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The Masked Tulip

Bond Markets Spooked

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The FT headline this morning is about the worries by bond holders of bank and government debt that they are about to get a massive haircut - i.e. be made to take a hit on all the bad debt out there.

But why aren't equities - DOW, FTSE, etc - falling more on this news?

I would have thought that when perceived to be safe bonds have questions raised about them - and this is really the first time this has happened in decades - that people woul be running from equities? I would assume that any annoucement of bond holders losing money, either partially or fully, would result in a stock market crisis... so I am amazed with all this news of potential bond losses about to happen that stocks are holding up?

Or have I got this wrong?

Edited by The Masked Tulip

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It was US Thanksgiving on Thursday and a half day of trading on Friday on low volumes with most senior people taking a day off.

The kids (FTSE, Nikkei, DAX etc) really need to be told what to do by Mum and Dad (the S&P 500).

The kids will have to wait until Monday afternoon our time to hear what their parents want them to do.

The parents are irrational, probably because they are taking that new drug called QE which has side effects that we do not yet fully understand, so I have no way of predicting what they will tell the kids to do on Monday so no "Black Monday" prediction from me I am afraid.

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The FT headline this morning is about the worries by bond holders of bank and government debt that they are about to get a massive haircut - i.e. be made to take a hit on all the bad debt out there.

But why aren't equities - DOW, FTSE, etc - falling more on this news?

I would have thought that when perceived to be safe bonds have questions raised about them - and this is really the first time this has happened in decades - that people woul be running from equities? I would assume that any annoucement of bond holders losing money, either partially or fully, would result in a stock market crisis... so I am amazed with all this news of potential bond losses about to happen that stocks are holding up?

Or have I got this wrong?

Normally treasuries/gilts and stocks are counter cyclical (ie money transfers between one and the other depending on the state of the wider economy).

This rule normally only breaks down when there is a wider financial crisis when both classes of investment can get creamed. This is essentially what happened in 1931 when the US long bond tanked and took the stock market which had been recovering from the 1929 crash with it. At the moment some people are in equities because the perceived risk difference of holding them to bonds has decreased. This does not mean that equities have become safer just that sovereign debt etc has become much more risky. If the Treasuries market does implode as now looks likely then inevitably equities will get taken down too because it will almost certainly lead to another banking meltdown with all the impacts that will have on the wider economy, lower GDP, less borrowing and spending etc. All the QE that you have seen in the USA and the UK has essentially been designed to stave off that evil day by propping up treasury/gilt prices. The problem is that the can that they started kicking down the road in 2008 has transformed into a 20 ton cannon ball that is now getting harder and harder to move.

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Normally treasuries/gilts and stocks are counter cyclical (ie money transfers between one and the other depending on the state of the wider economy).

This rule normally only breaks down when there is a wider financial crisis when both classes of investment can get creamed. This is essentially what happened in 1931 when the US long bond tanked and took the stock market which had been recovering from the 1929 crash with it. At the moment some people are in equities because the perceived risk difference of holding them to bonds has decreased. This does not mean that equities have become safer just that sovereign debt etc has become much more risky. If the Treasuries market does implode as now looks likely then inevitably equities will get taken down too because it will almost certainly lead to another banking meltdown with all the impacts that will have on the wider economy, lower GDP, less borrowing and spending etc. All the QE that you have seen in the USA and the UK has essentially been designed to stave off that evil day by propping up treasury/gilt prices. The problem is that the can that they started kicking down the road in 2008 has transformed into a 20 ton cannon ball that is now getting harder and harder to move.

Yes, that is exactly how I see it now.

Many of the big bond holders are, for example, pension funds who, from what I have read, basically dump a large chunk of their fund into bonds - blue chips, banks, countries - to get a good longterm IR return on the cash and then another chunk into equities so they have a balance of risk and safety.

But now the safer bonds are looking very risky indeed. I suppose there is no where else for them to stick their cash if they sold up equities and some of them have so much in shares that it would be very difficult to off-load in this market without causing a crash.

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I think it's worth pointing out we just had an earnings season where (I think) > 70% of reports beat expectations. It seems to me, earnings have outstripped price such that equities look interesting value at the moment.

China, Canada, Mexico and Japan are far more important for the US than the weak links in the euro chain. Even if the US sets the tune for the European markets.

