A warning: InvestmentNews wants to make damn sure its readers, the
90,000 professional financial advisers who rely on timeliness and
accuracy of every INews forecast: “What will your clients’ portfolios
look like when the bond bomb goes off?” Get it? Not if but when it
happens.
Yes, they do expect the bond bomb to explode and are publishing “a special report on the impending crisis in the bond market.”
InvestmentNews is not staffed by a bunch of not alarmists, quite the
opposite — conservative, trustworthy and methodical. They know the
90,000 registered investment advisers that rely on them are in turn
responsible for advising millions of Americans and managing trillions
of retirement assets. Yes, their audience demands reliable forecasts.
So listen closely, we’ll summarize Andrew Osterland’s lead article
“Fear Rising With Rates,” along with an interview with Bond King Bill
Gross. And INews editorials on “repositioning client money” with
“strategies for rising rates.” And a couple of opposing portfolio
suggestions: “The case for, and against, stocks.”
The Bull says we’re on “the verge of an even bigger run-up. The bear
warns, if you “goal is to avoid losses, stay out of equities
altogether.”
Either
way, the INews report reads like a Stephen King horror story, and in
the background, you hear the ticking ... ticking ... louder ... louder
... Boom!”
Bond bubble, dangerous, big, doubled last four years
Since
the crash four years ago investors have been wary of stocks and have
been putting their money in bond mutual funds. INew’s interview with
Gross noted that “assets in bond mutual funds have more than doubled to
over $2 trillion.”
Interesting that Gross also warned while interest rates will go up
10-15 basis points annually, “a big spike in interest rates is
certainly a worry for bonds, but it wouldn’t be friendly for stocks,
either.”
Latest stock bubble even more deceptive, more deadly
Over at
Bloomberg BusinessWeek, Peter Coy also picked up on the “imbalance
between the Dow and the economy ... Bond yields are so low that savers
who used to keep their money in, say, Treasurys are being driven into
the stock market in search of positive returns. They have no choice.”
Why? Coy highlights the no-win scenarios of economist David Rosenberg:
“If the economy slips into recession, even the Fed won’t be able to
keep the market aloft. On the other hand, if the economy finally
catches fire, investors will conclude that the Fed’s extreme unction
will eventually be withdrawn. They’ll sell bonds in anticipation,
driving up interest rates and possibly pushing down stocks.”
It gets worse. Rosenberg doesn’t like what’s dead ahead: “His worry is
simply that no one else is particularly worried — that the stock
market’s rise has been so steady, calm, and untroubled” and nobody
seems concerned.
Which reminds him that “stock market volatility is back to the lows of
2006 and 2007 (right before, ahem, the biggest crisis since the
Depression). Says Rosenberg: “If there’s a bubble right now, it’s in
complacency.” Investors are in for a rude awakening.
Warning: ‘Investors have no idea about what’s about to happen’
Why are
investors complacent? Why? Because “the public thinks bonds are safe,
but they’re not ... Bonds are a big problem, and most people don’t
understand that yet,” said Harry Clark, chief executive of Clark
Capital Management.” Deep inside, the public has a vivid memory of the
$10 trillion market cap lost on Wall Street in the 2008 collapse. But
after four years of being lulled into feeling safe in bonds, “they have
no idea what’s about to happen to them.”
Listen to the warnings. Start planning now. You have no excuse.
Something big is “about to happen” and you are not going to like it.
But what’s really scary is not just rates going up, or bonds down, or
stocks hitting a bear patch, or the economy stalling. No, what’s really
scary is that investors are complacent, clueless, just don’t get it. As
a result, when the ticking time bombs go off (not just the bond bomb
and the rate bomb, but the stock bomb and the economy bomb) the
volatility will go into a wild ride like a roller coaster that will
trigger panic selling, even a full-blown crash, repeating the 2008
disaster.
“Buyer beware. There’s a big yellow sign saying, ‘Caution ahead.’ It’s
not going to be pleasant when rates go up,” said David Sherman,
president of Cohanzick Management.” In fact, downright insane, if you
remember the last crash.
Market’s already turned ... even brokers see worst-case scenario
InvestmentNews
even added a warning from FINRA, the chief regulator of the brokerage
industry: “Last month, the Financial Industry Regulatory Authority Inc.
took the unusual step of issuing an investor alert about the
vulnerability of bonds and bond funds.”
Many
economists believe that interest rates are not likely to get much lower
and will eventually rise. If that is true, then outstanding bonds,
particularly those with a low interest rate and high duration, may
experience significant price drops as interest rates rise along the
way.”
Warning, wake up plan ahead ... your complacency, everyone’s
complacency will soon end with a shock when rates jump ... but by then
it may be too late to plan ahead, because it will right here, right
now.
Do the ticking math ... tick ... tick ... tick ... boom!
Osterland relies on some solid numbers to make his point that the
market’s turning has already begun and will spiral down and out of
control: “The yield on the 10-year Treasury bond, just under 2%, is up
more than 35% from the record low in July. Investors are almost
certainly going to see negative real returns on their Treasury
portfolios in the first quarter, a rare event that many feel has the
potential to trigger a wider selloff in the market.”
And
adding to the selloff risk, we’re coming into federal tax season and a
couple more debt ceiling cliffs: “With the Federal Reserve keeping
short-term rates near zero and long-term rates near historic lows with
its bond-buying program, there’s little room for
further price
appreciation. That means ... interest rates have nowhere to go but up.”
And unfortunately, he warns that “a rapid rise in interest rates would
bludgeon many existing bond portfolios. Simple bond math holds that a
1-percentage-point rise in interest rates would result in a roughly 1%
decline in prices for every year of a bond’s duration.” Yes, “bludgeon”
your portfolio once rates start ratcheting up.
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