The entire article goes into much more detail, but here's a quick sanity check.So, I’m not particularly worried that Treasury bonds are a bubble about to pop. Here’s why:The simplest reason to be skeptical of the bond bubble story? A bubble means that people are buying an asset at ever-rising prices for speculative reasons, not for the fundamental value of the asset but because they are assuming somebody else will buy it at a higher price. I see no evidence of this behavior by buyers of Treasury bonds. They tend to be people looking to get their 2 percent yield and their money back at maturity. And while they may complain that the yield is so low (and the price of the bond, by extension, so high), that they are buying the bond because the guaranteed 2 percent is a better deal than the alternatives — not because they’re convinced that interest rates will fall further and they’ll be able to “flip” the bond at a profit.http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/04/n...
"...One peculiar legacy of the financial crisis is that, among the financial commentariat, there is a tendency to see a bubble whenever the market for a particular asset rises..."Dear(est) PM:Check out this quote from Bloomberg Businessweek, circa 2005:"...I don't foresee any national decline in home price values. Freddie Mac's analysis of single-family houses over the last half century hasn't shown a single year when the national average housing price has gone down. The last consistent drop was during the Great Depression, when the unemployment rate got up to 25%, or five times the level we're at now..."---- Freddie Mac Chief Economist Frank Nothaft, Taking the other side of the argument was economist Dean Baker: "...We've never seen this sort of run-up in home prices in U.S. history. In the past, home prices have always moved pretty much at the same rate with inflation's overall rate. But in the last seven years, they've outpaced the rate of inflation by 60 percentage points. This kind of run-up becomes unsustainable...I don't think the housing market will follow exactly the same pattern, but in the case of the Nasdaq bubble, in February of 2000... people were having this same conversation, but were more focused on the fact that prices were rising more rapidly than ever..."Here's the link to the entire article:http://www.businessweek.com/stories/2005-06-21/housing-bubbl...Notice how the anti-bubblist is quoted with certainty, while the bubblist back tracks a bit by implying that it wouldn't follow the exact same pattern of the Nasdaq bubble, (although one could argue that he was, in fact, spot on. The housing bubble was far worse.)It seems to me that a bubble is a bull market until it bursts. The problem is that the run up has a psychological dimension to it. No one wants to say, "GET OUT" for fear of being ridiculed as the market continues its run up, or worse, have their clients move their money elsewhere.I even have a name for it: Pompeii syndrome. There's a known volcano, spitting smoke and fire and the residents who live under it are in denial. I'll bet there was someone there at the time, (speaking to an ancient reporter) saying something like, "...look, if that volcano ever erupted in the past we'd've uncovered signs signs of it by now. But we've dug this place up from end to end without any evidence, whatsoever, of a disastrous past! Look how much it's been built up! It's one of the best resorts in the entire empire...".The counter argument would have gone like this: "...well, it's spitting smoke and fire. It's clearly in the beginning stages of an eruption. However, it'll probably give us a scare for a few weeks and then blow over...".But while we're on the subject of 'sanity check' I'd like to add that the bubblist are forgetting something very, very important. I'm hearing many interviews saying that when money starts coming out of bond it'll go into stocks. How soon we forget! From the begining of the vaunted 'stock market recovery' Bond prices have risen as well as stock market prices as well as commodity prices as well as inflation hedge prices as well as,... well, as well as everything else!It wasn't a one month or a couple of month abberation, this across the board tandem assent of markets has gone on for years, and has gone on with global central bank engineering! Think about the leveraging relationships, the new structuring of institional portfolios, the new struction of currency relationships, default protection, central bank balance sheets, bank balance sheets and on and on. I emphasize, all asset markets have had more than four years to restructure themselves on a engineered central bank foundation.So, without further ado, I'll say that this isn't a bond bubble ready to pop. This is an asset volcano ready to explode.Your insane Fool,FM
They tend to be people looking to get their 2 percent yield and their money back at maturity. And while they may complain that the yield is so low (and the price of the bond, by extension, so high), that they are buying the bond because the guaranteed 2 percent is a better deal than the alternatives — not because they’re convinced that interest rates will fall further and they’ll be able to “flip” the bond at a profit.The relevant point very carefully omitted is an essential one: TERM.Any bets these investments are 30-year commitments? 20 year? 10 year? How about 5 years? 2-3 years? 1 year?Yes, it DOES make a difference. If the plan is to "hold to maturity", then that is one problem not faced--because the bond will *never* be sold. It will be held until it matures and then the funds will be used as needed--which could mean the money is re-invested back into bonds.However, if the objective is to get a reasonable return on investment, then a long-term investment at low rates is irrational. That investor would NOT buy anything over (say) 5 years--and would even limit low-return investments to 2 or 3 years on a rolling schedule (i.e. having a certain percent (10%?)) "come due" every 3 months in order to have "cash now" available in order to be able to catch any reasonable investment with a higher return that might come up.
FM,Great post, as usual! I well remember the dot.com (NASDAQ) bubble. I stuck with stodgy DODBX and DODGX in my 401k, while my co-workers were buying into any tech fund that was going up. I learned how to gauge the stock market implosion's ups and downs. I'd sell around $50k of DODGX anywhere from 2-3 weeks after a plunge. Then the market would plunge again and I'd buy $50k of DODGX. (Plunges were very close to periodic.) I, and other like minded folks, probably caused the 401k policy folks to limit the number of trades allowed in a 401k.I also definitely remember the housing bubble, since I was fighting tooth and nail to keep MDH from buying a shiny new abode. I succeeded, kind of. I spent the first year of my retirement helping to build a new house. (I now can buy 120+ light fixtures, ceramic tile w/ 50% recycled content w/in a 250 mile radius of home base, and enough cabinet pulls for both the old and the new house to make people think I'm in the contracting business. The most important lesson I learned was that I knew nothing about the proper sequence of ordering these things.)Anyway, in both cases, people were talking about the "bubblified" asset in question around the water cooler and trading tips on the next hot thing. Admittedly, I'm retired, so I don't have access to the company water cooler these days, but I'd venture to say that bond prices aren't the topic du jour. Mostly, that's because anyone w/ a 401k can't buy individual bonds - even with a self-directed account. (I tried.)Frankly, I posted that link and excerpt because I'm afraid folks are calling anything "going up" a "bubble". We've added blinders to our interpretation of the various markets by limiting ourselves to the "bubble" view. As someone once said a few years back, "Sometimes a cigar is just a cigar." We shouldn't limit our perspective in doing due diligence.PM
It will be held until it matures and then the funds will be used as needed--which could mean the money is re-invested back into bonds.That's exactly what my family has been doing. We did that with the funds for our two sons that were destined for college expenses. We couldn't afford to lose that cash!We continue to do that with money we can't afford to lose, by building a bond ladder to provide income and, possibly, some cash if our plans go awry or we are faced with health problems, some natural disaster or any other catastrophe strikes.That's what most retirees, or soon-to-be-retired folks, do. We build a bond ladder to provide some modicum of income, as well as a steady stream of maturing bonds for anticipated expenses. If the expenses don't appear, the money gets re-invested.Being retired is a different world than investing. I figured that out when FIL died about 12 years ago. I looked at his holdings and said, "WTF are bonds for?" I've slowly learned...That said, I have my stock holdings to provide growth for the long-term, that is separate from my security blanket.PM
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