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Ignore Jobs, Buy Bonds


  • Economic growth remains in a sharp downturn.
  • Recent data from the employment and ISM manufacturing reports confirmed and emphasized the slowing growth trend.
  • When economic growth is slowing, avoid cyclical assets in favor of defensive assets.
  • Looking for more investing ideas like this one? Get them exclusively at EPB Macro Research. Learn More »
stock and bond

Kameleon007/iStock via Getty Images

Over the past several quarters, the direction of real economic growth has been decidedly lower as the massive fiscal spending impulse wanes. Price pressure, however, has not yet peaked and is set to jump north of 8% once the March consumer price figures are released

The Money Is Made At Inflection Points

As an investor, you need to know where to move your money and when to move it.

EPB Macro Research identifies the most critical economic inflection points so that you can position for the next market regime.

Track leading indicators of the economy, get dozens of trade ideas for the 6-12 month view and have direct access to Eric through our Member's only chatroom.

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This article was written by

Eric Basmajian profile picture

Eric Basmajian is the Founder of EPB Macro Research, an economics-based research firm focusing on inflection points in economic growth and the impact on asset prices. He was previously an analyst at a quantitative hedge fund.

Eric leads the investing group EPB Macro Research where he applies investing strategies with the understanding that when there is an economic inflection point, company fundamentals don’t matter, technical trends break down and investors are blindsided. His analysis helps investors position their portfolios to avoid losses and maximize gains during changing economic conditions. Learn More.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SPY, TLT, IEF, SGOL, BCI, VOO, IEI, QQQ, EDV, XLU, XLP, USMV, DIVB, BTAL either through stock ownership, options, or other derivatives. 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 (257)

Lake OZ boater profile picture
@Samsara Growth@Fero.

1. Eric Basmajian recently appeared for an interview on the Wealthion channel. He presents a very understandable explanation of various aspects of the business cycle.

Many stock investors are looking at lagging economic indicators and believe the economy will avoid a recession.

If you will invest the time, you will come away with a better understanding of the nuances of the business cycle, and why the future for corporate earnings is not that rosy.


2. In terms of risk and reward for today's stock investors, it all depends on your investment horizon*. Investopedia's # 1 ranked financial advisor, Michael Kitces, defines the retirement "danger zone" as the final decade leading up to retirement, and the first decade of retirement itself.

It is the chapter of time where the size of ongoing contributions to a retirement investment plan and the benefits of continuing to work are dwarfed by the returns of the portfolio itself.

As a result of the “portfolio size effect”, a pre-retiree or someone newly retired becomes almost entirely dependent on getting a favorable sequence of returns

3. The dividend yield on the S & P 500 index (SPY) is about: 1.53%
Source: www.multpl.com/...

From historical data...

Starting Yield on SPY---------10 yr average rate of return

4. The duration of equities can be measured by the inverse of the dividend yield of an index (1/dividend yield). It's roughly the number of years of dividends it would take to recover the current price.

Estimate of current modified duration: 1 / 0.0153 = 65 years

A basic financial planning concept: If a buy-and-hold investor with no particular view about market conditions or future returns wishes to have a fairly predictable amount of wealth at some future date, that investor should hold a portfolio with a duration that is roughly equal to their investment horizon*.

5. An estimate of the blended duration of today's 60/30/10 portfolio using a
S & P 500 index fund, a total bond market index fund, and 10% in cash...

(0.6 x 65 yrs) + ( 0.3 x 6.5 yrs) + (0.1 x 0 yrs) = 41 yrs

6. An investment horizon is the approximate mid-point of one's retirement spending. A few examples of investors who retire at the standard age of 65, with a life expectancy of age 90.

50 years old: (90-65) / 2 + (65-50) = 27.5 yrs
60 years old: (90-65) / 2 + (65-60) = 17.5 yrs
65 years old: (90-65) / 2 = 12.5 yrs
70 years old : (90-70) / 2 = 10 yrs
75 years old : (90-75) / 2 = 7.5 yrs

7. What might be prudent allocations for today's 60 year old in the retirement "danger zone" with a remaining investment horizon of 17.5 years?

About 21% in SPY, 60% in a bond index fund (BND) and 19% in cash.

(0.21 x 65 yrs) + (0.6 x 6.5 yrs) + (0.19 x 0 yrs) =17.55 yrs
Samsara Growth profile picture
@Lake OZ boater Since you advocate the purchase of bonds (I remember our exchanges on the subject), it is clear that stocks have outperformed.
Lake OZ boater profile picture
@Samsara Growth Investing is not a competition. They don't give out prizes to the people who have earned the most money--- on paper. In the long run, it's about growing your wealth slowly, and preserving it so you have some left to spend when you retire.

I seem to recall you have a very long investment horizon. Like my children in your age range, I counsel them to be stock heavy---but include some bonds for an anchor to the wind. (75% stocks / 25% bonds and cash).

The 2023 Dalbar report confirms again that many investors tend to underperform the stock funds they invest in. Some of this is due to over-estimation of their risk tolerance . A lot of "selling low" occurs around times of increased stock market volatility. But it's just not younger investors. The Morningstar analysis showed many "experienced" investors panicked during the 2020 pandemic bear market.