All this euro chaos could help corporate America, by weakening euro competition in US markets, overseas and domestic.

Same with the international companies quoted on FTSE 350 like SAB.

The CAC especially and the DAX have both recovered far less from the March 09 low than the Anglo-Saxon indices, so pressure against them takes longer to build.

Edited by indirectapproach

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Or have I got this wrong?

Yes very wrong together wiith all the fixed income lovers on here.

Equities are not in a bubble hence why they wont crash spectacularly like you want.

The equities bubble popped a decade ago. Sure we will have 10-20% corrections along the way but as it stands investors need somewhere to park their cash.

Bonds - Bubble awaiting to explode.

Cash - Will be eroded some 40% over the next decade with the continual negative interest rates

Property - Globally still overvalued and needs mean reversion to fully occur

Commodities - Good but short term overbought

This leaves equities with the best risk/return basis for the next decade.

I love the negativity and disbelief that is still present from joe public about equities...

Edited by ringledman

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Normally treasuries/gilts and stocks are counter cyclical (ie money transfers between one and the other depending on the state of the wider economy).

This rule normally only breaks down when there is a wider financial crisis when both classes of investment can get creamed. This is essentially what happened in 1931 when the US long bond tanked and took the stock market which had been recovering from the 1929 crash with it. At the moment some people are in equities because the perceived risk difference of holding them to bonds has decreased. This does not mean that equities have become safer just that sovereign debt etc has become much more risky. If the Treasuries market does implode as now looks likely then inevitably equities will get taken down too because it will almost certainly lead to another banking meltdown with all the impacts that will have on the wider economy, lower GDP, less borrowing and spending etc. All the QE that you have seen in the USA and the UK has essentially been designed to stave off that evil day by propping up treasury/gilt prices. The problem is that the can that they started kicking down the road in 2008 has transformed into a 20 ton cannon ball that is now getting harder and harder to move.

A superb synopsis. Of course, a bond crisis will also create downwards pressure on the affected country's currency too. As this is global and especially if it a bond run hits the US, where will all the money flow for safety? :ph34r:

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Yes very wrong together wiith all the fixed income lovers on here.

Equities are not in a bubble hence why they wont crash spectacularly like you want.

The equities bubble popped a decade ago. Sure we will have 10-20% corrections along the way but as it stands investors need somewhere to park their cash.

Bonds - Bubble awaiting to explode.

Cash - Will be eroded some 40% over the next decade with the continual negative interest rates

Property - Globally still overvalued and needs mean reversion to fully occur

Commodities - Good but short term overbought

This leaves equities with the best risk/return basis for the next decade.

I love the negativity and disbelief that is still present from joe public about equities...

I agree that real commodities are overvalued, but what's your view on precious metals (some would call gold/silver commodities, but they are not true commodities IMO)?

I feel equities, while they may suffer some initial downwards pressure, will definitely be a safer place to be than cash or bonds over the longer term. However, safe is all they will be at best. In the 1970's the stock markets made a real return of around 5% over the decade, safe, but hardly blinding. Whereas metals made returns of 2400% if bought in 1970 at $35/Oz and sold at peak in 1980 at $850/Oz. Metals is the place to be to ride out the coming storm IMO. (But you all knew that ;) )

Edited by General Congreve

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I agree that real commodities are overvalued, but what's your view on precious metals (some would call gold/silver commodities, but they are not true commodities IMO)?

I feel equities, while they may suffer some initial downwards pressure, will definitely be a safer place to be than cash or bonds over the longer term. However, safe is all they will be at best. In the 1970's the stock markets made a real return of around 5% over the decade, safe, but hardly blinding. Whereas metals made returns of 2400% if bought in 1970 at $35/Oz and sold at peak in 1980 at $850/Oz. Metals is the place to be to ride out the coming storm IMO. (But you all knew that ;) )

I am long metals, however I did sell my silver last week (got way to far above its 200d ma). Will reinvest should there be a correction.

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I am long metals, however I did sell my silver last week (got way to far above its 200d ma). Will reinvest should there be a correction.

The problem with commodities is that you have to trade futures to get access to them and they have become so popular that the roll return, as you move from expiring contracts to longer dated ones, is now something horrendous like -9%. With cash returns at zero that means spot prices have to rise 10% every year to get any return. There was excellent piece on Jeremy Grantham's GMO website about this.

