On the dangers of fighting the last investment war

Don’t miss this post by Viskanta Tadas at Abnormal Returns, which begins:

It is often said that generals are always preparing to the fight the last war. The same thing could be said of investors as well. Investors are prone to extrapolate the recent past well into the future. For example, nearly four years into a bull market only now are investors beginning to put money back into equity mutual funds.

This point is well-illustrated in a series of graphics from David Rosenberg, via Business Insider, showing magazine covers from the most important eras finance of the past two decades. These include the Internet bubble, housing boom and the Great Recession. These compilations show how investors become slowly convinced as to the inevitability of the trend at hand.

In terms of trends there are few more well-established than the bond bull market. For over thirty years now bond yields have done little more than go down. Maybe because the trend has been so long-standing there is no cluster of magazine covers to highlight it. However a look at the graph below shows just how far yield have come from the end of the highly inflationary decade of the 1970s.

a81f468a7cd728059b4b24cd88d40b07 On the dangers of fighting the last investment war

30-Year Treasury Bond Yield data by YCharts


Read Abnormal Returns for the complete picture – many excellent resource links. Lots to think about. Especially low-risk investors: what are their options given the state of the bond markets?

2 thoughts on “On the dangers of fighting the last investment war

  1. Indeed. Where does the low-risk investor go? Inflation (not the officially-reported fiction) erodes the value of your cash. How long can bonds sustain their run at this point? I don’t buy the arguments now that the rise in the stock market means that it is time to jump back into it. Gold and silver have had a big run. Real estate still hasn’t bottomed out. I don’t see politics doing anything at all to reverse the current trends. Oy vay!

    • How long can bonds sustain their run at this point?

      When a 30-yr bond yields 1.5% there isn’t much “run” left:-). But there is a hell of capital crater if the rates pop up to 3%.

      Good news/bad news = US Fed seems to be moving towards NGDPLT. If they really did that then economic growth would speed up and the economy would get back on the growth track of say 2007. But between now and then could be 5 more years of financial repression. Meaning negative interest rates for lenders like retired folks.

      Where does the low-risk investor go?

      I wish I knew. Hopefully some commenters will stop by with suggestions.

      There are options for the hands-on investor in real estate now. And the indicators I look at imply that US real estate has turned around overall. The pockets that haven’t bottomed might be even better return opportunities. Myself, I would be conservative and look at buying up homes (and small apartment buildings) that will do well in the rental market, and will be attractive to first-time buyers down the road.

      The obvious problem is the management. Somebody has got to do a good job of managing those properties.

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