Dalbar summary: "Investors are Still Their Own Worst enemies"


Morningstar: "An Updated Look at 401(k) Participant Behaviors During the COVID19 Crisis"


Short- term moves in markets are based on investor psychology and heuristic trading patterns. Those are very difficult to quantify and plan around.

Longer term movements in asset classes are driven by economic fundamentals--this is Eric's area of focus.

For consideration...If an investor needs needs the historical returns from US stocks (11-12%) over the next decade to meet their retirement goal, it may be a good time to consider a "Plan B".

Here are 10 yr return projections for various mainstream asset classes from the investment house Vanguard ($5T AUM) at the link. Notice they are about half (1/2 ) the long-term averages for US stocks.


These estimates should not come as a shock to anyone. Economies and stock market valuations do not start from the same place every year.
Samsara Growth profile picture
@Lake OZ boater Yeah, meanwhile TLT - 23% since the publication of this article for what is supposed to be a risk-free investment, at least less risky than stocks. That's what I remember, the rest for me is literature, to be kind.
corav profile picture
Didn't anyone notice when this was posted? April 1st, on April Fool's Day! Pretty good joke by Eric with this "Buy Bonds" recommendation. The Fed had made it clear at that time that raising interest rates would extend into 2023. Since April 1st, TLT has given up 21%. When rates go up, bonds go down. Who in their right mind would fight the Fed and buy bonds at such a time?
Lake OZ boater profile picture
@corav Since we don't have your gift of seeing the future, I guess you'll then have to take it up with people a lot smarter than most of us here.

They concluded since most investors are risk-averse...

"...the optimal portfolio replicates a long-term bond." And ...

"...highly risk-averse investors desire a stable income stream."


Here's what happened over the Fed's last tightening cycle 2016-2018...

Time period: Jan 2016 - Dec 2018 ( 3 years)

Symbol----------------------Inflation adjusted CAGR

Key: VCLT = Long term treasuries
SHY = Short-term treasuries

Full results at link:

Sure, IF you need the money in the next few years, there's a chance you've lost money. But....

-Bond ETFs don't have risk.

-Investors who don't match their investing horizon with their fund's duration DO have risk.
@LakeOZ boater "Bond ETFs don't have risk" - that depends from the type of bonds I guess. Maybe no bankruptcy risk but there is the paper loss risk still. Some don't like it :-)
Lake OZ boater profile picture
@Fero. Investor risk can only be evaluated relative to a financial goal.

It is optimal to insure the 'duration gap' is as close to zero as possible, i.e. the difference between duration of the asset and the investment horizon of the investor's future consumption.
odsmaker profile picture
In retrospect, good call, short-term, anyway. I think bonds have gone up about as far as they can go right now.
Lake OZ boater profile picture
@odsmaker Will the Fed be brave, or will they cave?

If they "cave" and fail to contain inflation and repeat Volker's initial mistake, the majority of our citizens will continue their declining standard of living.

No denying it...we are suffering from the worst cost of living crisis since 1980.
Revisiting this post
30 year closed above 4.29% .
About 8 points lower equates to 5%.
It is down a massive 55 points so far this year .

The zero coupon EDV closed at 75 ,down from 100 on 8/1 and down a massive 65 points this year .

Those who have been long bonds have experienced the greatest bond bear market since Volker
@r cohn they will get their money back plus interest. That's what they signed up for. It's inflation that's killing them, not the bond bear per se.
Worst performance of a 60/40 portfolio in the last 100 years this year so I read. Now the good news. This treading mud will eventually end. It might have ended already for all I know.
Lake OZ boater profile picture
@r cohn Re-visiting one of your posts...

"Look for >5% rates and prices in the mid-low $ 80s before rates bottom out"

On 11/16/2022, the 30 year treasury closed at 3.85%, down 44 bps from your call out of the 4.29% mark--- that included a forecast of going higher.

TLT price as of 11/17/22 = $100.

It would seem that it's difficult to call both tops in rates and bottoms in rates, even by skilled traders like yourself.

I will assume you occasionally visit the SPIVA data (acronym stands for
S & P Indexing Versus Active )?

They collect annual results of bond index investments versus "active" (trader) managers. Go to page 22 and 23 of the document to see the most recent fifteen (15) year percentages of "actively" managed (trader) fixed Income (bond) Funds that UNDER-PERFORMED their index benchmarks.


IMO: The average fixed-income investor here in these forums is better off just choosing index bond ETFs that have blended duration that matches their investing horizon. That greatly increases the odds they will capture their chosen index's performance.
* Estimates of investing horizons with life expectancy around 90 years, and retirement around the standard age of 65...

