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Jeff Gundlach - Why Own Bonds At All
Submitted by Lance Roberts of Street Talk Live,
In the continuing series of reports from the 10th annual Strategic Investment Conference, presented by Altegris Investments and John Mauldin, the question of why you should own bonds was answered by Jeff Gundlach who is the CEO and CIO of Double Line.
Why own bonds?
I have been presented with the question twice in my career. The first time was in the 90’s when bonds and stocks were highly correlated. If stocks rose, bond prices fell, and vice versa. Therefore, investment managers decided that they should only own stocks as there was no advantage in being diversified. Unfortunately, we all know how well this turned out.
Today, investment managers are making the same decision but for a different reason. With the Fed’s artificial suppression of interest rates to historic lows; the return from owning bonds has become painful particularly for underfunded pension funds. That pain, combined with the inflation of asset prices via continuing QE programs, has forced managers into overweighting stocks.
The other reason that managers are jumping into stocks is due to the belief that interest rates are going to start rising on “Tuesday.”
“Let me be clear. This is absolutely wrong. Yields are NOT going to rise any time soon.”
There is one thing about being an asset manager. Timing is everything. The synonym for “early” in the investment business – is “wrong.” If you had bought the Nikkei two years ago you would now be right – after losing about 20%. Now is the right time.
Is there a bond bubble?
Flows into bond funds have been robust compared to equities. This has particularly been the case since 2009 as investors have scrambled for yield. Therefore, there must be a bubble – right?
The answer is no. The great rotation is NOT happening. First of all, for every buyer there is a seller. Therefore, in order for someone to sell their bonds and buy stocks means that someone has to be selling stocks. It is a zero sum game.
“There is no secret treasure trove of equities waiting to be bought.”
Furthermore, as opposed to most mainstream commentators, equities are not under allocated. The U.S. currently has more than 40% of household assets in stocks which is the highest of all other major countries. There is also no stash of cash waiting on the sidelines waiting to rush into the markets and, lastly, bonds are only a small percentage of most investor’s holdings.
“Quantitatve easing is NOT going away. Every major country is running a deficit. If they are all net borrowers then who is the lender? The central banks. For this reason – QE is not going away for a long time.”
QE programs will continue until such time that the Federal Reserve begins to see negative consequences. However, up to this point as Ben Bernanke has clearly reiterated, there has been NO evidence of any negative consequences.
Of course, Janet Yellen, who is a front runner for Bernanke’s replacement, also sees no negative impacts and says QE should be appropriate through at least 2025.
Should you own bonds? In such an environment as currently exists, and will likely continue to exist, bonds are absolutely appropriate in a portfolio. Yields will be lower in the future – not higher.
What About Stocks?
Most individuals believe that the Fed’s QE programs have propped up the stock market – they are right.
However, there is a misconception. While there is ample evidence that the Fed’s Q.E. programs have supported stock prices – QE is NOT a “put” on stocks. In reality, QE is a “put” on treasury and mortgage bonds as injections go directly into the bond market.
This is why you should own TLT in your portfolio as long as QE remains in play.
A Few Other Thoughts
Copper is clearly saying that there is no economic growth going on. As opposed to what is reported - China is most likely growing near zero in reality.
Understand that there is NO WORLD in which rates will rise with copper prices falling. Interest rates are currently telling the same story as copper – there is very little economic activity occurring.
“Volatility on bonds is at historic lows – bonds are acting like the bond market is manipulated…because it is.”
Another point here is the mistake that all investors are currently making. DO NOT buy stocks for the dividend yield simply because they yield more than stocks. There is no guarantee that dividend yielding stocks will perform better in the long term versus owning bonds. History says that is unlikely to be the case.
“Let me reiterate….bond yields are not going to rise. QE drives yields lower as it goes straight to the heart of the bond market.”
Rates will not rise with real HIGH unemployment. The unemployment (U-3) rates is a false measure of employment due to the high level of dropouts. All that really matters for the economy, and ultimately the bond market, is the labor force participation rate which is at the lowest level since the 80’s.
Rates will not rise with median household incomes at the lowest level in 19 years.
Rates will not rise as QE is all about funding the federal budget. if rates rise the budget will be blown and deficits will explode.
Rates will not rise as it will kill any economic growth. Housing, private investment and consumer borrowing all rely on low interest rates. If rates rise it is the end game for the economy.
