In Investing, Just As Most Things In Life, Everything Is Relative

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Includes: AGG, DEM, DIA, DXJ, EDEN, EEM, EFNL, EIDO, EIRL, ENOR, ENZL, EPHE, EPOL, ERUS, EWA, EWC, EWD, EWG, EWH, EWI, EWJ, EWK, EWL, EWN, EWO, EWP, EWQ, EWS, EWU, EWW, EWY, EWZ, EZA, FXI, GEM, IEMG, INDA, ISHG, MCHI, NORW, PGAL, PIN, RSX, SCHE, SHY, SPEM, SPY, TLT, TUR, VWO
by: The Fortune Teller
Summary

When it comes to investing, most people look at things from an absolute perspective: Have I made money or not?

However, investing is a relative - not an absolute - game, and a return is "good" or "bad" only relative to many other factors such as: i) Benchmarks, ii) Alternatives, iii) Risk, iv) History, and v) Maximum/Limited potential, etc.

Only when returns, rates, or yields are being measured on an equal-adjusted basis - an intelligent conclusion can be drawn.

Almost everything in life is relative, and investing is no exception.

Stocks are having a wonderful year, thus far, in 2019, right? Well, yes, but (certain) bonds are having an even better year than stocks:

  • Shares 20+ Year Treasury Bond ETF (TLT): +17%
  • SPDR® S&P 500 ETF (SPY): +16%
  • SPDR® Dow Jones Industrial Average ETF (DIA): +13%

Stocks are having a great year? Bonds (NASDAQ:<a href='https://seekingalpha.com/symbol/TLT' title='iShares 20+ Year Treasury Bond ETF'>TLT</a>) are doing better than S&P 500 (NYSEARCA:<a href='https://seekingalpha.com/symbol/SPY' title='SPDR S&P 500 Trust ETF'>SPY</a>) or Dow Jones (NYSEARCA:<a href='https://seekingalpha.com/symbol/DIA' title='SPDR Dow Jones Industrial Average ETF'>DIA</a>)!

Ok then. So do we want to put some of our money in bonds? Well, yes, but that very much depends on the type of bonds you invest in. I mean, the last things you wish to see is the "super safe" bonds that you put money into 10 years ago losing 16% (on a total return basis) during that time frame:

  • iShares Core US Aggregate Bond ETF (AGG): +45%
  • iShares 1-3 Year Treasury Bond ETF (SHY): +12%
  • iShares 1-3 Year International TrsBd ETF (ISHG): -16%

Chart Data by YCharts

Safety is also a relative term.

When you invested in those "super safe" bonds (ISHG), back in August 2009, you never thought that such a day will even come, when the average yield to maturity ("YTM") is... -0.11%

Needless to say, a combination of a negative YTM and an expense ratio of 0.35% ensures that this ETF isn't going to make money (especially not for you) in the foreseeable future.

Below, you can see is a list of global sovereign 10-year bonds.

On its face, the US is offering an amazingly high yield (in absolute terms) compare to its developed markets' peers, right?

On one hand, the list of countries offering negative yields is growing, now including Switzerland (EWL), Germany (EWG), Denmark (EDEN), Netherlands (EWN), Austria (EWO), Finland (EFNL), France (EWQ), Sweden (EWD), Belgium (EWK), and Japan (EWJ, DXJ), with Ireland (EIRL) practically belonging there too.

On the other hand, the countries that offer higher yields than the US are mostly Emerging Markets (VWO, IEMG, EEM, SCHE, SPEM, DEM, GEM): China (MCHI, FXI), Philippines (EPHE), India (PIN, INDA), Brazil (EWZ), Russia (RSX, ERUS), Mexico (EWW), Indonesia (EIDO), South Africa (EZA), and Turkey (TUR)

Singapore (EWS) and Poland (EPOL) are the only developed markets that offer higher yields than the US, with Spain (EWP), Portugal (PGAL), UK (EWU), Australia (EWA), Canada (EWC), South Korea (EWY), New Zealand (ENZL), Hong Kong (EWH), and Italy (EWI) floating in between the >0% and the <1.74% (offered by the US).

Image

Allegedly, 1.74% should be a bargain then, right? Well, only if you look at things from an absolute perspective. If you take a historical, relative, view, things might look very different.

In October 1981, the 30-Year US Treasury Bond Yield closed at an all-time high of 15.21%. Right now, the 30-year yield is trading at 2.21%, only 10 bps away from a new all-time low.

So, from a historical relative basis, the last thing one can say about a 30-year US government debt yielding only 2.21%.

But then, again, just as you think that 2.21% for 30 years seems ridiculously low, you look at German (EWG) Bunds, currently paying a negative yield of -0.04%, and you think to yourself "what a great deal 1.74% is!"...

Taking into consideration that inflation (i.e. CPI) in Germany currently runs at 1.7%, while in the US we look at only 1.6%, makes 1.74% looks even better (on a relative basis, of course).

Historical US 10-Year minus 3-Month Treasury Yield (past 10 years):

  • August 2009: 3.62%
  • August 2010: 2.71%
  • August 2011: 2.57%
  • August 2012: 1.49%
  • August 2013: 2.63%
  • August 2014: 2.46%
  • August 2015: 2.19%
  • August 2016: 1.31%
  • August 2017: 1.24%
  • August 2018: 0.89%
  • August 2019 (Today): -0.32% >>> That's the most inverted 10-year/3-month spread we've seen since April 2007!

Chart Data by YCharts

But don't forget: It's all relative.

A negative 10-year/3-month spread is not unique for the US inverted yield curve. The same is happening in Mexico, Hong Kong, Canada, UK, Norway (NORW, ENOR), Japan, Singapore, New Zealand, and Germany.

Have we already said that when it comes to investing, just as most things in life are, everything is relative?...

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.