55 years old: (90-65) / 2 + (65-55) = 22.5 yrs
60 years old: (90-65) / 2 + (65-60) = 17.5 yrs
65 years old: (90-65) / 2 = 12.5 yrs
70 years old : (90-70) / 2 = 10 yrs
75 years old : (90-75) / 2 = 7.5 yrs

Reference: "Understanding Fixed-Income Risk and Return"

@LakeOZ boater I'm revisiting this as well, because I honestly thought it was an April fools joke at the time. No matter how you sugarcoat it, it was a bad call. If not for the very simple basis of buying this headed into aggressive tightening. There were other factors, but that was the most glaring.
Also, the advice was quite generalized, and not specific for the elderly. He's younger person who stated this "With a 6-12 month view, I'm still a buyer of (EDV) (NASDAQ:TLT)." That was ridiculous given the data.
Another massacre early this week toward 110 and TLT is a low risk trade
Lake OZ boater profile picture
@r cohn Your profile suggests you are a trader. There are many roads to Dublin.

The average 65 year old has a remaing investing horizon of about 12-15 years. The current increase in bond yields is actually beneficial to most retirees IF they refuse to be scared and do not capitulate.

For additional consideration that aligns with Eric's thesis, Daniel Want of PCM writes...

"What people are misdiagnosing in the current system is...Monetary conditions. Despite popular belief (fuelled in part by the misunderstanding of Central Bank policy and to a lesser degree the interactions with fiscal policy), monetary conditions are not loose, in fact they have been reasonably stable over the last 12 months and are now starting to tighten… the global US Dollar currency & banking system is not on an expansionary footing, but it remains structurally impaired and still at risk of stresses causing bouts of significant tightening. If US Dollar system monetary conditions were ‘loose’, then Gold would be priced beyond $2,500 by now, and the USD itself against the other major currencies of the world would be much weaker. (Bond & Eurodollar markets are also similarly discounting tight conditions overall on a multi-year basis)"


Bob Farrell's Rules...

# 2. "Excesses in one direction will lead to an opposite excess in the other direction."

Translation: Markets that overshoot on the upside will also overshoot on the downside, kind of like a pendulum

# 9. "When all the experts and forecasts agree – something else is going to happen."

Translation: It usually pays to be a contrarian. Buy low, and sell high.

Per Want's / PCM's recent conclusion...

"..30yr US Treasury Yields are likely to be below 1% sometime over the next couple of years."


The key question for a retiree at this point: Do you want stability of principal, or higher income? Now is the higher income we've all been longing for.
@LakeOZ boater
In your opinion, when the Fed begins to reduce its balance sheet in June, how do you think it will impact the price of TLT?
Lake OZ boater profile picture
@GHOUND IMHO: Monetary conditions are not loose. Reducing their balance sheet is akin to tightening.

The Fed is tightening financial conditions into an global economic slowdown, and it's a recipe for a hard landing. The Fed has about a 10% success rate in soft landings.

Also, have you noticed the strength of the US dollar? I hold Invesco DB US Dollar Index Bullish Fund (UUP), and it is up +8.5% in the last 90 trading days.


The US dollar is strong and strenghtening. This will lead to dis-inflation of our imports. Struggling overseas export-based economies need our business.

Financial assets are the only ones that cause investors to run out of the store when prices go on sale. That's why Ben Graham* recommended that investors consider formula-based investing to avoid behavioral mistakes.

Here's one example that you might find interesting...

If you were comfortable with 65% stocks and 35% bonds when the Shiller P/E was at its 50 year average around 20.5, what should be your ratio now with the Shiller P/E at 31.6 ?

The formula's output determines a bond allocation...

% Allocation = 100 x (Current PE10 – Avg. PE10 /2) / (Avg.PE10 x 2 – Avg. PE10 / 2)]


-The 50 year average of the Shiller P/E is 20.5

-The current Shiller P/E is at 31.6.


“There is no controversy in social science that shows such a large body of qualitatively diverse studies coming out so uniformly in the same direction as this one , i.e. models outperform experts.” Paul Meehl
Graham's passage found in his book The Intelligent Investor...

"The chief advantage of a formula will is that it will give the investor something to do. As the market advances, he will from time to time makes sales out of his stock holdings, putting the proceeds into bonds; as it declines he will reverse the procedure. These activities will provide some outlet for his otherwise too-pent-up energies. If he is the right kind of investor he will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd."
Why the bulls in bonds have been wrong

1. Underestimated the amount of inflation resulting from MMT and the resulting Federal governments huge budget deficits
2. Assumption that inflation would fall to levels seen during the last decade . Ageing populations and globalization were both major factors underlying the low inflation argument . An older population is still there , but globalization is starting to fall apart - just refer to the shipping logjams last summer and the future logjams resulting from the current Chinese Covid lockdowns .