Despite what you may have heard – the reality is that rates will not rise any time soon. This is the liquidity trap the Fed has gotten itself into.
Furthermore, Bond indexing makes no sense into today’s market. However, emerging market bonds, on a very selective basis, will likely be lucrative as the global economic malaise continues in their developed counterparts.
If the current financial experiment fails – the only place to be will be long US Treasuries. A decent hedge in the event of an economic disruption will be long US Treasuries and short French Bonds. As all European bonds converge toward 1% the reversion due to economic disruption could be hugely profitable.
Own bonds? You bet. With corporate profits in the U.S. at all-time highs as a percent of GDP the repayment probability for bond holders is extremely high. However, this is also bad for holders of corporate stocks because the reversion of profits to GDP will be brutal.
Financial Investment Thoughts
Bank debt is likely a good bet particularly since the Fed’s actions benefit them directly and they are unlikely to be allowed to default.
Real Estate will go higher because of lack of supply. However, IF YOU BELIEVE that rates are going to rise DO NOT BUY A HOUSE.
MLP’s are massively leveraged and will lose tremendous value if rates rise.
Talking heads on CNBC started talking about a new bull market in stocks. REALLY? That started 4 years ago folks. We are likely closer to the end of a bull market cycle than a beginning.
Lastly, why own bonds, because they are negatively correlated to stocks. You may not get rich - but you will survive the long term investment game.
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Bond Funds = Death Traps
You've been warned.....
You can see the inverse relation between stocks and bonds today. As I type, SPX +1.13%, 10-yr Tnote (using IEF as proxy) -0.86%.
This seesaw effect has prevailed since the 2008 crisis.
If stocks were down 1% today, the bonds likely would be up.
Inverse correlation is exactly what you want for portfolio diversification.
How do you explain the the upward path consistent in 10yr treasury bond prices and upward path of the S&P that has taken place over the last four years? If there were in inverse relationship the ten year note yield would be waaay higher, no?
Fonz - The upward path in Treasury's and stocks has gone on much longer than 4 years. Try over 30......
Nolonger I don't know about that. 2000 - 2010 was certainly not upward for stocks.
fwiw it's worth my point is with the 10yr at 1.65ish and the S&P at 1600 plus....I think the risk still lies in stocks and yields could continue to drop
Sure, we can cherry pick any time frame to fit our bias. Try Jan 2003 to current...... SPY up 75% roughly and long bonds up near 60% when you factor in interest.
Bottom line is that bonds and stocks have both gone up a ton over the long term. In fact, bonds have beat gold over the long term in real prices:
http://static.seekingalpha.com/uploads/2011/9/30/475264-131740692520981-...
That is before gold plunged nearly 25%. Buy stocks and Treasuries, and as you can see below: long term, don't buy commodities:
http://static.seekingalpha.com/uploads/2011/9/30/475264-131740714822591-...
You are actually making my case for me with that period. I originally used 2009-present to illustrate that both stocks and bonds have rallied in tandem. Then for whatever reason I ended up illustrating that stocks stalled out and bonds continued to rally. Then you just slammed home my original point using an even longer time frame.
I don't even know what we are talking about anymore. My only point is, imho, the risk still lies in stocks right now and bonds have been a homerun for 30yrs.
However in the current environment I feel a lot more comfortable owning physical PM's than stocks or bonds. But you do whatever you like.
I won't own bonds either, because I have no fucking money in the first place.
LOL
REad fullarton and you know why. When money goes in step 4, bonds are kaput.
Exactly..... the negative correlation is around -.70...... buying Treasury's, it sure beats getting your nuts crushed trying to short the market:
http://seekingalpha.com/article/1301831-with-treasuries-it-s-not-about-t...
With copper up today did he capitulate?
Why own bonds......what a stupid question.
You own bonds because they will be much cheaper to use than toilet paper when this Keynsian experiment goes BOOM.
You hear that Bernank, you MOTHERLESS COCKSUCKER.
bond FUNDS are a death trap...........absolutely
Well said, common sense.
You can not follow purchasing power in bonds = bonds are shite.
Buy soft commodities all you want.
This is one of the smartest dudes out there and everything he say's is worth listenting to.
Sure, if the only two choices were stocks or bonds.
At some point mining and refining precious metals will be significantly more profitable than currently. One of the biggest impacts of gold silver price suppression/manipulation has been margin compression for miners, IMO.
