Treasuries might be heading to 6-7%, rates that will double an investor's money in 10-12 years with no risk of technological disruption, antitrust actions, changing business conditions, or product obsolescence.
If you had to bet that 30 year treasuries will pay a 7% yield within a couple years... what odds would you assign to that possiblity? How rare is it?
10 year treasuries yield 4.16%, or a total +50% return
stock market averages 10%/year, or +160% return
META recovers (3yr?), switch to VTI (7yr @ 10%/yr) = +290% return
I think the scenario where treasury rates rise to 6-7% cannot happen at the same time as tech stocks with three-figure or negative PE ratios rebound to their 2021 highs. Even valuations based on the most optimistic far-future earnings estimates get chopped down by a higher discount rate. Plus, as long as Jerome Powell is Federal Reserve Chairperson, there will be a significant lag in monetary policy, because he does not trust forecasting. Recent comments from the Fed suggest the plan is to keep rates higher for longer than strictly necessary, to ensure inflation is killed and to prevent policy whiplash like we saw in the 1970s and early 1980s. Thus, dramatically lower interest rates may not come to the immediate rescue of tech stocks like they did in the 1990, 2001, and 2008 recessions. There's a very good chance, IMO, that we saw the lowest interest rates of our lifetimes in 2020-2001 and the era of a 0.25% Federal Funds Rate will never return.
If I had to assign odds, I'd say the FFR has a 75% chance of exceeding 6% sometime next year, and 10-year treasuries have 60% odds of exceeding 6% sometime next year. The odds are higher for the overnight rate because I expect a 0.5% to 0.75% yield curve inversion between the overnight and 10y rates at the time the FFR peaks. My expectations are based on the data and reasoning on the inflation and interest rates data and models thread. The odds of those things not happening are basically the odds of a financial crisis / severe recession hitting within the next 6 months and ending the inflation problem the hard way.
I don't understand the meaning of the last 3 lines above, about treasuries, VTI, and Meta. I think the gist is that the expected policy lag could allow one an opportunity to profitably hold bonds through the post-recession rate cuts, and then switch to stocks
after the rate cuts are finished in 2024-2025ish and we've had a 4-10 quarter recession. If that's the meaning, then I agree this is shaping up to be an attractive play.
I'd be more inclined to go with value stocks (through an ETF like VBR, VOE, or VTV) because they will be less affected by inflation / rising discount rates than their growth peers ...
Active money managers are taking that route, and seem to like health care and energy stocks. The problem comes in a recovery, and those value stocks won't recover much.
What if there is no tech recovery for the next few years?
Let's consider a possible future where the 10y treasury stays around 4+% for the next few years and a middle class shell-shocked by a severe recession changes their buying habits, shifting away from expensive consumer discretionary gadgets or half the fluff for sale on Amazon. Suppose they have no more hours in their days to contribute to attention-economy advertising stocks like Meta, Snap, and Alphabet. Let's consider a world where the average consumer's monetary budget for tech and attention budget for apps
stops growing after decades of increases. Or imagine a world where the WFH economy actually requires
less corporate IT spending than the old era of onsite server farms, office building access and security systems, and the practice of running ethernet cable through the ceilings and down to beige cubicles.
If all that seems too specific, just imagine a world where the Personal Savings Rate goes from 3.1% where it is today back up to 7% like in the 20teens or early 1990's, or if it goes to the 10-14% range like we saw in the inflationary 1960's through early 1980's. That would shrink the market for smart refrigerators, video games, and Apple ear buds, because arguably a lot of that long-term decline in the PSR went into increasing consumer spending on the "tech" which dominates the S&P500.
Such a future is consistent with Stein's Law, but it would also imply that there might not be a booming recovery for growth/tech stocks as occurred after 1991, 2003, and 2008. And the above describes the recovery scenario... a future in which stagflation takes hold would be worse for growth stocks. What if companies which had high PE ratios in the past due to being "tech" will in the future be priced in line with other companies in the consumer discretionary, financial, and communication sectors?
Thanks for the insights about VBR. Think I'll replace it on my watchlist with AVUV or SLYV. I guess there's more demand for SCV funds than the liquidity of the SCV market can handle and so they can only tilt in that direction?