3. Have not factored in the future changes resulting from the Russian sanctions. On 3/9 when the sanctions policies were announced , the 30 year yielded
2.3%. The sanctions policy have had and will continue to have 2 main effects
a.higher prices for many energy, minerals and food stuffs .
b . A move towards using the dollar less in transactions among unfriendly countries and the liquidation of dollars in reserves of China. Although the latter can not happen immediately for reasons which Lake spelled out, holding fewer dollars as reserves is a rational move for a number of countries .
It is not that the dollar will disappear as the most popular currency held by countries , but a substantial reduction from the current 58% to below 50% would have very negative implications in our ability to finance any future deficits
4. Assuming that the Fed would be forced to become dovish due to negative moves in the stock market . This may be a valid point , but it is going to take much lower than S+P at 4,000 before any Fed put becomes relevant .
5. And the most important-
the low level of nominal and real invest rates along with the bursting of the biggest bond bubble in history
@r cohn The ironic thing though is that those continuing to hold BND/IEF/TLT through 2022 have not really done any worse than someone stubbornly holding onto SPY/QQQ. Neither party is all that happy right now! Just a sucky environment to be holding anything but energy/commodities and a few REIT sectors.
Lake OZ boater profile picture
@r cohn "...the bursting of the biggest bond bubble in history"

Calling a bubble in real time? That's bold.
corav profile picture
Eric is fighting the Fed as the Fed is fighting inflation. I feel for the investors who followed his advice and bought bonds. TLT has dropped 14% since his recommendation on April 1. It was probably an April's Fool message.

Looking forward to see if Eric responds to your comment with an explanation.
Lake OZ boater profile picture

For those of us in our 60's and nearing retirement soon, most of us have an investment horizon that is 15 to 20 years.

For those who construct a retirement portfolio using only bonds with a duration that is shorter than their investment horizons, those investors should consider that...

1) You are making an active bet that bond yields will rise faster than the market expects over the next 20 years

2) You are expressing a preference for certainty of portfolio value over a preference for certainty of retirement income.

Long-term bonds (or ETFs) generally provides certainty of cash flows over a period that is twice as long as that provided by a shorter bond, which makes it a good choice for an investor with a long term investment horizon.

I feel sorry for income investors who don't understand this financial planning concept.
@corav he wrote that he expects it to be volatile. That drop is what volatility is. We'll see in a few years how this will play out.
Austin Rogers profile picture
I need an EPB fix. Going through some serious withdrawals. My long-term bonds are killing me.

Eric, stop spending so much time with your new fiancé and getting interviewed by Danielle DiMartino Booth and give us poor sods an update.

In all seriousness, congratulations on getting engaged!
Lake OZ boater profile picture
@Austin Rogers LOL!

Ditto...Yes, congratulations!
Austin Rogers profile picture
@Eric Basmajian I forgot to tag you in the original comment.
Trying to reconcile Eric's downbeat post on April 1 with a considerably more upbeat post April 15 from bloomberg.com ;

U.S. Factory Output Rises More Than Forecast in Broad Advance
• Manufacturing climbed 0.9% in March after increasing 1.2%
• Auto output strengthened, along with business equipment
Vince Golle
Lake OZ boater profile picture
@Diego Montalbon, raconteur

Supply chains were disrupted by the pandemic, and now aggravated by the war in Ukraine.

Some of the producers you cite are increasing production to try to alleivate the shortages. They are also causing the prices to go up. It's called cost-push inflation.

Cost push inflation doesn't come from the demand side, but the supply side. So it's not not a sign that the economy is strong.

As goods become more expensive and less affordable as Eric points out :

"Real consumption growth is declining (direction), below "trend", and a fraction away from contraction." (see chart at link)

Lake OZ boater profile picture
4/14/22 Great new interview with Eric Basmajian.

See: "Vance Barse & Eric Basmajian Discuss The 2008 Financial Crash & The Power Of Social Media"

(1:10:03) www.youtube.com/...
AlmostHeaven profile picture
@LakeOZ boater thx for link. Great interview and insight.
Lake OZ boater profile picture
@sdrice63 I agree.

Eric is a rising macroeconomic star, and is the heir- apparent when Dr. Lacy Hunt decides to retire.
Lake OZ boater profile picture
@sdrice63 sent you a PM too
The good news is that the bond bear market is more than 1/2 over
The bad news is that the bond bear market has much more to go on the downside- 30 points on TLT .
The interesting question which arises is what is the black swan event that will be associated with long term rates over 5% . Yes , the stock and real estate market will crash, but those are 100% predictable with higher rates .
Will there be a major financial firm that goes under because of VAR ?
Will a major country default on its debt?
Will the Euroland disintegrate?
And scariest of all, will credit default swaps reverberate throughout the financial markets , causing mass liquidations
Lake OZ boater profile picture
@r cohn I am glad you finally commited to a forecast, i.e. 5% on the 30 year treasury, right? We will hold you to it.

I'll just caution others in the forum that bond market timing is a loser's game, and the only way we can win is by not playing. Here's support for my contention that the 5% forecast has a high probability of being wrong.

Many 'full-time' bond fund managers have Ivy League educations and are highly incentived to beat their benchmarks.

These are the most recent fifteen (15) year percentages of "actively" managed Fixed Income Funds that UNDER-PERFORMED their benchmarks, i.e. index ( these guys try to time the bond market like you).
Category----------1-YR(%)-- 3-YR(%)--5-YR(%)--10-YR(%)--15-YR(%)
US Gov't Long---17.65------ 95.74----- 96.23------ 98.65------- 98.00
US Gov't In't ----- 48.15------ 68.75----- 78.95----- 83.87------- 82.22
US Gov't Sht----- 73.68------- 61.54-----72.00------ 75.86-------77.14

Source: Annual SPIVA results for 2021

As a part-timer, I'll stick to my bond index funds, and take what the market gives me. By doing so, I'll outperform 80% of "active" bond fund managers.
@LakeOZ boater
You keep on saying the same thing and ignore the obvious facts right in front of you

Deficits were the greatest in US history in 2020-2021 . Who was the enabler of these deficits- the FED

The Fed bought far too much in the last two years.
Interest rates went far too low because of the Feds purchases . Now that the FED is no longer a buyer and will become a seller , who will buy Treasuries when real rates are negative and nominal rates are below historical averages ?