Do you know where Gundlach stands on mining companies? He is a big fan.
Speaking of which....GS just downgraded some more miners...
Well, you can not bet on mining companies and low yield at the same time, this is idiotic when you get to phase 4. It works in phase 1-2-3 but in phase 4 you get wacked.
Farmland give you calories. The value of money is imaginary.
THere is too much debt to GPD.
Debt = financial assets, equities too, sensitive to interest rates.
GDP = circulation of present goods services and commodities.
The ratio will be restored by base money pushing up commodities goods and services.
The ratio will be restore because the base money pushing the prices of everything as it quits bonds and other finanical assets will make a bear market in bond yields.
PE at 6 in 7 years and Gold at 3,200 USD.
At that price median income is 100,000 but it buys less than today. Bond yield at 7%. Voila, at that point the FED CAN RAISE RATES IN REAL TERMS.
The nominal rates do not matter, they can go to 6% as long as inflation is above that, Gundlach assets shrink (which what the US economy needs, i.e. inflate away the excess of debt to GDP).
Si!
Numbers better than Gross, in fact some of the best in the biz, period.
Doesn't appear to have all the inside relationships of Gross and PIMPCO, the conflicts, either... which I like. (Ethics and morality thing... but he does or did keep dildos in his desk drawer, or so the story goes. ... Girls just wanna have fun...)
Plus, many here love to prognosticate the coming unwind of troubles a brewing. If the SHTF, one of the first moves is gonna be a flight to quality, just like last time, the time before, etc.
Any port in the storm's gonna do that says y'all getcher money back, forget the return
Meaning Treasuries, Bunds, etc.
And and and.... don't forget the article here yesterday (I think it was) about no collateral.
SHTF and ain't gonna be enuf to go around.
Kinda like bond traders brains... not a lot, scarce and that's why they're worth so much!
Kinda like bond traders brains... not a lot, scarce and that's why they're worth so much!
Like caviar, I hear they're good spread on a Ritz. I like my trader brains as a dip with Fritos Scoops.
The spreads on bank debt relative to alternatives doesn't justify the risk in a post-Cyprus world.
The upside on a long USD domestic bond position is capped by limited downside in nominal rates without serious risk or leverage ramping, and this does not factor in loss of purchasing power if USD depreciates in addition to a negative real rate of return on unleveraged debt.
If you live USD hell and have ginormous piles of Uncle Ben's finest one-ply that you need to find a home for, his advice is one thing, but if you actually have that problem, you should also have a small army of in-house company asset managers looking at more tailored options given the companies specific circumstances.
And if you're not in the over-sized corporate wallet club then there the daunting choice of either intentionally signing up for sheeple rape pricing from your nearest horny bankster (if you dare venture outside of USTs) or actually finding a competent bond manager at a fund that is perhaps a bit more nimble than the RMS Titanic.
Smart hasn't been enough in quite a while, bar it's far preferable to stupid.
I agree with him because he hit my hot botton- the Fed is buying bonds to support federal government deficits. The fact that they help banks out, too is almost incidental at this point. If the Fed ever has to choose between helping banks or helping the government, they will help the government (I understand many here would disagree, but that's my opinion). However, no such "choice of masters" is on the radar screen for the Fed at this time- both parties benefit from thier policies so they will continue without much dissent in the halls of power.
I like Janet Yellen's comment that QE would be appropriate through 2025. Yeah, at least then. Really, it won't end until most of the baby-boomers die off.
Remember, NEVER underestimate demographics. The boomers have warped and distorted everything in their own favor through every decade they have existed. They have the NUMBERS, so they have the VOTES to give themselves what they want. And what they want now is everything, same as always.
Yellen also admitted that insurance companies were already desperately reaching for yield.
Yeah, I wouldn't be surprised to see some of them run into trouble. They have to invest in this world of low yields for a mutitude of reasons so they're probably getting hammered, especially on older policies and annuities.
Doesn't Warren Buffet own an insurance company? Somebody told me he did.
That's what blows my mind. You seeing the stocks of Met and Pru etc? Through the roof. Unbelievable.
Ever heard of Geico? That's him.
"If the Fed ever has to choose between helping banks or helping the government, they will help the government (I understand many here would disagree, but that's my opinion)."
