In the Matter of World versus Steve, on the charge of knowing possession and ownership of TLT with intent to profit, the jury hereby finds the defendant not guilty on the grounds of insanity.
Back in court . . .
Perhaps the people judged to be insane are actually the sane people.
Steve
Another article on this subject:
http://www.wsj.com/articles/buying-longer-bonds-holds-danger-1469661392
I donāt subscribe to wsj so I canāt read the article.
But all investments pose risks, one canāt make money risk-free. In all likelihood, LT TBonds wonāt become worthless overnight and TLT is quite liquid. So you should be able to get out when necessary (and that is not now). If we want to use fear analysis, lets try it on stocksā¦ in the extreme case, an investment in stocks can lead to total loss, or at least 90% loss as in the case of 1929-1930ās. What is the upside for stocks? Not much especially if the fed narrative that interest rates are going to rise hold true.
Steve
Correct answer . . . to the wrong question.
The question is why choose TLT over IEI.
subquestions:
What is your potential reward for being right on TLT in lieu of IEI if your analysis is correct?
What is your punishment for being wrong about TLT relative to IEI if your analysis is not correct?
What is the probability your confidence in your ability to make the fine distinction between TLT and IEI is on target and how much margin of error do you have before youāre screwed?
Why are you holding TLT or IEI?
a) in an effort to profit from your ability to analyze economic and interest-rate prospects and trade quickly enough so you can get an edge in tLT vs. IEI?
b) as a hedge against equity risk (the aim of such a hedge being to spare you the hazards and burden of having to hyper-follow the details and be precise in your timing)?
Your having posed a comparison of TLT to stocks is wrong. Itās TLT vs IEI, or if you wish TLT vs SHY or TLT vs cash or TLT vs some other hedge vehicle or TLT vs some other income vehicle, or TLT vs some other trading vehicle.
Steve,
I donāt subscribe either but in the US one can access wsj online for free through their local public library.
Scott
Marc - TLT is riskier than IEF, IEF is riskier than SHY, and SHY is riskier than cash. However, IF what I am hearing is correctā¦ that the long end of interest rates are pinned by Japanese and European investors, then TLT will move less in the wrong direction than something at the short end of the interest rate spectrum IF the fed decides to push up the fed funds rate. And the fed reserve would be wise not to, as they will just be demonstrating their own ineffectiveness.
And my analogy to stocks is still correct. That is if we are going to analyze by fear. I forgot to mention that stocks will be a lot less liquid than TLT on the way down. Anyone who remembers 1987 will know that there were practically zero buyers during the crash.
I am looking forward to see what Japan is going to do (should know late today). There is some speculation that they will cancel their outstanding debts. āInterest rates might be positive and quite large if the BOJ hadnāt bought up a majority of bonds and created a scarcity of duration. So now most of Japanās external debt is actually owed to the BOJ and is not external at allā¦it has been suggested that the government swap out all those bonds for one giant perpetual zero-coupon bond (i.e., no maturity), which is effectively the same as canceling it out.ā - Mauldin Economics (The 10th Man).
Steve
Interesting answer. Itās fine if, as is obviously the case, you want to do deep analysis and you are confieent in the accuracy of your work and your ability to trade well on the basis of it.
But others, seriously, if you are looking for a vehicle to HEDGE agasint the risks of stocks and the chllenges of makret analysis and tgiming, do you want any part of that sort of thinking. Thatā/s the sort of process yolu want to get away from when you hedge.
Remem ber, itās always about ypour goals. So as youy think about why you hedge or choose a hedged SA model, think about whether you do it in order to place bets on your ability to outthink the Fed, the Bank of Japan, etc. and in your confidence that this dismal science finally gets it and understands how things work. And is that what you think about when you look lovingly aqt those 1999-2016 sims, during the time when LT bonds were a no brainer?
Thank you Steve for the live demo on why TLT may be the single worst āhedge vehicleā on this or any other planet (although it can be a fun trading vehicle).