It is hardly a surprise that inflation has exploded due to liquidity that the Fed flooding the markets with money

Despite Wall St propaganda that recent car prices and energy prices have come down , there are no indications that inflation is going back to even the 3-4 % annual number rather than 2% number that the FED used to justify its policies
All asset prices have been goosed up due to this avalanche of liquidity.
There have Numerous reports of buyers of housing paying far over the asking price with some buyers buying second and third houses.I still see commercials on TV for those who will buy houses for cash
Stock prices were at the highest in history relative to GDP thanks to the FEDs liquidity . Speculative gambling has reached unbelievable levels . The number of stocks without prospects for FCF is by far the highest in history . Many of these stocks have market caps in the tens of billions of dollars. Option buying has soared to levels far above levels at previous tops . Even the announcement of a stock split has sent stocks soaring .
You cite historical statistics without placing those stats in context , I. E. , the amount of the Feds balance sheet and the amount of the governments deficits .One analyst has actually related the current period to the immediate period after WW2. Sure there were some similarities such as high federal deficits from WW2 and high inflation rates , but the differences are also obvious to an unbiased observer.
I do understand the one fact about markets that you and others seem to have forgotten . Every bull market ends and it does not end calmly but does so with blood on the street.

. A recent poster had questions about ZROZ and EDV. Zero coupons ETFs are two of the poster boys for bond market gambling and will go down a larger % than other bond funds.
By definition most fund managers are going to underperform the indexes due to fees charged .
Lake OZ boater profile picture
@r cohn I sense the passion about your position, and it seems to be screaming, "this time is different."

Charles Kindleberger of MIT studied the entire economic history of the world. Kindelberger did not cover the case of bonds in his work on bubbles. I'm sure you would say that's was an egregious error on his part. But I don't think so.


It's OK to have a thesis, but I challenge you to produce any proof by well- recognized scholars that explicitly defined a Treasury bond market "bubble." You seem to believe the treasury is in a bubble, right?

Consistent with well-established and thoroughly vetted theory, the economic value of long-term Treasury bonds is determined by the relationship between the nominal yield and inflationary expectations, or the real yield.

Right now, inflationary expectations are high. And that's understandable. But investors are conflicted...

-Over the next 5 year horizon, investors are assigning the same probability to two different outcomes...

1) The Fed will be able to get inflation back to their 2% target

2) Inflation will average 5%

See table at link:


I'm simply pointing out reasons why it's reasonable to take the other side of your bet.

Based on macroeconomic inputs, there is a high degree of probability that future inflationary expectations are wrong, and bond yields will eventually make a violent move lower.

-Short-term movements in the market are influenced by heuristic trading methods and investor psychology. (where the puck is now )

Longer term moves in the bond market are driven by the fundamentals. (I've skated to where the puck will be, i.e. yields will drift lower along with future weak economic growth).
odsmaker profile picture
I don't know about the rest of you, but I have been doing very well lately with TMV and TYO, which represent, of course, the short side of the treasury market, contrary to Mr. Basmajian's advice; and on the long side, DBC. I fervently believe that eventually, this author will be right. "When" is another question. Real rates and inflationary expectations are so high, I think the Fed has no choice but to put the economy into a chokehold, or risk prolonged stagflation. It should be noted, however, that Powell, who foolishly allowed a loose pre-pandemic monetary policy under Trump's public bullying after the full-employment tax cuts, may not be able to take the heat for long once we enter recession. In the meantime, he's doing his best Volcker impersonation, and he has a ways to go. This is a healthy process. Keep in mind that there has been excess capital formation for many years. Capital efficiency has been quite low, with large pockets of sporty capital unable to find a good return for some time now in the real economy. Productivity is key and will improve during recession, but the quickest ticket out of town is a policy shift toward consumption and away from capital formation. A wealth tax, though largely symbolic at best in this political arena, is one such policy tool, though I expect the caterwauling by the short-sighted rich and their surrogates in Congress to be deafening if the Dems actually have the nads to go for it. Most likely the rich will wage a successful campaign to block consumption-friendly policy by raging on about "socialism" on the usual media outlets, much to the detriment of their own stock portfolios, until Powell caves, that is. In the meantime, bottom pick treasuries at your own risk.
Lake OZ boater profile picture
@odsmaker "In the meantime, bottom pick treasuries at your own risk."

I liked your post and agree with 99%, but you end with an odd conclusion.

You seem to be worried about interest rate risk, A short term investor (investing horizon 1-3 years) , may be better off in a money market fund or C.D. if they are not sleeping well at night.