They're basically one in the same at this point. JP Morgan, HSBC, and Goldman are going to be the firms left standing (globally), they run all of this. QE is the wealth transmission mechanism. They will end up owning most private land assets (through the MBS side of the QE equation) and the future productive value of all taxpaying citizens (UST side of the equation). So, really, QE is slavery.
We have been asking that question since day one.
The real question is, why buy stocks?
If you don't lose your shirt in the next crash, any gains will be taxed away.
What is today's X-Sigma move on treasuries about?
Goldman convincing its clients to sell their bonds to GS Prop
It is about realizing that you lend money to uncle Sam for 10 years at 1.6%, re-invest the coupon and in 10 years you can buy 3 eggs.
Gundlach said he likes Silver.
Then he is full of shit, if bonds are money good, there are not good money. So they can rise in price but fall in value at the same time.
It's not about the coupon.
Hell yeah it is. The price does not matter, the value. the Value.
If you bought Japan Tobacco and short the JGBs until 2012, you beat the JGBs monstruously. And not you beat it even fucking more.
If I bought a 10yr treasury a year ago and sold it today what was my rate of return?
If I bought a 10yr treasury 2 years ago and sold it today what was my rate of return?
...................
As Tyler said last year. It's backwards today. You buy bonds for capital appreciation and stocks for income today.
Well a year ago the Yield was 1.93% but 9 months ago 1.43%. So wait three month and the YoY is negative. Welcome to bond bear market.
1.43% will be high yielding for TSY's at some point soon.
Um, I've been reading your posts on this thread and you seem to have a strong opinion on this topic, so let me know if I'm missing something. in your example the yield went down, so the price went up - where is the bear market?
duh
"First of all, for every buyer there is a seller." - So answer just one question then. What if your "bidder" has a fucking printing press? what garbarge.
Agreed, Gundlach is saying basically buy a manipulated market. Yeah right...
And inflation can happen with high unemployment, ask the Argentinian. His statements that high unemployment = low inflation is pure garbage.
A theory should be confronted with fact and if facts refute the theory, the theory is garbage. Plenty of instances of high inflation and high unemployment in history.
Exactly.
And we can always get out quickly if things turn ugly, right! /s
CNBS and their shills say I should be in stawks because the trillions of dollars on the sidelines will send this sucka to the moon.
Yeah, heard those guys talking their book.
As soon as they sucker in enough individual investor money it will be time for them to sell and crash the sucker all over again.
All sales promotions.
Not investment advice.
Who are the talking heads?
Brokers, money managers, Cramer (entertainment in his own words) billionaires (must needs the public attention for ego salving) crack economists and occasionally for real viewership ratings, a Ron Paul, Taleb, Nigel Farage, or somebody of that ilk.
The program(s) are fucking commercials, people!
True. The viewers were treated to 2 hour long "features" on McDonalds and Dr Pepper for two days in a row.
I tuned out.
The sideline money will get tired of fighting the Fed and buy what the Fed is buying, bonds.
Gundlach knows only credit and Dalio knows Credit money currency and commodities.
Gundlach is focused on the credit side of the equation, and not the money side.
There is no growth coming from credit, but there can be plenty of nominal growth coming from money.
To plagiarize Jim Grant:
Some people like taking reward-free risk.
Does someone know of a "free" market anywhere? Or are we to only judge the market on how much "money" is pumped by the controllers? If I invest I invest in companies I visit, small low cap up and comers. Totally risky...but good potential and...I think more honest. We shall see. I like small manufacturers of products here in the US, mainly machines or engines or engine components. Got out of all bonds especially munis. Just a hunch...
I think at some point there will be a huge break between HYG and TLT. There will be a freeze in Junk and it will hurt a lot of people. That will actually send the ten yr sub 1%. There is your blow off top in treasuries. But that's just my 2 cents.
BTW why would rates rise? There's no organic growth. There is 17T of debt. Any sign of stimulus withdrawl would smash all sorts of systemic things.
Why would rates rise? We heard this same music about 3 mos ago at 2.05%. "This is IT!!!!" Instead, the reality of zero to no growth asserted itself and we return to 1.7% The low last year was 1.45%. Plenty of time to get under that this year.
Why rates rise? Because base money (not credit) enters the circulation. I.e. people tired of Gundlach sell their bonds and buy stuff.
Inflation has nothing to do with organic growth.
Check Argentina, check the 60s and 70s in the US.
Organic growth and rate rising have nothing to do one with the other.
