Juggling Dynamite

The highest quality bonds have sold off-year to date while risky assets have leapt.  The opposite happened last February to March when risk assets last crashed.  The negative correlation offered by treasury bonds is extremely valuable in managing portfolio risk.

As typical, equity-bulls are declaring a few percentage point decline in bond prices ‘carnage’ and warn that long bonds have ‘duration’ risk (time to get your money back through weighted cash flows) while failing to mention (or appreciate?) that the duration risk in equities is much larger than bonds.  Equities have no set maturity date at all, no contractually required income payments, and can drop as much as 100% in a matter of hours and days.

With a dividend yield of 1.5%, the S&P 500 has a duration at least twice as long as a 30-year treasury and dropped 37% last year in just 3 weeks. Stocks that pay no dividends are even worse.  Nonsense is the universal currency of many market commentators.

Yes, and stocks have durations of 60 years plus and dropped twice as much as the 30 yr in 3 weeks a year ago, with no maturity date or required income payments. Are priced to drop even more from here. Duration indeed. https://t.co/IW7BPaFuUF

— Danielle Park (@kdaniellepark) March 1, 2021

With most convinced inflation will run hot and treasury yields continue to climb (as their prices fall), we are watching closely for another valuable buying opportunity to add the highest credit-quality bonds.  David Rosenberg explains more on why in the clip below.

David Rosenberg of Rosenberg Research predicts the 10-year Treasury Note yield will fall to 1%. Here is a direct video link.

Mark Z. Jacobson is Director of the Atmosphere/Energy Program and Professor of Civil and Environmental  Engineering at Stanford University. He seeks to understand air pollution and global warming problems and to develop large-scale clean, renewable energy solutions to these major and urgent problems. His most recent book, published by Cambridge University Press, is titled 100 Percent Clean, Renewable Energy and Storage for Everything. The book is the culmination of Dr. Jacobson’s life’s work on transitioning the world to 100% clean, renewable energy, and it examines the technologies, economics, and social/political aspects of that transition.

On February 9, as part of the Joint Declaration of the Global 100% Renewable Energy Strategy Group, Dr. Jacobson joined other leading climate scientists and experts to propose a 10 point declaration to transform the world’s energy supply to 100% renewable energy. This statement will be specifically published in support of President Biden’s United States climate change agenda.

Here is a direct audio link.  You can skip the preamble by advancing the play bar to the 3-minute mark.

Rob Carrick’s Globe article last week bemoans a “second-opinion desert” for unbiased financial and portfolio reviews.  Noting a few online review services, Carrick concludes they are really designed as “sales promotion” for financial products and services.  That’s true, and it’s unfortunate because, particularly in the present financial mayhem, individuals are badly in need of unbiased, risk-assessments and insight on their holdings, plans and approaches. See What to do if you want feedback on your portfolio.  Here’s the gist:

In a hot stock market like we have now, we’re all genius investors. But realists know the test of smart do-it-yourself investing is to consistently generate the returns you need over long periods of time. If you have doubts about that, a second opinion makes sense.

Unfortunately, our current investing landscape is mostly a second-opinion desert.

…with newbies flooding into DIY investing these days, it’s a done deal that many are riding the wave and not thinking about the future much. A portfolio-health check, simplistic as it is, is better than flying blind into the next market downturn.

Not just do-it-yourselfers (DIYs), those with so-called ‘professional’ broker/fund/portfolio service providers can also benefit from a sober review and assessment.  The trouble is that in an equity culture dominated by product-underwriting, sales, services and firms, second-opinions often leave recipients none-the-wiser.

Even when wise financial counsel is found, many are not receptive and only look to change service-providers and approaches after major loss episodes.  Similar customer-migration patterns happen at the bottom of every cycle.  See this excellent article from The Medium for more insight on today’s mayhem: Everyone wants to get rich, and it’s driving us crazy.

In financial manias, the saying goes that ‘genius is before the fall.’  In real life, proactive review and sober risk management are a ‘genius’ with lasting benefits.