For "long-term" retirement investors however, it's probably better to anchor on a basic financial planning concept, i.e.

"If a buy-and-hold investor with no particular view about market conditions or future returns wishes to have a fairly predictable amount of wealth at some future date, that investor should hold a bond portfolio with a duration that is roughly equal to their investment horizon* ."

-Interest rate risk and reinvestment risk will cancel each other over the duration period.

See: "Understanding Fixed-Income Risk and Return"


Successful bond market "timing" is hard--- just like stock market "timing." And here's some proof...

These are the most recent fifteen (15) year percentages of "actively" managed Fixed Income Funds that UNDER-PERFORMED their benchmarks (Absolute Return).

Category----------1-YR(%)-- 3-YR(%)--5-YR(%)--10-YR(%)--15-YR(%)
US Gov't Long---17.65------ 95.74----- 96.23------ 98.65------- 98.00
US Gov't In't ----- 48.15------ 68.75----- 78.95----- 83.87------- 82.22
US Gov't Sht----- 73.68------- 61.54-----72.00------ 75.86-------77.14

Source: Annual SPIVA results for 2021

Over a typical "long-term" retirement investing horizon*, holders of indexed bond funds will do better than 80% of "active" managers (i.e. "timers") by simply sitting tight and taking what the bond market gives them.
*Consider a 40-year old investor expecting to retire at age 65 and potentially living to age 90. He/she could easily have an investment time horizon of 35 to 40 years.

Example: (90-65) / 2 + (65-40) = 37.5 years
Powerless has done virtually nothing -only 1 measly rise
Eventually rates will stop rising but at much higher level
Lake OZ boater profile picture
@r cohn China, Japan, and the many European countries have much higher debt/ GDP ratios than the US.

What in your view makes the US situation so unique that we have some of the highest interest rates in the world?
Lake OZ boater profile picture
"We can thank the supply chain bullwhip (effect) for doing the Federal Reserve’s job."

From: "Deflation Next? Will The Bullwhip Do The Fed's Job On Inflation"

Lake OZ boater profile picture
IMHO: We are witnessing a repeat of 2018 and the Fed's policy mistake from that period.

Here's the investment results for a long-term, retirement investor who followed "conventional wisdom" to avoid longer duration bonds and switched to a shorter duration bond ETF to protect themselves from short-term "losses", e.g. price risk.

BACKTEST: Time period: Jan 2016 - Dec 2018.

The Fed raised rates nine (9) times over 3 years period until the stock market crashed.

-Lump sum of $10,000 in each

-Dividends re-invested (a common practice of most long-term investors)

Symbol-------------------Final Balance -----------Inflation- adjusted CAGR
SHY ----------------------$10,257------------------- (-1.16%)

Full results at link: www.portfoliovisualizer.com/...

Rising rates should be of little consequence to a "long term" bond investor who stays the course.

“Everyone is a disciplined, long-term investor until the market goes down."
Steve Forbes
@LakeOZ boater how do you reinvest? DRIP or buy the most beaten down position of your diversified holdings?
Lake OZ boater profile picture

-DRIP and periodic re-balancing are primary ways.

-Also DCA into what is out of favor through my 401-k at work.

Some historical perspective from 1928-2021 for a stake in the ground...

Years with Stock-Bond 'nominal' (before inflation) losses : About 4% of the total.

Years with Stock-Bond "real" (after inflation) losses: About 14% of the total

Source: pages.stern.nyu.edu/...

When inflation is high like the 1940s (when there was YCC) and then the period in the 1970s, it proves to be toxic to both stock and bond returns.

We can only hope that the current high inflation in the U.S. abates as the year grinds on, and does not linger for a prolonged period.
@LakeOZ boater out of cash, stocks and bonds it is the least toxic to bond returns.
I do not know whether to call the bond move since 4/1/22 as historic , but it certainly has been a debacle . TLT has moved down to below 123 from 133, while EDV has moved down to almost 110 from 122.50. And these price moves tell only part of the story . All large bond traders trade with leverage , some with much more and some with less , but still significant . Any losses on long term duration bonds has been magnified by this leverage probably in the 5 sigma level for those long.
From the action of the last few days , forced panic selling seems to have happened / is occurring .
Once this forced selling is over (IMOP this is close ) it is OK to buy TLT, EDV, ZROZ ) for a trade . But understand real long term yields are sharply negative , the FED is no longer at your back and long term interest rate charts have broken through their 40 year trend line, so expect any rally to be nipped in the bud.
Another factor which has not been discussed much recently is whether the Chinese are dumping their horde of Treasuries. Because of the sanctions policy , the US has been lecturing the Chinese not to aid Russia . Anyone who has studied the Chinese understands that they do not like to be lectured and threatened , especially by the US.

By any standard stocks are very expensive. The only argument propping up stocks has been low interest rates and the FED put. Without low interest rates , the major and probably only stool of the chair has been eliminated. When a pipe leaks it starts out small and then becomes a geyser . Expect the same with stocks
@r cohn While I suppose bonds in general provide a buffer effect on stock portfolios, the only rational reason to buy long duration bond ETF's at this time would be for the capital gain to be realized when the FED breaks something and quickly reverses direction on raising rates and QT.

