I hate to see retail investors buy bubble tops because they work so hard for their money, it’s a pity to see it all disappear like a puff of smoke. That is exactly what is happening with bond funds now.
We are near the top of a 28 year bull market in government bonds, and a piper has to be paid in the not too distant future. Yes, I know you have heard all of this before, with numerous advisors ringing the bell over our exploding national debt and the hyperinflation this is bound to bring. On this front, I have been just as guilty as the rest.
It’s time to face reality folks. So far the Cassandras in these pages have failed to deliver big time. Running record budget deficits, the US Treasury today can borrow all it wants at all time record low interest rates. Thirty year money at 4%? No problem. Unbelievable!
Last year, a staggering $375 billion poured into bond funds, a record, while $40 billion exited equity funds, despite a Dow that rose 23%. Many investors are suffering from a false sense of security that if they just hold bonds to maturity they will suffer no loss. If you are holding the bonds outright, which often come in $1 million round lots, this is true. But do you really want to hang around for 30 years?
And if you have your nest egg hiding in bond funds, you are running more risk than you realize. Funds have management fees and administrative costs that come out of your hide, which, if added up over several years, can amount to quite a bit of dough. When the market turns, individual funds may suffer liquidity problems.
If you are the typical individual investor with a 50:50 bond/equity split who has somehow stumbled across this letter, it’s time to make some adjustments to your portfolio and cut your risk. Here are four suggestions, ranked by a rising level of risk tolerance: 1) cut your bond holdings and increase you cash, 2) keep the same 50:50 ratio that lets you sleep at night, but shorten the bond duration from long to short term. That means selling ten and 30 year bonds and funds and buying those with three year maturities, 3) cut your bond exposure and increase your equity holdings.
Good candidates for this move would include the iShares Barclays 1-3 Year Treasury Bond ETF (SHY), and the PIMCO 1-3 Year U.S. Treasury Index Fund (TUZ).
For the most aggressive willing to make a leveraged short play, there is always option (4), the ProShares Ultra Short Lehman 20+ Year Treasury ETF (TBT), which is trading just above its 2009 lows. But if you get your timing wrong on this one, the cost of carry will eat you alive.
Don’t call me wrong, just early.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
But Shilling, president of A. Gary Shilling & Co., is a charter member of the risk-off deflation camp and is positioned accordingly:
early ... is wrong.
So, where to put the 401K money?? Gold is not an option in most plans. So, that leaves stock, or bonds.
"So, where to put the 401K money?"
Take possession and buy physical.
put it in money market fund and then wait ...
Gold IRA with custodial possession by someone else (e.g. a gold vendor) is an option.
Hey metastar,
One thing that seems left out here is that not all bond funds are the same. In most 401k plans, you can go conservative with a blend of Stable Value funds, money market funds, and short term bond funds. Also, short/intermediate term is okay.
This would dial down the risk on most portfolios a ton. It's not no risk, but then nothing is. not even physical gold. Though I like gold, what the fuck are the armageddonists going to do when teh Government places an edict that all gold has to be turned in, at the rate they choose?
Thanks for the suggestions all. I'll play a little of each and pray.
Chinese Solar, of course.
I have asked this of many investers, and have not received an answer. What (if anything) can a retiree who depends on the dividends of their bond funds for income, do to protect their wealth from being eaten up by inflation/hyperinflation?
If you are worried over inflation/hyperinflation (which is not a given, by any means,
but which you seem to want to hedge against) there are many things you can do.
First, agree on the obvious; if this comes to pass, you do not want to have money.
To show you the consequences of the above statement, consider the following.
What you want to have is fixed debt.
The reason is simple, you will be paying off this past debt with ever cheaper dollars.
(If you doubt the above, talk wth anybody that lived through Argentina's hyperinflation.)
Therefore, a fixed mortgage at today's rate is a play. In effect you are shorting the dollar.
Of course, there are many other strategies.
A more direct route is actully suggested in this post by hedgefund, short the Treasuries. Though use TBF and not an ultra.
It seems to me that what you need is to understand what you are asking, since many posts in ZH and elsewhere address your concerns.
gl
Muir, Thanks for the reply. I have considered mortgages. It seems like the best option that I can see at this point. Thanks again.
cut your bond exposure and increase your equity holdings
first part, yes, second part, huh?!?!?!
mad hedge:
Why anyone would recommend TBT (ultra) over TBF (no ultra) is beyond me.
2x and 3x ETFs bleed on swings.
I think it's very unprofessional to even hint at holding an ultra as a long term strategy.
I've been following along here for months. Now seems as good a time as any for a new guy to weigh in.
I'm always amazed that the GNMA bond continues (even today) to be under most investors' radar. My favorite GNMA bond fund has the following attributes:
1. No load
2. Expense ratio of 0.13% (that's $130.00 annually on $100,000.00 invested.
3. As of January 2010 average duration was 3.5.
4. Current SEC yield about 3.15%
Read Full Article »