The Fixation On The Fed: 3 Investing Implications [View article]
Yes, but at a significantly reduced weight. The reason I would not eliminate them entirely is that they do provide some diversification benefit, even compared to other fixed income assets.
Thank you all for the comments. My list of the 15 riskiest countries was not meant to be an exhaustive list of all countries in the world. Instead, it was meant to be a look at the riskiness of a tradable subset of countries, meaning that there are liquid instruments to get exposure to those countries. Thus, some countries like Venezuela weren’t included. Other countries like Greece, Portugal, Ireland and Argentina weren’t included in the analysis as I question their efficacy as reliable vehicles to trade risk due to their dependency on idiosyncratic political issues.
To analyze our subset, we relied primarily on realized one-year USD return volatilities of the countries’ MSCI country indices as measures of risk. Countries that have a relatively stable currency relative to the dollar would show up as less risky.
Meanwhile, the United States didn’t make the list as it has relatively low volatility compared to other countries, particularly emerging markets, and even though China is an emerging market, it’s somewhat less sensitive to “risk on/risk off” than other emerging markets thanks to its stable currency.
4 Reasons Europe Is A Major Risk For U.S. Stocks [View article]
Thanks for reading. Certainly a full blown European crisis would negatively impact US credit creation. However, to the extent this can be avoided and we're instead dealing with continuing deleveraging by the European banks, then I believe the US will be relatively unaffected, particularly in comparison to other countries such as emerging markets in or around Europe that are likely to bear the brunt of the asset disposition.
I actually agree as far as physical real estate is concerned. If you own the bricks and mortar variety, as you suggest, real estate has been a good way to hedge against inflation. The record on REITs is more mixed. While rents go up, multiples have often contracted during periods of unexpected inflation. This, at least historically, has made REITs a less effective inflation hedge.
Sell In May: Volatility Isn't Going Away [View article]
Very long term return estimates look different. Looking at returns going back to 1896 – more reliable as you have more data points – the seasonal bias is not nearly so clear cut. May and June tend to be weak and September is clearly negative. That said, historically, average returns in July in August are 1.33% and 1.24% respectively.
Finding Income Today: A Risky Business [View article]
While I would agree that today’s large spreads are mostly driven by Treasuries being artificially expensive, rather than investment grade being particularly cheap, negative real yields in the Treasury market still argue for underweighting Treasuries and raising allocations to other sectors, like investment grade. In terms of the relative attractiveness of investment grade to high yield, spreads are well below their long-term average. Currently, high yield is only yielding about 200 bps over BBB, well below the 25-year average of 310 bps.
Money For Nothing: Navigating Fixed Income Investing In A Low Yield World [View article]
Thanks for reading and for the comments. While I agree that bonds look very expensive relative to equities, bonds are inherently less volatile than stocks. And while stocks are arguably the better value, few investors are likely to accept the volatility that would accompany an all equity portfolio. This is why I expect that most investors will maintain some significant allocation to fixed income. My view is that investors should raise their equity allocation and lower their fixed-income allocation relative to whichever benchmark they follow.
Fewer Workers: A Drag On U.S. Growth [View article]
The rally off of the fall lows has been largely driven by liquidity and accompanying multiple expansion. While I believe the market can move higher in 2012, further gains are likely to be driven by earnings growth - which will be positive, but modest - and be accompanied by more volatility.
How Rising Rates Will Impact Stocks [View article]
I agree, though I would phrase it differently: Equities can withstand inflation. However, unexpected inflation - which generally tends to be more abrupt - is what typically leads to multiple contraction.
In The Hunt For High Yield, Proceed With Caution [View article]
Typically the correlation with equities has been considerably higher for high yield than for investment grade. This basically reflects the fact that high yield has had a stronger correlation with economic growth than any other segment of the bond market.
On the valuation side, I do think that the lower end of the investment grade space, i.e. BBB, has room for modest spread compression. In terms of sensitivity to rates, I would agree that this is a major risk and it’s why I generally prefer equities to bonds. That said, I do think that within the fixed income space, investment grade credit appears to be relatively cheaper than Treasuries or even high yield.
In The Hunt For High Yield, Proceed With Caution [View article]
On municipals. I would agree that a number of smaller, municipalities are at risk. My view is that the state GO obligations are offering a significant premium over Treasuries with only a modest increase in risk. For that reason, I would stick with the higher quality issues.
The Case Against Long-Term Treasuries [View article]
The Fed is purchasing a significant amount of long-dated Treasuries (the exact percentage depends on which timeframe you’re referencing). Effectively, this is the equivalent of printing money. The Fed buys the Treasuries and credits the Federal Reserve account of the bank it bought the Treasuries from. This has the impact of increasing the monetary base, which is currency + bank reserves. Basically, the Fed is creating money out of thin air. Now, while Fed lending impacts the monetary base, it doesn’t impact the money supply until banks use their new reserves to extend credit to customers. While the Fed can technically keep this up indefinitely, as bank lending rises, this policy runs the risk of stoking inflation. Given the dearth of private borrowers for Treasuries, cessation of the Fed program is likely to push interest rates higher. My estimate is that without Fed buying, the 10-year Treasury would probably be trading at a yield of around 3% to 3.5%, as opposed to 2%. I answered your question on iSharesblog.com.
Inflation Inferno? Maybe In 2013 And Beyond [View article]
You’re right that money supply alone only explains a portion of the inflation picture. Wage growth, capacity constraints and overall demand also play a large part in driving inflation. In Japan, most of these factors have been deflationary, starting with weak aggregate demand. However, even in Japan, it’s useful to consider the monetarist argument. While Japan has anchored short-term rates at zero and increased its monetary base, the supply of money (M2) has been growing slowly due to weak bank lending. In Japan, M2 growth has averaged less than 3% year over year during the past decade. In contrast, in the United States, the money supply grew at nearly 10% over the past year. In short, Japan is a cautionary tale of what happens when the mechanism for credit creation – bank lending – breaks. I answered your question on iSharesblog.com.
The Fixation On The Fed: 3 Investing Implications [View article]
Seeking Shelter From The Storm? Consider Mega Caps [View article]
Where In The World Is Risk Today? [View article]
To analyze our subset, we relied primarily on realized one-year USD return volatilities of the countries’ MSCI country indices as measures of risk. Countries that have a relatively stable currency relative to the dollar would show up as less risky.
Meanwhile, the United States didn’t make the list as it has relatively low volatility compared to other countries, particularly emerging markets, and even though China is an emerging market, it’s somewhat less sensitive to “risk on/risk off” than other emerging markets thanks to its stable currency.
Swimming With Black Swans: The Volatile Decade Ahead [View article]
4 Reasons Europe Is A Major Risk For U.S. Stocks [View article]
Inflation Fighters [View article]
Sell In May: Volatility Isn't Going Away [View article]
Finding Income Today: A Risky Business [View article]
Money For Nothing: Navigating Fixed Income Investing In A Low Yield World [View article]
Fewer Workers: A Drag On U.S. Growth [View article]
How Rising Rates Will Impact Stocks [View article]
In The Hunt For High Yield, Proceed With Caution [View article]
On the valuation side, I do think that the lower end of the investment grade space, i.e. BBB, has room for modest spread compression. In terms of sensitivity to rates, I would agree that this is a major risk and it’s why I generally prefer equities to bonds. That said, I do think that within the fixed income space, investment grade credit appears to be relatively cheaper than Treasuries or even high yield.
In The Hunt For High Yield, Proceed With Caution [View article]
The Case Against Long-Term Treasuries [View article]
Inflation Inferno? Maybe In 2013 And Beyond [View article]