Over the past few months, I have been saying US Treasuries remind me of the dot com stocks circa 1997-98 in three ways:
1) You knew momentum was taking them (much) higher; 2) You knew it was going to end badly; 3) If you were honest, you admitted you had precisely zero idea when the day of reckoning would be.
I mentioned this at the Agora conference last month, and again on Fast Money last night and Bloomberg radio this morning.
What made the dot com situation so pernicious was that anyone who was judged on relative performance (i.e., Mutual fund managers), were all but forced into these names in order to keep up. Very few people — Buffett and Grantham come to mind — manged to both avoid both chasing these names and losing their client base.
Tobias Levkovich, Citigroup’s chief U.S. equity strategist, mentions something quite similar in the Bloomberg Chart of Day:
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Chart courtesy of Bloomberg
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Here is Dave Wilson:
“U.S. bonds may be just as vulnerable to a plunge as stocks were a decade ago, when the Internet bubble burst, according to Tobias Levkovich, Citigroup Inc.'s chief U.S. equity strategist.
The CHART OF THE DAY depicts how an index of monthly returns on 10-year Treasury notes since 2000, as compiled by Ryan Labs, compares with a total-return version of the Standard & Poor's 500 Index from 1990 through 2005. The latter gauge peaked in August 2000 and tumbled 38 percent in the next two years.
About $561 billion has flowed into bond funds since the beginning of last year, according to data from the Investment Company Institute. Stock funds, by contrast, had a $42 billion outflow during the period.”
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Source: U.S. Bonds Resemble Internet Bubble, Citi Says: David Wilson Bloomberg, 2010-08-17 13:02:46.389 GMT
Some discussion of it in the first couple of minutes of this clip. Kaminsky makes the case, which I'm not ready to dismiss out of hand, for a secular shift, and that the bond buyers are not in it for a trade.
http://www.cnbc.com/id/15840232?video=1569032163&play=1
It’s going to be a sad story when this one bursts.
What interests me most is the aftermath. People think govt bonds are safe in all respects while, in fact, they only guarantee payment of interest and principal. Capital gains and losses are not a part of the picture. Losses, realized or paper based, will be massive. Deflation and double dip … here they come while wealth and spending go away. This one will be really bad.
Pity the poor whipsawed investor. Nothing will look safe. Big losses in stocks in 2000 and 2008. Big losses in bonds soon.Real estate is the last big sucker play. Stocks to remain unsafe until Fed meddling in asset prices ends.
What will be the next sucker play? Anyone?? I am sure that real investment that creates jobs won’t be a part. Fed meddling goes after asset prices, not real investment. Start-ups and lending to main street won’t be a part of any Fed activity, if history and current activity remain constant.
Literally, cash in a coffee can under the bed is the safest alternative at this time.
Glad you finally caught on. I saw this one coming months ago, as did many others.
Definitely a bubble and the chart shows a troubling similarity — there will be losses, the magnitude is yet to be determine when the bond bubble deflates (not bursts), but different from the dot com burst because many of the companies had equity valuations based on hot air so the loss in principle investment much higher.
Where is the next bubble ? Once the herd gets their @ss handed to them in bonds they may make a rush to gold to drive it to bubblicous levels.
The secular shift argument sounds so much like “new economy” talk that we heard in 1998-99 upto the point the bubble burst. IBM selling notes at yield half that of the stock yield. Isnt that a sign of a bubble !!!
I don’t do bonds, don’t know the correct jargon or the transaction mechanisms.
If I wanted to tear off the warning labels and blow through a stop sign, how would I get myself into a leveraged short on bonds with limitted duration risk? Are there 2-year LEAPS of bond puts? Are they tradable by ticker?
I’m thinking about converting my kamikazi equity short position into a kamikazi bond short position about 2 months after it (goodnes I hope) comes through for me.
Assuming you keep average maturity and duration at a reasonable level (the aggregate bond mkt, for example), how much are you going to lose when rates rise?
Compare losses if PE or PE10 (using 10 year avg E) reverts to its mean sometime soon.
Cash in a coffee can is always the safest alternative (actually either very short TIPS or TIPS matched to your horizon). Its returns are somewhat limited.
I’ve been hearing rates will soon go back up for at least 10-20 years. One day it might actually happen.
This is an interesting comparison and an interesting question. Dead Hobo makes some excellent points.
However we can’t bridge too much of a correlation between the two run-ups. The dot-com equity rally was a typical “tulip-type” hysteria boom. Information, logic, fundamentals were ignored and animal spirits took over.
The pressure that fund managers were under is a GREAT point to raise (although apparently very few of them had heard of a stop-loss order). The question is, are we looking at the same thing happening to bonds?
The case for a secular change, I believe, does have some basis. Retail investors are a lot older and looking for more stable sources of income (or simply wealth retention).
The last 10 years have not done much to create confidence in equities for investors, and a secular shift to bonds could simply be a reflex action as part of an equities hang-over.
We are facing a very deflationary (or minimally inflationary) outlook, which is a good place for bond holders.
In the short-term we have had an 80% rebound that has put Wall Street ahead of Main Street.
David Rosenberg is another guy who has made some eloquent arguments for a secular shift to income.
As an aside, I don’t usually give much credence to an outlook on binds provided by the Chief Equity Strategist of Citi (maybe that’s just me).
At the end of the day though I am a strong believer in mean reversion. I suppose the question would remain, from a long-term perspective, where dies the mean lie?
The one who will get seriously hurt is the little guy who has been told that “fixed income” is safer because it’s government guaranteed and it offers — fixed income. Seem obvious.
What no one has told him is that a “fixed income” fund managed by an active manager can be just as volatile and just as risky as any equity fund.
So, what happens when all of the little guys who have been scared out of equity and into bond funds and similar (you’ve got to go somewhere …) learn this one the hard way?
I cry foul, the scales don’t match: Intentionally isleading chart.
Treasuries = dotcoms? I don’t think so. Dotcoms were pure speculation on massive profits (which would not and could not materialize) years into the future. Treasuries can and always will repay the principle amount together with the coupon interest at the designated times. There is no risk in that. The only risk to Treasuries is inflation which ain’t gonna happen anytime soon. Inflation requires money creation which requires lending and borrowing which also ain’t gonna happen in this age of deleveraging. Money supply is contracting as loans default and get paid off. Also lenders don’t want to lend due to risks of default and borrowers just don’t want to be in debt anymore. Can anyone spell liquidity trap? End of story. Treasuries remain as safe as ever albeit with lower interest income.
Two Wall Street tycoons that ended up with “pockets full of money” after the Crash were Alfred Lee Loomis and his partner and brother-in-law Landon Thorne. The two had been leading financiers for the new electric power industry in the 1920s. Loomis was also a scientist, and he became a major supporter of some of the century’s greatest scientific minds at his Tuxedo Park home. By early 1929, the two partners had liquidated all their stock holdings and put the gains into long-term Treasury bonds and cash. The reaction by their peers, so many of them forced out of business, seemed more like envy than admiration since “in the midst of so much despair, with the economic situation deteriorating day after day, Loomis and Thorne continued to profit handsomely
also-
the prime corporate bond yield average went from 4.59% in September 1929 to 3.99% in May of 1931. By June of 1938 the average corporate bond yield fell to a new low of 2.94%. Bonds returned 6.04% during the 1930s.
9 years- has it been 9 years?
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