes the starvation wages earned by getting We- ZIRP’d ….so short duration the only safe space. The Banksters making the guaranteed ZIRP spread will lose again of course as everything they do is wrong while living a lie, but then they are too-big-to-FAIL and so on. The Obaminator is talking small business tax credits, but that probably will include a business flipping outsourced junk soon to cycle to landfills, which counts for squat. So we wait for the shine to wear off.
I agree with Tradeking13. The “stocks for the long run” is over for the boomers, I see it with all my friends who are boomers. This is a secular trend, and it will be here for a while. Maybe a long while.
I am third in line of the opinion that this a long term trend of rotating out of equities and into fixed income. Individual investors are under weight bonds at about 7% of total asset allocation. The risk of high future rates is confirmed by the forward curve, but this risk can be mitigated with a properly laddered portfolio duration and real return bonds. Demographics and the understated risk of equities will portend this reallocation as a negative for equities.
i have several friends who have been advised by ‘experts’ to buy preferred stocks and junk bonds to get the yield. no mention of risk. i agree 100% that this is a bubble and not a way to preserve capital. they are all retired.
Is Belkin still maintaining his outright bullish posture towards stocks over the intermediate term?
But diversified bonds wont “lose principal”… they seldom do over any medium term periods.
PIMCO total return fund made ~5% in 2008 and 15% in 2009 and was positive the prior few years.
What they will do is grind into 2-6% returns versus larger returns elsewhere.
Bonds “lose” by forgoing upside.
There certainly is a lot of enthusiasm for bonds, except for Treasuries, which are currently the most despised asset on the planet.
I think the more appropriate question is to back up further and ask where is the bubble in the American economy. It is the financial sector. That includes stocks, bonds, money management, hedge funds, insurance, derivatives, employment, etc, etc, etc.
Fair value for stocks is 400-450 on the S&P. Fund flows doesn’t reflect this. But reality does. The financial sector is headed for a major employment shakeout. And so is government which is in collusion with the financial sector in maintaining the bubble for its own personal gain.
As long as we’re discussing asset allocation, viz bonds vs. stocks, nothing’s changed. Seems I remember a bond bonanza in 2007 as well, when even junk was yielding near nothing over treasuries (junk over junk, suppose). The more things change…
My understanding is that investors over the last 10 years have been overweight stocks and underweight bonds. The increase in bond investment is likely a rebalancing, especially with people looking at retirement and the need to preserve capital.
If people are buying decent quality bonds (not ETFs), they won’t lose their principal. Sure, there could be a mark-to-market hit, but the principal will be there when they go to roll over the bond. And they will have collected the interest.
BDG – How is “fair value” on stocks in SPX 425? I think they paid $22 in divs last year. Have paid $100 in 4 years. SPX will pay closer to $30 this year. Why should stocks pay 7% dividends? Plus growing cash on bal sht, eps, cash flow, etc.
What the fair value on bad investment advice?
“"Your average baby boomer is 55. Where do you think she is going to stick her retirement money?"
after bonds collapse? I say cash, stocks, part gold, and real estate”
Really? I would say nowhere. Someone else will have it.
rc
Mike M,
“There certainly is a lot of enthusiasm for bonds, except for Treasuries, which are currently the most despised asset on the planet.”
The yield on Treasuries says something else. I wonder why so many buy them, if they are as despised as you paint them.
rc
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