Monday, June 6, 2011

Bonds vs. Stocks

June 5, 2011
Are Stocks Beckoning?

Gross said a year ago that bonds had very likely seen their best days, and he reiterated that viewpoint in a Bloomberg TV interview a few weeks ago. When asked if investors should buy stocks instead of bonds, Gross said, "I think so."

He thinks so? He doesn't seem 100% convinced. Here's my theory for what it is worth.

I do think bonds have seen their best days. Long-term rates have fallen from about 15% in 1981 to less than 5% now. It would be difficult for them to fall another 10%, especially since 0% is the floor.

If he is trying to imply that interest rates will rise and stocks would therefore be a good choice then I might disagree. Stock market investors did not do all that well in the 1970s as interest rates rose. I think it would be even worse today.

Would stock market investors "appreciate" (pun intended) higher interest payments on $11 trillion in corporate debt? I tend to think not.

Of course, there's the other end of the spectrum to consider as well. We could continue to fight deflation. Housing prices do continue to fall. Bond investors could still do okay even at these pathetic rates.

Although bond investors have already seen their best days, would stock market investors "appreciate" more deflation and even higher unemployment?


Stagflationary Mark said...

All was fine in the subprime mortgage market as long as subprime borrowers had access to falling interest rates and their home's value appreciated.

What if all is fine in the subprime corporate debt market as long as corporate borrowers have access to falling interest rates and their stock's value appreciates?

Never mind. Nothing to see here. Forget I mentioned it.

mab said...

Lenny Dykstra is at it again! Check out the name of his phony business - "Home Free Systems". You can't make this stuff up.

I wonder if this will change Cramer's opinion of Nails?

Mr Slippery said...

Treasuries have let me down the last week. As stocks rolled over, treasuries found a strong bid, then sold off the next day and have been drifting lower since. Maybe the debt ceiling thing has people spooked. Rising treasury yields mean corporate bonds also took a hit. Cash, losing 2% purchasing power a year, may be the safest place over the summer. Ack!

Mr Slippery said...

The return of financial repression as a means of liquidating massive government debt:

Note: not endorsing the author or his materials, just seemed related

Stagflationary Mark said...


Are you sure that isn't a link from "The Onion", because it sure reads like one!!!

Stagflationary Mark said...

Mr Slippery,

From your link:

"Financial Repression offers a third way out - as it allows governments to pay down huge debt burdens without either 1) default or 2) hyperinflation."

I am a believer.

1. We're told over and over again to stay in short-term treasuries. Meanwhile, I sit in long-term TIPS for fear real interest rates at the short end will stay low. I have yet to regret it!

2. The government recently reduced the amount of I-Bonds we can buy by 83%. That IS a capital control. A 0.0% rear rate was so good they felt the need to reduce my long-term purchases? Seriously? I will lose some purchasing power over the long-term (due to taxation) but apparently that wasn't enough? I feel very repressed!

Stagflationary Mark said...

Rear rate? I meant real rate!

Freudian slip!

As a saver, these short-term real rates are certainly giving me returns up the... well, you know, lol. Sigh.

Mr Slippery said...

More from that link:
"So we're getting sheared, we've got no choice about it, the government explicitly plans to keep on shearing us for every remaining year of our lives, and wherever we go in the meadow, we still get sheared. This leads to the more savvy of us sheep trying to escape the meadow, and again, this is anticipated in the Financial Repression structure right from the beginning, with the construction of capital control fences. Many of the controls on savings leaving the country have been loosened since 1980. However, these controls have been returning since 2008, and are just likely to grow stronger as the return to full-on Financial Repression likely grows more overt."

I'm at my I-bond limit. I'm at my gold limit (as much as I am comfortable holding). Long term TIPS don't look great to me at current rates.

So I am just a rabid sheep running around the meadow looking to avoid the shears, but getting sheared anyway. :(

GawainsGhost said...

Stocks? Bonds? Treasuries? Gold?

The highest return on investment is found in . . . wait for it . . . farmland.

getyourselfconnected said...

If staining a deck is killing me I think farming is out.

Stagflationary Mark said...

GawainsGhost (& all),

Just how hot is American farmland? By some accounts the value of farmland is up 20% this year alone.

Stocks? Bonds? Treasuries? Gold? Farmland?

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan (1966)


If staining a deck is killing me I think farming is out.

I hear that!!

Here's the modern pun equivalent:

There is no "safe and stain" store of value in a FIREworks eCONomy.

Pepe the Trailer Park Dog with Fireworks

Stagflationary Mark said...

Please welcome The Echo Boom Bomb to my blog list.