Bonds !!!

[vand]

The 60/40 portfolio is between a rock and a hard place.

The only way bonds do well from here is if we have a very bad deflationary recession to relieve the inflationary pressure - and the deflation would almost certainly have to come from higher unemployment to reduce demand.  Demand tends to collapse when the workforce is being laid off.

But then.... I don't see how that that scenario doesn't totally crush stocks, just like the GFC.

[Dicey]

I follow a simple formula: Subtract my age from 100, and then invest everything in stocks.

The year is still young, but I hope this is one of the top quotes for 2021.  :)

Glad someone noticed. ;)

I've never noticed this thread before today and just started reading through it. Your post made me laugh. Contrary to popular "wisdom", the older I get, the less I like bonds.

[tooqk4u22]

The 60/40 portfolio is between a rock and a hard place.

The only way bonds do well from here is if we have a very bad deflationary recession to relieve the inflationary pressure - and the deflation would almost certainly have to come from higher unemployment to reduce demand.  Demand tends to collapse when the workforce is being laid off.

But then.... I don't see how that that scenario doesn't totally crush stocks, just like the GFC.

The US will revert back to low inflation or borderline deflation in 1-3 years due to the nature of how our economy is structured, low birth rates, poor immigration policies.  The inflation from supply chain issues and pent up demand will work itself out too. 

This is basically what the yield curve is telling with short term at or above long term bc it is pricing in FED rate hikes. The 10 yr UST will probably top out at 3-3.5% then head back down - It has more to go bc the Fed has to start offloading its balance sheet which will hit onger term rates harder.   After all that rates will fall back to the 2% range. 

Housing will likely be down/flattish over the next several years.

As for your comment about unemployment causing deflation....that horse has let the stable withbthe pandemic.....the politicians and fed won't be able to help themselves and will throw excessive funds to people if unemployment is high (big reason for the inflation btw) as it worked last time.  So high unemployment might be worse for inflation.

So for now keep bond allocation in short duration bc yield is same without duration risk, but if 10 yr hits 3% and 2yr/10yr spreads widen then start transferring to longer duration.  This way you capture the yield and capital appreciation when rates come back down a bit.   Again this will be 1-3 years

[ChpBstrd]

Well, I'm kicking myself because over a year ago everyone was moving their bonds into other options, and I thought, "yeah right, that's market timing, how do THEY all of a sudden have a crystal ball?" So I stuck to my AA plan, like I've heard time and time again for my decade-long working career.

And everyone was right. I still don't really understand how this was so predictable, but if it is, can any of you crystal ball guys tell me if BND is going to keep taking a beating? If not, I'm gonna keep staying the course and shovel more money into it according to my AA..

I haven’t a clue, but in the “inflation gets out of hand and the fed must eventually raise rates to 5-7%” scenario both stocks and bonds will reset to a much lower level. If VIX gets back down to the 15-16 range I’ll be holding long calls plus cash or protective puts. I lack the guts to go short because the odds are generally against multi-year bear markets, but may consider some relatively high bear spreads during rallies.

[djadziadax]

What duration and what interest rate would get you to go back into bonds @vand @ChpBstrd @tooqk4u22?

As everyone is saying, a correction of some kind is coming as rising rates always deflate equities - I moved to 20% cash in my portfolio for some protection in the next few months as rates start to rise and equities come down a bit, as I am not well versed  and taking swift action by watching the spreads, VIX, shorting, etc.

[ChpBstrd]

What duration and what interest rate would get you to go back into bonds @vand @ChpBstrd @tooqk4u22?

As everyone is saying, a correction of some kind is coming as rising rates always deflate equities - I moved to 20% cash in my portfolio for some protection in the next few months as rates start to rise and equities come down a bit, as I am not well versed  and taking swift action by watching the spreads, VIX, shorting, etc.

I think you're looking for bond funds with 1-5 years' duration, which will not be hit as hard by rising rates as longer-duration bonds. E.g. BSV, VGSH, or VCSH. That said, each of these funds have already lost more YTD than their entire annual yield, which illustrates the problem of trying to outrun rapidly rising rates from a starting point of <2% yields. Interest rates could rise BY 3% this year.