Iām curious too! Especially about how the investors will react to an extreme monetization of debt (converting JGBs owned from the BOJ into zero coupon perpetual). If they really do it.
Possible outcomes:
-
expectations donāt change a bit, investors in Japan simply accept negative real returns indefinetly or shift their fixed income allocation even more to foreign debt, Japan resolves its 230% debt/gdp problem and has forever a current account surplus. You want to be really long on the Yen.
-
expectations do change, somewhat drammatically given the current yield curve, inflation reach 2% and BOJ has to adjust policy accordingly to avoid overheating the economy. JGBs yields shoot up and the government recapitalizes the BOJ (but itās happy to do it with inflation boosting revenues). You donāt want to be long on the Yen.
My view? Short on short term JGBs. And maybe long yen if Kuroda delivers something huge and the subsequent currency drop. Not because Iām 100% sure on the second outcome (in that case I would be REALLY carefull in considering a long JPY position) but another cut in interest rates would end up being restrictive in monetary policy terms beacuse it would put pressure on banks balance sheets. In the end the private banks create money, not the central bank.
The future performance of TLT is an important issue. Many of the SmartAlpha models use TLT as a hedge and may not perform so well if TLTās performance degrades. I have been experimenting with alternatives to TLT as a hedge using IEI and SHY and also BNDX.
-Debbie
Debbie - let us know if you find a good hedge!
Ah shucks Marc. You are just upset for getting it wrong last year.
Steve
Research Affiliates publishes expectations for fixed income, broken out by duration/maturity (LT, Mid, ST):
http://www.researchaffiliates.com/AssetAllocation/Pages/Fixed-Income.aspx
They even post their methodology:
http://www.researchaffiliates.com/Production%20content%20library/AA-Fixed-Income.pdf?print=1
Would you prefer to rely on forward-looking estimates, or backtests?
Quad - To answer your question, their estimates are based on their own modeled historical data (read backtests). The only real way to judge is to wait and see, and not base on someone elseās predictions which may or may not include an agenda or support a narrative.
As a contrarian, I am quite OK with their expectations as it is more or less a crap shoot that does not even remotely consider the global economic environment.
Cheers,
Steve
S&P500: 10-year annualized real return = 1.2%
Germany: 6.2%
Germany is getting a good deal being in the EU (low Euro). It is best to wait until the 4-5 countries considering an exit from the EU get through with their referendums. Germany might not look as good 
Steve
Personally, the only long term hedge to stocks that I like right now is cash. Everything else (bonds, GLD, REITs) have too many caveats and uncertainties. I can see US Treasuries to continue up in fits and starts due to foreign buying and other non-Fed related causes. But my gut feel is that when it breaks, it will be sudden and everyone will head for the exits at the same time. And I will be one of the last ones out. So just cash for me as a hedge and I knowingly give up on the potential for those extra profits.
There is nothing wrong with holding cash.
It was a rhetorical question.
And I disagree; capital market assumptions (from respectable providers) are informed by history, but are not backtests.
Itās true that the only real way to judge is to wait and see, but it seems that at least some folks are making decisions today based on the best performing backtests, hence the popularity of TLT in SA models.
SA subscribers are making decisions on past model performance (which is not the same as backtest) and negative correlation between TLT and the stock market. That of course could change, as could the Research Affiliates assumptions regarding yields simply based on historical data (Iāll avoid calling it backtesting so as not to avoid offending anyone). Research Affiliates has their own agenda āResearch Affiliates has steered PIMCO All Asset (PASAX) and PIMCO Asset All Authority (PAUAX) to mixed results: While both funds fared well during the bear market and All Asset still has a solid long-term record, their recent emphasis on emerging markets has hindered their results.ā http://news.morningstar.com/articlenet/article.aspx?id=736175
Anyways, the BOJ surprised by not easing so perhaps TLT will take a hit tomorrow
Steve