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Get out of long-term government bonds (GMO)
“Over the same 30-year period that global stocks have delivered their stellar +7.5% real return, a constant maturity portfolio of 30-year U.S. Treasuries has delivered a no less impressive +6.2% real,” GMO’s Ben Inker writes.
But Inker also believes the party’s over. From GMO: “To our minds, any investors who are not required to own long- term government bonds in their portfolios should warmly consider getting rid of them, and those tempted to speculate on the future pricing of bonds may want to consider the benefits of betting that European and perhaps Japanese bond yields will be higher in the future …
“The case for long-term government bonds today as an investment is a very thin one. The case for them as a speculation is perhaps better. After all, if there are price-insensitive buyers for a security who have already stated that they will be continuing to buy large amounts of it in the coming months, it may make sense to front run them by buying the asset ahead of time to sell to them. It is possible that this will be a good money maker in the coming months. Much of the time, markets price in events that are known (or thought to be known) ahead of time. But sometimes the market seems to be taken by surprise by events that have actually been well-telegraphed. Today’s all-time low bond yields may very well be eclipsed by tomorrow’s even lower ones.”
Investors diversify their assets so that everything in their portfolios don’t go in the same direction at the same time. Low correlations between assets make for smoother returns in the long run. However, sometimes those correlations will jump.
“[C]orrelations typically rise during a crisis,” BlackRock’s Russ Koesterich notes. “This all, however, shouldn’t take away from the importance of having a diversified equity portfolio. Why? Periods of crisis — and their associated high correlations — don’t last, and the benefits of diversification are derived, almost imperceptibly, over a multi-year time frame.”
The financial crisis was followed by a wave of new policies and regulations intended to prevent the next crisis. Guggenheim’s Scott Minerd warns that they may actually be inviting the next crisis. From Minerd: “Under the new era of macroprudential policy, the theory is that regulations will restrain the availability of credit — even to the extent that some good borrowers may have not access to capital — in order to avoid allowing bad loans to exist. This means that growth, on balance, will be lower over the business cycle and there will be less upward pressure on interest rates. Credit will only be accessible by certain borrowers, some of whom are likely to become overleveraged and allocate capital into marginal investments, while other, more speculative credits, will have to access capital in the shadow banking system …
“In the near term, the negative impact of macroprudential policy isn’t likely to be obvious. The U.S. economy for the next few years will likely continue to be strong. But macroprudential policy will ultimately lead to mal-investment, which will result in lower levels of productivity, making the economy less resilient to increases in real interest rates. As the Fed begins “lift off” later this year or in 2016, there will be less headroom for rate increases before inducing a recession.”
Traders are boring tons of money to buy stocks. From GaveCal: “After spending the past year somewhat ranged bound, margin debt increased by just under $US11.5 billion in March to a new all-time high of $US476 billion, taking out the previous high set in February 2014. The increase in margin debt over the past two months is the largest two-month increase since February 2013. Net margin debt (Debit balances minus credit balances) also increased to a new all-time high in March. However, the one-quarter moving average of margin debt as a % of total market capitalisation remains 18 basis points below all-time highs.”
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