This is why everyone seems to be flocking into dividend stocks, oil companies, and other "short-duration" equities like REITs and MLPs. Their earnings today are similar to or less than their earnings in the distant future, so a rising discount rate will hurt them less than growth stocks - in theory anyway. The problem with this approach is that even the shares of companies paying 4% dividends will tank when US treasuries start yielding 4%, and as the interest rates on their debt burdens go up and crimp profitability. 

That brings us back around to asking when growth stocks will be cheap enough to back up the truck. It may be a while, so your cash allocation is not necessarily a problem - especially if you can earn some income writing way-out put options against it.

[djadziadax]

Thanks @ChpBstrd. I am well hedged (by being super lucky to have my single stock name in my portfolio be a metals stock which has seen a 40% rise this YTD.

I sold my growth stock fund in my 401K but my 401K does not have a short duration bond fund unfortunately. So the cash will have to stay in MM until an opportunity arises, hence my question about bonds (in a rising rate environment).

[tooqk4u22]

I am not and have not been all equites so i am not "getting back into" into bonds but ido and have managed duration and AA mix.   

All my bond AA is in short term like vfsux, vusfx, ibonds, cash, and older cds and has been for more than a year.   Sure i lost to inflation but it was a matter of time for rates to rise but didn't want to lose to inflation AND significant depreciating values..

I still think those are still fine especially bc yield is same as longer term right now.   

As I said above if 10yr gets to 3% I will start incrementally going to longer duration.  Market needs to see pace of Fed balance sheet sell down....if they just let it run off as things mature or just sell $100billion a month long term rates won't rise that much but if they want to sell off $5trillion in 9 months then watch out.   The balance sheet matters way way way more than the Fed funds rate

I just think longer term we will have deflationary pressures more than inflationary ones but in the near to medium term it hurts. 

[djadziadax]

"ure i lost to inflation but it was a matter of time for rates to rise but didn't want to lose to inflation AND significant depreciating values.."  - Rings true to me as well!

[vand]

The 60/40 portfolio is between a rock and a hard place.

The only way bonds do well from here is if we have a very bad deflationary recession to relieve the inflationary pressure - and the deflation would almost certainly have to come from higher unemployment to reduce demand.  Demand tends to collapse when the workforce is being laid off.

But then.... I don't see how that that scenario doesn't totally crush stocks, just like the GFC.

The US will revert back to low inflation or borderline deflation in 1-3 years due to the nature of how our economy is structured, low birth rates, poor immigration policies.  The inflation from supply chain issues and pent up demand will work itself out too. 

This is basically what the yield curve is telling with short term at or above long term bc it is pricing in FED rate hikes. The 10 yr UST will probably top out at 3-3.5% then head back down - It has more to go bc the Fed has to start offloading its balance sheet which will hit onger term rates harder.   After all that rates will fall back to the 2% range. 

Housing will likely be down/flattish over the next several years.

As for your comment about unemployment causing deflation....that horse has let the stable withbthe pandemic.....the politicians and fed won't be able to help themselves and will throw excessive funds to people if unemployment is high (big reason for the inflation btw) as it worked last time.  So high unemployment might be worse for inflation.

So for now keep bond allocation in short duration bc yield is same without duration risk, but if 10 yr hits 3% and 2yr/10yr spreads widen then start transferring to longer duration.  This way you capture the yield and capital appreciation when rates come back down a bit.   Again this will be 1-3 years

Personally I think you place too much faith in the best case scenario, which let's face it, never happens.  The bond market doesn't predict inflation well:

https://www.piie.com/blogs/realtime-economic-issues-watch/bond-yields-are-not-good-predictors-inflation



Long duration bonds: lose due to falling price, will eventually get to a point where yields are high enough to earn you a real return. Trouble is that may be a -50% move away.

Short duration bonds: Same problem as cash; you lose as inflation sets a 6%+ hurdle each year while your T-bills earn you 1%.

Neither are good places to be.

[vand]

What duration and what interest rate would get you to go back into bonds @vand @ChpBstrd @tooqk4u22?

As everyone is saying, a correction of some kind is coming as rising rates always deflate equities - I moved to 20% cash in my portfolio for some protection in the next few months as rates start to rise and equities come down a bit, as I am not well versed  and taking swift action by watching the spreads, VIX, shorting, etc.

I'd want evidence that bonds are priced to deliver a real return. That could mean yields moving higher, or a fall in inflation, or some combination of.  At the moment we are far off that happening.

