I Hear A Freight Train Coming, It Is Time To Get Off Of The Tracks
Summary
- I warned of a market top in this asset class one year ago.
- Those that listened avoided a big, big sell-off.
- If you did not listen the first time, here is your second chance.
The regime of the last nine years in which central banks cut rates to nothing and pumped incredible sums of money into the financial system is coming to an end, writes Ray Dalio.
"Central bankers have clearly and understandably told us that henceforth those flows from their punch bowls will be tapered rather than increased."
Next up is the late-cycle phase in which central banks tighten policy "until they don't get it right and we have our next downturn."
Bond rout just getting started - Gundlach
The 10-year Treasury yield is at 2.38% today vs. about 2.12% just a few sessions ago. It's certainly a sizable move for such a short time frame, but it's barely a blip on a longer-term chart.
Jeff Gundlach tells Bloomberg he expects a move toward 3% this year. Taking to Twitter as well, Gundlach reminds the German 10-year Bund yield - near zero not that long ago - has spiked above 0.50% as the ECB begins to move to take the punch bowl away in Europe.
One year ago, I wrote about the growing bubble in REITs, Utilities, and other interest rate sensitive stocks and sectors. At the time, bond yields in Japan, Germany, and Switzerland were going negative, while our interest rates were hitting new, all-time lows.
Since that time, Utilities have gone nowhere, bonds are about even to slightly down, while REIT's like Realty Income (O) are down anywhere from 5-20%. Meanwhile during that same period of time, the S&P 500 is up over 15%.
REIT's, Utilities, and other interest rate sensitive instruments look just as bad today, if not worse than they did back then. When I wrote my article last year, our FED had just begin to hike rates, they have turned much more hawkish since then.
In addition to this, central banks around the world are now shutting down the spigot and beginning to tighten. Rates all over the world are beginning to move higher.
It was interesting to read Ray Dalio's comments this past week about the central banks. Who is Ray Dalio? He started what became the biggest hedge fund in the world (Bridgewater Associates). He is also currently the 30th richest man in American, and #69 in the world.
He did not get to where he is today by not knowing how to recognize cycles and patterns in the market. Investors in bonds and other interest rate sensitive investments better sit up and take notice when someone like Ray Dalio warns about a global central bank tightening cycle.
If Dalio's warning was not enough, bond guru Jeffrey Gundlach shocked bond investors with his comments last week. He said that the bond rout is just getting started! I could not agree more.
I warned about the "unprecedented risk in bonds" back on July 25th of last year. At the time, the bond market was hitting new, all-time highs and they had been delivering returns way outside of the norm for the last decade. Something had to give and it did. That was almost the exact top in the bond market.
The bond market started to plunge and interest rates began to move higher in early September of last year. The bond market finally bottomed out in mid-December and it has been working its way a bit higher since then.
If you missed the chance to get out one year ago, you had another chance a few weeks ago. Now the bond market is under fire again, but it is still not too late to run for cover. It will get a whole lot worse.
I also sent out a dire warning on REIT's back on August 28th of last year. Here is an excerpt from that article.
"Utilities were not the only sector that was seeing massive inflows of dividend seeking cash however. The real estate investment trusts (REITS) were also being bid up to giddy levels. This situation almost always spells T-R-O-U-B-L-E. This time was no different. I cringed when day after day, the most popular articles on Seeking Alpha were REIT related.
In fact, I made the following comment on an article about VNQ back on July 3, 2016.
"Check back on VNQ in 2008-2009, it got clobbered. It went down much more than the overall market. REITs were grossly overvalued then and they are fast reaching that point again. I fear too many investors have become complacent and passive with their rising REITs, thinking that they will continue to rise forever."
I also warned in my comments on another Seeking Alpha article on REITs back on June 23rd of this year.
"Everything in the market is cyclical. REITs are having their day in the sun now, but watch out when the clouds start to gather on the horizon. Don't go overboard with them at this level, and be on the lookout for rising rates and runaway valuations."
The REIT index has only corrected by about 4% so far, but I believe that it could go down a lot further. Valuations are still extremely high."
Well, here is what VNQ has done since my August 28 warning. It went from $89 per share to $77 per share. That is a drop of 13.5%. I don't want to hear the comment, "but I still get my dividend!" Investing is all about total return. The REIT sector has been whacked.
VNQ has made its way back to $82 per share, but it still looks ugly. Look at what just a little central bank tightening has done. What happens when they really start to get serious about trimming their balance sheets and hiking rates?
It just amazes me that many authors on this site continue to coo about the virtues of real estate investment trusts (REITs). I feel sorry for their readers that are following them all the way down. It is not good to have just one asset class in your quiver. Everything in the market is cyclical, including REITs.
KEEP IN MIND THAT THE MSCI REIT INDEX WENT DOWN 71% FROM OCTOBER OF 2008 TO APRIL OF 2009. NOW IT IS FINALLY BACK TO WHERE IT WAS TEN YEARS AGO!
Real Estate Investment Trusts are not as safe as many investors are led to believe. They are extremely sensitive to the economy and to interest rates.
So what are income investors to do at a time like this? My financial planning software tells me that I should have about 50% of my assets in the bond market at my age. No thanks, I don't want any exposure to the bond market going forward.
I am glad that as a financial planner and a professional money manager that I can override what the "robot" inside my computer is telling me to do. I don't need a weatherman to know which way the wind blows.
I believe that the bond market has entered into a new secular bear market. I first made that call one year ago. So far, it has been pretty darn accurate. Furthermore on March 27th, 2009 I stated in my newsletter that a new bull market had been born.
That bull market call has been in place ever since and I am a market timer. Stocks are cyclical too. While bonds follow interest rates, stocks follow earnings. Earnings for the S&P 500 have been growing every year since 2009, but at some point in the future they will begin to recede. I do not see that event on the near time horizon as of now, but it will happen at some point in time.
It will then be time to look for other asset classes to invest in. Who knows, maybe cash, gold or even inverse ETFs will be the place to be at the time. All we can do is take it one day at a time.
I know what you are thinking, even a broken clock is right two times per day, but those are two pretty good calls. Two rights don't make a wrong.
This article was written by
Bill Gunderson is CEO and Chief Market Strategist at Gunderson Capital. He is a professional money manager, former research analyst, author, and media personality with over 24 years of experience.
He runs the investing group Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (23)
I'm going to hang on to the couple of bond funds I purchased well over 10 years ago. I've watched how they move up and down. I assume they could tank again, but with the DRIP, my share count goes up and up, and I don't intend to sell shares. I may be a bit overweight in REITs. However, I have held real estate through boom and bust. The way one makes money in real estate is to manage liquidity risk. Have enough margin of safety that you aren't forced into a fire sale when the market is soft. I think I'll hang on to those REITs as well. My cost basis in all of them is WAY low and, yes, I still get my dividends. I think the author said it all when he said "I am a market timer". Have fun with that game. I'm playing to different rules.