Anyone buying now is probably a little early to the game, but I think most folks don't believe the Fed will be able to increase rates very high before things begin to really come unglued in the markets. The big question is how long the FED will stoically watch the carnage unfold before dropping rates to zero again.
Lake OZ boater profile picture
@r cohn commented: "Another factor which has not been discussed much recently is whether the Chinese are dumping their horde of Treasuries."

China does not have a 'nuclear option' for their Treasury bond holdings. IF they sell them, they would hurt themselves because any increase in interest rates would reduce the market value of what they have.

Plenty of buyers too should China want to became a seller. Examples are U.S. banks and the Fed.

The President would put an end to the nucelar option with a quick phone call to the US Treasury. The U.S. is in sole control of the digital ledger that records ownership of all Treasury securities.

The US would freeze the Chinese bond accounts in place and that would immediately stop any such action.

@r cohn commented "By any standard stocks are very expensive".

There is no 'standard' for the stock market, only competing theories. Stocks have price risk, and no return of principal feature.

There is a standard for the bond market, and it's the Fisher equation. Treasury bonds have a return of principal feature.

A study assembled a unique data series on the total returns for sixteen (16) advanced countries over a nearly 150-year period from 1870-2015. The study also improved upon the existing global return series for stocks, bonds and bills, extending the coverage to more countries and years.

The study's summary included the following "real", geometric average growth rates of assets for the 16 countries (equal weighted) from 1870-2015:


See: "The Rate of Return on Everything, 1870–2015" by Jorda et al


There you have it. The return on long-maturity treasuries is mean-reverting to +2% "real". The "real" return is way too volatile to measure in present time. Nothing but noise.

BONDS 201: Don't forget there are two (2) kinds of risk that come with bond investing. Most investors focus on 1) Interest rate risk. But there is also 2) re-investment risk.

What is re-investment risk? "Refers to the possibility that an investor will be unable to reinvest cash flows received from an investment, such as coupon payments or interest, at a rate comparable to their current rate of return."


When we match the duration our bonds (funds, ETFs too) our investing horizon these two risks will eventually cancel each other over the duration period.

Source: "Understanding Fixed-Income Risk and Return" (see summary)


Stay calm and carry on!
@r cohn Good food for thought there, thanks for the post.
Although I am extremely bearish on TLT, ZROZ and EDV over the longer term , they are worth buying for a trade if they sell down another 5% this week .
Lake OZ boater profile picture
@r cohn I am very bearish on stocks. They are due for a 10% correction or more.

There is no standard for "fair value" for stocks, only competing theories. One popular way to value stocks is to use after-tax earnings, cash flow or some combination of the two and the discount rate to put these flows in present value terms.

Researchers Sebastien Lleo and William T. Ziemba determined the Bond Yield ‐CAPE Earnings Yield Model is a very good predictor of equity market corrections (i.e. 10% or more).


Here are some commonly used discount rates...

30 year UST: 2.76%

10 year US note: 2.72%


Moody's Seasoned Aaa Corporate Bond Yield (AAA): 3.43%

Source: fred.stlouisfed.org/...

Shiller P/E: 36.37

Source: www.multpl.com/...

Warren Buffett believes it is the stock analysts job to turn the stock's yield into a bond yield for comparisons. The analyst needs to determine "How much cash is the stock (company) going to give you? "

Intrinsic value of a stock = "The discounted present value of future cash."
(5:38) www.youtube.com/...

The inverse of the Shiller P/E is the Cyclically-Adjusted Earnings yield: (1/36.37) x 100 = 2.75%.

This converts the S & P 500 stock index into an earnings yield (which is an approximate bond-like yield for comparisons).

C-A E/P x 100 has a high correlation with the "real" (after inflation) returns of stocks at the 18-20 years time horizon.

EYCR = Earnings Yield Coverage Ratio. It is the ratio of C-A E/P and commonly used discount rates mentioned above.

EYCR estimate based on 30 year yield : 2.75% / 2.76% = 1.00
EYCR estimate based on 10 year yield: 2.75% / 2.72% = 1.00
EYCR estimate based on Aaa bond yield: 2.75% / 3.43 = 0.80


-Bonds are starting to give stocks some real competition at the current 1:1 ratio.

-Lleo and Ziemba's findings suggest stocks are entering a 'danger zone' for a correction. (e.g. a fund flow from stocks to bonds)
@LakeOZ boater
Great post, thank you!
Lake OZ boater profile picture
@GHOUND My pleasure. Hope it is helpful.
jalanlong profile picture
It you are after long duration, why not do ZROZ for maximum effect?
Lake OZ boater profile picture
@jalanlong Why not? A lot of investors have Vanguard's Total Bond market index fund available in their retirement plans at work. (or similar) They might not know it, but 9% of that portfolio is in maturities over 25 yrs.

IMHO: As long as your ZROZ allocation is reasonable like found in the index fund, and adding it in addition to what you already have doesn't misalign your blended duration with your investing horizon, ZROZ is a very good diversifying asset.
@LakeOZ boater

Just curious, but do you have any reason to prefer ZROZ over EDV (or vice versa)?