[vand]

Long term rates are easing today while shorter term rates are going up - that is resulting in a dramatic narrowing of the spread between the key 2yr and 10yr yields today


2yr yield: 2.35%
10yr yield: 2.46%

Remember, this is the spread that everyone watches as a recession bellweather.

https://fred.stlouisfed.org/series/T10Y2Y

At the rate of descent of the RHS on that chart, it seems inevitable that we are going to get our official recession warning bell within weeks, and maybe even days.

[djadziadax]

And then, when we get the warning bell, will the FED have the guts to raise rates 50bp?

[ChpBstrd]

Here's an interesting perspective:

If the post-Global Financial Crisis cycle “could be erased from people’s memory banks,” then markets might be pricing 300 to 400 basis points of hikes this year rather than around 240 basis points now priced in, Reid wrote in his note highlighting the chart. That’s “given just how far the Fed is behind the curve.”

“Overall there has been a constant misunderstanding of this cycle,” Reid said. “The market is collectively anchored to the trends of the last cycle.”

Before the FOMC meeting  in June 2021, “the Fed and the market were hardly pricing in any rate moves until 2024,” he said, “and only 3 hikes for 2022 as recently as the start of this year.” The amount of rate hikes now priced in by the market for 2022 “still isn’t a huge year of tightening historically,” said Reid.

https://www.marketwatch.com/story/the-dam-finally-broke-10-year-treasury-yields-spike-to-breach-top-of-downward-trend-channel-seen-since-mid-1980s-says-deutsche-bank-11648492268?siteid=yhoof2

In other words, the market may be behind the curve alongside the Federal Reserve. Both may think 7% inflation can be tamed by a 2.5% or so Fed Funds Rate, and that we'll be back to the old trendlines by January 2023. If that expectation is upended, stocks and bonds will crash together. So the question is whether inflationary expectations set in among investors by this summer, or if inflation will fall due to a lack of stimulus.

I honestly don't know the answer. On the one hand, the huge spread between inflation and the FFR, plus full employment, plus the potential for commodity disruptions on the scale of the 1973 OPEC embargo, plus continuing manufactured goods supply disruptions in China, all suggest that the stars are aligned to create a 1970's style experience out of the 2020's. On the other hand, stimulus created this inflation and its withdraw should kill it too. If not, the Fed has a huge pile of ammunition for QT, but that could be a rocky road too.

The downside to holding a conservative / hedged AA during these uncertain times might be a few percent, but the upside could be an opportunity to pick up stocks within the next couple of years at levels that could justify higher WRs.

[tooqk4u22]

The downside to holding a conservative / hedged AA during these uncertain times might be a few percent, but the upside could be an opportunity to pick up stocks within the next couple of years at levels that could justify higher WRs.

Maybe and I am in line with that thinking.  Whatever the phrase "normalization" or "regression to the mean" and so on are irrefutable truths.  So while I have a desired AA I do essentially market time when things "appear to me" to be out of what significantly.   During covid crash I increased my equities AA.   After they slashed rates to zero and below I went to cash and short term duration foe my bond AA.   Sometimes I have been early and late but there ARE times when you just knownsomething is off.   

Historical sp500 pe is probably normalized to 18-20 today vs historical 15 but still at 26 current with higher rates....something feels off.

Regardless, if Fed gets it badly wrong asset classes will get pummeled.

[vand]

Here's an interesting perspective:

If the post-Global Financial Crisis cycle “could be erased from people’s memory banks,” then markets might be pricing 300 to 400 basis points of hikes this year rather than around 240 basis points now priced in, Reid wrote in his note highlighting the chart. That’s “given just how far the Fed is behind the curve.”

“Overall there has been a constant misunderstanding of this cycle,” Reid said. “The market is collectively anchored to the trends of the last cycle.”

Before the FOMC meeting  in June 2021, “the Fed and the market were hardly pricing in any rate moves until 2024,” he said, “and only 3 hikes for 2022 as recently as the start of this year.” The amount of rate hikes now priced in by the market for 2022 “still isn’t a huge year of tightening historically,” said Reid.

https://www.marketwatch.com/story/the-dam-finally-broke-10-year-treasury-yields-spike-to-breach-top-of-downward-trend-channel-seen-since-mid-1980s-says-deutsche-bank-11648492268?siteid=yhoof2

In other words, the market may be behind the curve alongside the Federal Reserve. Both may think 7% inflation can be tamed by a 2.5% or so Fed Funds Rate, and that we'll be back to the old trendlines by January 2023. If that expectation is upended, stocks and bonds will crash together. So the question is whether inflationary expectations set in among investors by this summer, or if inflation will fall due to a lack of stimulus.