Let's see, the FED wants you out of gold, so..............crush gold
Let's see, the FED wants you out of Bitcoin, so...........crush Bitcoin
Let's see, the FED wants you out of treasuries, so.......crush treasuries
Let's see, the FED wants you out of shorts, so............crush shorts
Let's see, the FED wants long the stock market, so............%^#% Them!
Normal is DEAD!
Normal never existed. There can not be any growth coming from credit absolutely agreed.
But that does not mean there can be no nominal growth.
Why? Because there are two means of payment, credit and money, and the Fed has printed tons of money, at some point some people are tired of chasing ridiculous bonds and spend, and that means game over for bonds.
I remember watching the PBS show "Wall Street Week" with Louis Rukeyser and watching as, every week, the same asortment of experts would come out and essentially say the same thing about stocks vs. bonds and bonds vs. stocks. I was happilly clueless back then, thought the theme music was awesome, and thought these financial memes would never change. The conditions of the financial world have devolved so much since then, but the seeds were planted. It would have been interesting if Mr. Rukeyser still had his show in 2008 and 2009.
TLT is great. I'm holding as long as the age 55 and over group continues to grow.
The month it flips, going long everything else.
One thing we got from this article is that the FED is not going to stop QE for the foreseeable future. But what the author misses is that in order for this to occur, there has to be over one trillion new dollars created every year. This is in addition to a sub 0.25% fed funds rate also for the foreseeable future. Both of these are inflationary. The one thing this translates to is lower purchasing power of the dollar due to their massively increased supply. We are at new all time highs on the stock market every week or so now, and they can't stop printing. The only place to be, long term, is gold and silver.
This dude talks about a "liquidity trap" that the FED has gotten itself into. A trap is really a bad thing to be in. But this author acts as if there are really no big problems stemming from the accommodative monetary policies of the past five years. All we get is higher stock prices, lower bond yields and lower growth. But hey, Dipshit, who needs growth when you can just print currency to your hearts content with very little inflation. Get a clue, man.
Argentina had 750% increase in nominal Peso return of stock market since 2002. The debt to GDP decrease from 142% to 40%, interest rates are to the moon (yet still negative), and unemployment high.
What is it that Gundlach does not get between nominal and real rates.
Real rates are not going to rise, but nominal hell yeah!
As long as real rates are negative, regardless of the nominal rates level, the debt is inflated away.
Nobody is buying copper since Blythe caught her tit in the wringer. The Morgue was the only buyer in recent times and now that has stopped too.
I choose "Other".
Well, it looks like Gunlach understand credit a lot, but money little.
It looks like Gundlach is also confusing currency and ~monetary aggregate~. The later ~monetary aggregate~ have nothing to do with money but everything to do with currency, and agreed this will not rise, but it is irrelevant as far as money based inflation.
I think he is going to have an epic sorrow when Dalio is right again.
All I know is the insurance salesmen in Australia must be GREAT!
Rates will stay in in the US, but mortgage rates around the world will begin to rise anyway, just like in Ireland.
Own physical bonds (Federal Reserve Notes) since they are instant maturity and can be exchanged as needed for now (of course, only hold as much as you are comfortable with).
Own real stuff that has value and little or no counter party risk. I like this quote from someone on zerohedge:
This reminds me of a famous quote that "Bonds are instruments of Guaranteed Confistication". You're loaning money to the gunslinger at the poker table who has assistant gunslingers standing on either side of him, and you know that he gets to decide how much the "money" is worth when he pays it back. Not a very good idea.
-SAT 800 – 04/07/2012 – Zerohedge
bonds, gold, stocks, currency, houses
maybe
just make sure you have 400lbs rice stored in airtight rodent proof buckets first before you speculate on that other stuff. You might end up needing it. I've been rotating my family's rice storage for three years now I promise it tastes the same one day or two years old.
The reason to own bonds is because you confuse base money with credit Since you confuse credit with base money, you think that no more spending can happen, which would be right if base money were equal to credit, but base money is not credit and can be spent. Next you confuse real rates which obviously can not rise, with nominal rates which can definitely rise as long as they lag inflation.
For short-term (3-6 months), go Equities. But keep powder dry (Cash!) for major event, so you can BTFD. Keep 20% in PM bullion, but look for far bigger gains in hand-picked Equities (relative to PM) in next 3-6 months. But, to each his own.
Fuck that. I'm cashing in my EE bonds and buying silver.