I've held both in the past; holding none now, but may consider holding long duration treasuries some time later this year. I honestly don't know enough about bonds to have an opinion of one versus the other.

Any thoughts? Thank you in advance.
Lake OZ boater profile picture
@Pineside IMHO: Very little difference . Both are ultra long-duration bond ETFs

In the case of a tie, I would then compare expense ratios and your comfort level with the investment manager.

EDV's is 0.06%.

ZROZ's is 0.15%

Both houses are excellent bond managers.
Lake OZ boater profile picture
@gary bond guy Stats below from Ken French’s Data library from 1926 through 2021...

-There have been 5 years when both the S&P 500 Index and long-term Treasury bonds produced negative returns (1931, 1969, 1973, 1977 and 2018).

-The worst was 1969, when the S&P 500 lost (-8.5 %) and long-term Treasury bonds lost (-5.1%) .

Y-T-D 1/3/22 through 4/6/22

TLT: (-11.30%)

SPY : (-6.24%)

I have absolutely no idea how 2022 will end, but it just might be another double loss year for the history books.
corav profile picture
This the recommendation of this thesis is missing the mark. The Fed has stated they will continue to raise rates. Bond prices move inversely to rates. Why would any sane person buy bonds before the day the Fed changes policy? Long and short duration bonds generally move in the same direction. The TLT is not exempt from Fed action.
Lake OZ boater profile picture
@corav What you know is already priced in.

But even if you don't believe that, the question remains will your predicted impact of the Fed's actions on TLT be better than all other bond investors?

And even if your prediction comes true about more rate hikes at the next meeting or two, you will have to keep out-predicting them about the best time to move back from cash into bonds.

Conventional wisdom says that successful bond market timing is hard. And here's why...

These are the most recent fifteen (15) year percentages of "actively" managed fixed Income Funds that UNDER-PERFORMED their benchmarks (Absolute Return).

TLT is an indexing approach and falls under "US Gov't LONG"

Category----------1-YR(%)-- 3-YR(%)--5-YR(%)--10-YR(%)--15-YR(%)

US Gov't Long---17.65------ 95.74----- 96.23------ 98.65------- 98.00
US Gov't In't ----- 48.15------ 68.75----- 78.95----- 83.87------- 82.22

US Gov't Sht----- 73.68------- 61.54-----72.00------ 75.86-------77.14

Source: Annual SPIVA results for 2021

Investing is counter-intuitive. We should be re-allocating periodcially by shifting money out of what has done well and into what is NOT doing well. (e.g. Sell high and buy low).
Interest rates hit 5000 year lows in 2020 driven by an irresponsibly huge amount of QE by the Fed .Until recently the front end was still at zero.
In the last month or so 1-2 year rates have increased a good deal , while longer term rates have moved up a little . Longer term rates are still far below the inflation rate and far below historic norms prior to the last few years
Look for sharply higher long term rates as the FED stops QE and becomes a seller of its huge portfolio . Rates on the TLT etf should reflect at least 4.5 % and probably higher. The long term trend since the early 80s towards lower rates is over .
With considerably higher long term rates , the discount rate used to value future cash flows will also increase dramatically , thus causing a major revaluation of stocks to the downside
SELL bonds , stocks and real estate as the market is forced to readjust to the new reality of much higher rates
Lake OZ boater profile picture
@r cohn "Rates on the TLT etf should reflect at least 4.5 % and probably higher. "

FYI...30-year fixed mortgage crosses 5%


Why would a bank make a 30 years loan for that pitiful rate?. Shouldn't it be at least 10% in a "r cohn world?"
@LakeOZ boater
How many of these loans do they then bundle and sell to government programs and investors ?
The problem with current rates is the actual level of rates. They are still so low by historical and inflationary standards that they will not destroy demand . Much higher rates are needed to do that .
What have low rates done ?. They have been the primary contributor towards funneling money toward the rich and very rich . They have been the driver of stock buybacks , which do nothing for productivity .
They have encouraged huge amounts of speculation in the stocks and options of companies that have little prospects of ever generating significant free cash flow .
They have enabled the government to spend billions on any number of wasteful programs .None of these help with overall productivity , which fell to decades low levels recently .
And the current Wall St scenario is that once rates have risen that the Fed will then start up QE again . The problem with that suggestion is the dollar.
The current imposition of sanctions will encourage a number countries to GRADUALLY move away from using the dollar both with regard to reserves and transactions .Any future QE will only encourage this trend. Bernacke once described the dollars status as reserve currency as granting “ exorbitant privilege “ to the US . As this privilege diminishes , any number of negative effects will happen.
If the FED had not created a monster by buying trillions in paper , the Fed could buy paper to affect rates without also affecting the dollar. . But that is obviously not the case
gary bond guy profile picture
@r cohn
TLT -20% drawdown since Dec with effective duration +18.9 so duration*rate change = 18.9*.01 = -19%. Could fall another -10% with just a 0.50% rise in rates on the back end the curve.
Author produces pretty decent content, but may want to brush up his bond math and interest rate scenario analysis.
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