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Subject:  Re: Bond Funds, Again Date:  1/8/2013  10:22 AM
Author:  globalist2013 Number:  34619 of 36785

My concern remains that regardless of how long the fed wants to keep rates low, those in bond funds are almost guaranteed to feel pain because what the funds currently hold have no place to go but down.


Again, I disagree, and Schilling makes this argument. Let's say the current rate for the 10-year is 1.5%. You --and many people-- are saying that the rate couldn't go lower or even negative. Well, that's hardly true. It could happen. If it does, then those who buy at current levels --as Schilling is doing-- would achieve cap-appreciation gains of roughly 10%. "Forget the coupon", he says. "The trade worth making this year is long Treasuries for cap-gains."

In other words, he's making a prediction that rates will go down. You are making a prediction that rates will go up. A third prediction could be made that rates will remain flat. Over any time frame you choose, two of those three will be wrong, and --ironically-- all of them will be proven right under other time frames.

All of investing (trading/speculation/gambling/etc.) is nothing but a prediction game. You're making bets that certain event will (or won't) happen. That's one half of the risk calculation. The other half --the half nearly everyone ignores-- is the magnitude of the consequences, which Taleb illustrates well with a story from his career in which he is asked to make a market forecast and that forecast is compared to the position he currently had on. He guessed that the market would go up the next week, but he was massively short. Why? Expectancy theory. What were the upsides and downsides in each case? Traders in the conference immediately understood his point. The "risk manager" didn't.

Same-same with the problem you face, that I face, that all of us faces. "How do we position ourselves?" Right now, there's just pennies in front of the oncoming bulldozer, instead of the quarters before. The nimble could grab them. The clumsy had better let them go.

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