Holding physical gold, or if you have the space silver, is a way around this, but most can't hire a oil tanker or grain silos to try to capitalise on the rise in spot commodity prices.

I agree with many above that equities offer the best return especially global large caps. Many quality companies are paying dividends that yield between 3 and 4% and with corporations ruling the political stage as well I expect profits will remain high.

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The FT headline this morning is about the worries by bond holders of bank and government debt that they are about to get a massive haircut - i.e. be made to take a hit on all the bad debt out there.

But why aren't equities - DOW, FTSE, etc - falling more on this news?

I would have thought that when perceived to be safe bonds have questions raised about them - and this is really the first time this has happened in decades - that people woul be running from equities? I would assume that any annoucement of bond holders losing money, either partially or fully, would result in a stock market crisis... so I am amazed with all this news of potential bond losses about to happen that stocks are holding up?

Or have I got this wrong?

equity markets are pricing in future inflation. This is some way off but recognised.

We are in a multi year (probably a decade or so) bull market. It will be volatile but I am on for the ride.

I am buying on bad news.

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I agree that real commodities are overvalued, but what's your view on precious metals (some would call gold/silver commodities, but they are not true commodities IMO)?

I feel equities, while they may suffer some initial downwards pressure, will definitely be a safer place to be than cash or bonds over the longer term. However, safe is all they will be at best. In the 1970's the stock markets made a real return of around 5% over the decade, safe, but hardly blinding. Whereas metals made returns of 2400% if bought in 1970 at $35/Oz and sold at peak in 1980 at $850/Oz. Metals is the place to be to ride out the coming storm IMO. (But you all knew that ;) )

Mining shares tend to massively outperform metals. Particularly junior miners. If you think metals are the place to be get some of your money into miners.

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The problem with commodities is that you have to trade futures to get access to them and they have become so popular that the roll return, as you move from expiring contracts to longer dated ones, is now something horrendous like -9%. With cash returns at zero that means spot prices have to rise 10% every year to get any return. There was excellent piece on Jeremy Grantham's GMO website about this.

Holding physical gold, or if you have the space silver, is a way around this, but most can't hire a oil tanker or grain silos to try to capitalise on the rise in spot commodity prices.

I agree with many above that equities offer the best return especially global large caps. Many quality companies are paying dividends that yield between 3 and 4% and with corporations ruling the political stage as well I expect profits will remain high.

Use ETFs - no stamp duty and small management fees (0.49% pa typical). Very liquid too with tight spreads. Been trading CRUD in this way for while. Can go short with ETFs too.

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Use ETFs - no stamp duty and small management fees (0.49% pa typical). Very liquid too with tight spreads. Been trading CRUD in this way for while. Can go short with ETFs too.

Same problem it seems.

http://www.indexuniverse.com/etf-education-center/7532-in-focus-commodity-etfs.html

Unless the fund holds the physical in a vault as only the precious metals ones do.

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equity markets are not falling because no sensible investors believe in the total deflationary collapse scenario any more.

they are no longer afraid of the abyss.

in debt markets, it is much the same. Business as usual in treasuries and gilts and JGBs, and corporate bonds too.

the only place that is suffering problems in public debt markets is the place which is threatening to haircut holders of nominal bonds.

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Mining shares tend to massively outperform metals. Particularly junior miners. If you think metals are the place to be get some of your money into miners.

Agreed, junior miners made spectacular returns for investors during the last gold bull market. However, I'm waiting for another sell of in the equity markets before piling in, been waiting for quite a while now! Hopefully it'll happen.

However, gold miners can easily be nationilsed by govts., so if the sh1t really hits the fan there could be problems for investors here, something to bear in mind. This is why you should secure some physical first.

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Mining shares tend to massively outperform metals. Particularly junior miners. If you think metals are the place to be get some of your money into miners.

What he said. ALso said elsewhere in another thread :)

And the thing about equities is, people lump them all together, like the FTSE is one big produt. Imho this is only true if you invest in a tracker fund, but in reality you pick the bits of the FTSE you think will do well. I have similar qualms with people talking about 'inflation', which is just a shopping basket of goods that the general person buys, but I am not a general person - my shopping basket does not include petrol and a load of other 'normal' stuff we all supposedly buy. I focus on 'my inflation :)

Edited by Fawkandles

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  • 261 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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