Interesting snippet from an article by Morgan Housel
…Relative to the alternatives of bonds, stocks are about as attractive as they’ve been since the end of World War II. That doesn’t mean they’re cheap. They’re not, by almost any measure of stock valuations. But they’re cheap by comparative valuations, since bond yields are so low. And, when deciding where to invest their money, that’s what people look at. This is probably a reason the market keeps rising, even if it looks expensive. Stocks may be expensive, and they may offer low future returns. But the alternatives are so, so much worse…
I have a small amount in Vanguard’s investment grade long-term bond fund (VWESX). It pays slightly under 4% in dividends, and is up in share price about 8.25% over the last 5 years, and up about 4.85% over the last two years. That’s not bad, considering that bank interest is nearly zero, and car loans only charge about 2%.
Junk bonds and government paper are doing a lot worse.
My other bond investment is in a tax-free bond fund for my state that buys municipal bonds with short time before maturity to keep volatility low. It’s paid close to 4% in dividends for over 20 years, plus a modest amount of share price increase. There was a fairly severe dip in share price during the housing bubble collapse, when there was fear of municipal defaults, so it’s not suitable if you need 100% security and liquidity. But it’s the closest thing I could find to an old fashioned 4% bank account.
…Relative to the alternatives of bonds, stocks are about as attractive as they’ve been since the end of World War II. That doesn’t mean they’re cheap. They’re not, by almost any measure of stock valuations. But they’re cheap by comparative valuations, since bond yields are so low. And, when deciding where to invest their money, that’s what people look at. This is probably a reason the market keeps rising, even if it looks expensive. Stocks may be expensive, and they may offer low future returns. But the alternatives are so, so much worse…
So what happens when the alternatives stop looking “so much worse,” when bond yields rise, as they eventually will?
So what happens when the alternatives stop looking “so much worse,” when bond yields rise, as they eventually will?
The obvious, P/E ratios compress, the market drops.
As a long term investor I believe the best value one can hold is the productive power of the economy which is a collection of quality companies that produce wealth for society. They will rise and fall with the tide but they won’t sink.
I referenced Kotok in a previous post, very good guy. Found the bloomberg video in link above.
He has left the utilities and dividend players. He likes housing a lot coming out of this long housing recession with a “monstrous” demand coming. He does not believe diff between 3.25% or 4% for mortgage rates will not hurt housing market - but rising rates will hurt utilities.
Would rather own a house than gold. You need demand to raise the price.
Earlier in the interview he mentioned that the bond market was a game of musical chairs at this point.
Here is my thought…
When interest rates start rising, they should cause a competition for investment dollars, BUT, if you think they will keep rising, you are not going to put your money in bonds or utilities. Maybe money market, but that will still be low for quite a while. The Fed won’t sell treasuries because prices are falling. Insurance companies hold their bonds as a hedge against clients dying, so they hold to get their principle back. So, maybe not the panic people expect? Buffett has said the bond bubble is the biggest bubble in history, but will it burst? They all seem to burst, or do we just forget the ones that don’t?
I don’t know why the Fed doesn’t raise interest rates by something like 1/10 of a percentage point every once in a while, to normalize things, rather than its current policy of fearing a 1/4 percentage point increase and therefore doing nothing. A 1/10% increase is too small to cause panics, market crashes, etc., and it doesn’t have to be done every month or quarter, though a couple of quarterly increases would get the ball rolling.
I suppose part of the reluctance must be the size of the national debt and the increase in cost for the federal government of any interest rate increase.
Too bad (for me) that the low Fed rate isn’t reflected in my broker’s margin interest rate of 7 or 8% (I forget the exact amount). But if margin interest were only, say, 2%, there would likely be a speculation craze fueling a new bubble.
“Too bad (for me) that the low Fed rate isn’t reflected in my broker’s margin interest rate of 7 or 8% (I forget the exact amount). But if margin interest were only, say, 2%, there would likely be a speculation craze fueling a new bubble.”
I don’t know why the Fed doesn’t raise interest rates by something like 1/10 of a percentage point every once in a while, to normalize things, rather than its current policy of fearing a 1/4 percentage point increase and therefore doing nothing. A 1/10% increase is too small to cause panics, market crashes, etc., and it doesn’t have to be done every month or quarter, though a couple of quarterly increases would get the ball rolling.
I suppose part of the reluctance must be the size of the national debt and the increase in cost for the federal government of any interest rate increase.
EdGrey,
JMO, but as I see it, the Fed is stuck due to the tightly linked markets around the world. Interest rates are near- or at zero in many/most developed countries with strong economies. So if our interest rates are raised, money will flow into the U.S. in search of higher rates in a stable currency.
This will have two key effects: drive the rates back down due to supply/demand issues, and strengthen the dollar, thereby hurting U.S. exports (as well as effecting many other things in markets indirectly, such as lowering the price of oil, which is denominated in dollars).
So the Fed can try to raise rates, but ultimately the market can exert more control than the Fed, partially undoing its actions. And yet our exporters could be harmed even if the effective change in market prices isn’t as great as the Fed is trying to accomplish.
It’s tough living in a connected world. Many things that used to work simply don’t any more.
So we would need to negotiate with the EU and Japan (and possibly others) to begin an orderly increase in interest rates. That would be difficult. But negative interest rates are pretty crazy.