Juggling Dynamite

Holders typically love it when asset prices rise far above long-term norms. But gains accidentally made in the bubble phase are always taken back in the bursting, and most participants are left worse off in the end.  Believe it or not.  As Grantham puts it “sooner or later, you will have made money to have sidestepped the bubble phase.”  Meanwhile, saving, spending discipline, and compounding time, most relevant in individual lifespans,  lost forever.

Our guest this week is Jeremy Grantham. Jeremy is the long-term investment strategist at his namesake firm, Grantham, Mayo, Van Otterloo & Co., or GMO, which he co-founded in 1977. He serves on GMO’s Asset Allocation Committee and board of directors. Here is a direct video link.

Hunt’s 36-minute presentation is content-rich as always; it requires more attention than click-bait but is worth the time invested.

Is inflation truly winning out after decades of deflation/disinflation? If so, what will the repercussions be?

Hoisington investment officer and former senior economist at the Federal Reserve Lacy Hunt offers a graduate level presentation to answer these important questions.

Here is a direct video link.

U.S. consumer credit expanded $18.9 billion in January while retail sales slid 1.9%.
As in December, consumers are borrowing to cover basic needs and make ends meet as their interest costs are rising.  No wonder U.S. consumer sentiment is at a decade low.

As stocks continue through a much-deserved bear market, corporate bonds are, as usual, dropping along for the ride.  As bond prices fall, yields on the riskiest CCC issues have risen 33% since July (from 6.6 to 8.8%), while BB issue yields are up 51% (3.1 to 4.7%).  We expect yields to widen further as default and liquidity risk are priced back into corporate security prices.

At the start of tightening cycles, it is typical for liquidity to drain out of all asset classes.  But as the economic slowdown picks up steam and available cash contracts, default risk becomes the dominant concern.  That is when government bonds become the most attractive asset class on offer, and safety-seeking inflows drive up their prices as everything else drops.

I explain this stuff all the time.  Sometimes, it’s nice to see others take a stab.  Lance makes a solid effort in the clip below.  Here is a direct video link.

PIMCO co-founder, Bill Gross, explained these dynamics well in his January 28, 2008 market letter as follows:

“…early is a portfolio manager’s best maxim. In this case it has nothing to do with birds getting the worm or being the first runner out of the starting blocks, but more about being positioned when markets move into crisis mode. Risk assets in a highly levered, finance­ based global economy can move so quickly to the downside that by the time you hear the birds chirping or see the starter’s gun smoking the race may be already half over. Admittedly, there’s a price to be paid for sitting out the frenetic last thrust of any bull market. In stocks, it comes in the form of being labelled old ­fashioned or out of touch…In bonds, it shows up as lost carry when yield spreads compress, and high-quality government bonds are shunned for derivative structures offering double-digit levered rewards. But when risk markets perceive a change in the wind—a turn in profits, a potential recession, and most importantly as was the case in mid­ 2007, an implosion in the pyramid scheme, chain letter driven structure of modern finance—then you’d better be already positioned. Exit doors lock automatically as illiquidity and the psychological frailty of the human mind prevents quick action in order to preserve capital.”