I honestly don't know the answer. On the one hand, the huge spread between inflation and the FFR, plus full employment, plus the potential for commodity disruptions on the scale of the 1973 OPEC embargo, plus continuing manufactured goods supply disruptions in China, all suggest that the stars are aligned to create a 1970's style experience out of the 2020's. On the other hand, stimulus created this inflation and its withdraw should kill it too. If not, the Fed has a huge pile of ammunition for QT, but that could be a rocky road too.

The downside to holding a conservative / hedged AA during these uncertain times might be a few percent, but the upside could be an opportunity to pick up stocks within the next couple of years at levels that could justify higher WRs.

Raoul Pal referred to the long chart of othe 10yr yield as the "Chart Of Truth" and was expecting short term reversal in bonds to remain within the long term trend only a few weeks ago (around 2 mins).

https://www.youtube.com/watch?v=OAA33NL3mBk

I wonder what his thoughts are now, if this breakout is true and persists?

[djadziadax]

The downside to holding a conservative / hedged AA during these uncertain times might be a few percent, but the upside could be an opportunity to pick up stocks within the next couple of years at levels that could justify higher WRs.

The question is, what is a conservative AA allocation in thismarket.

Equities - super risky
Bonds - negative yield
REIT - near term time-bomb with steeply rising rates, which would kill housing

REIT for a 401k?
Oil stock ETFs (suggestions?)
Commodities ETF (suggestions)

Someone suggested to me TQQQ (Nasdaq 100). Thoughts? Views?

[ChpBstrd]

The downside to holding a conservative / hedged AA during these uncertain times might be a few percent, but the upside could be an opportunity to pick up stocks within the next couple of years at levels that could justify higher WRs.

The question is, what is a conservative AA allocation in thismarket.

Equities - super risky
Bonds - negative yield
REIT - near term time-bomb with steeply rising rates, which would kill housing

REIT for a 401k?
Oil stock ETFs (suggestions?)
Commodities ETF (suggestions)

Someone suggested to me TQQQ (Nasdaq 100). Thoughts? Views?

Excellent question. Perhaps a cash-heavy portfolio is counterintuitively the best way to handle the risk of rising inflation and volatility, as the everything bubble confronts rising rates. Either that or use options to hedge SPY and QQQ (pick up the longest durations when VIX is relatively low).

[vand]

Someone suggested to me TQQQ (Nasdaq 100). Thoughts? Views?

If you have to ask... don't even go there

[Radagast]

I won't say bonds are getting exciting yet, but they are getting back to pre-pandemic prices. Total Bond is having one of it's worst years ever, especially adjusted for inflation.

Right now, my goal is to get to 20% bonds over the next 3 or so years, I am currently sitting at about half that. Equally split between:
ZROZ (25- to 30-year treasury bonds which pay no interest before maturity)
VWALX (High Yield Tax Exempt, actually in the dead center of the credit and duration risk chart, so no that high yield)
Inflation savings bonds

ZROZ has been at half my target allocation for 18 months, and I keep buying, and it keeps going down while other things keep going up. I decided long ago not to sell anything to rebalance into it, I am just buying with new contributions in 401k.
VWALX... pretty boring. I had enough in taxable recently to almost top this off, and has since declined a few percent.
Series I Savings Bonds... the place to be right now. Buying whenever possible given the low annual limits. Need to buy $10k for spouse this month.

[MustacheAndaHalf]

Here's an interesting perspective:

“Overall there has been a constant misunderstanding of this cycle,” Reid said. “The market is collectively anchored to the trends of the last cycle.”

Before the FOMC meeting  in June 2021, “the Fed and the market were hardly pricing in any rate moves until 2024,” he said, “and only 3 hikes for 2022 as recently as the start of this year.” The amount of rate hikes now priced in by the market for 2022 “still isn’t a huge year of tightening historically,” said Reid.

(marketwatch URL)

The article provides a missing piece I've been looking for since Dec 2021: why did the markets keep pricing in one rate hike at a time?  Inflation is 7%, and the market thinks 0.5% will work.. then 0.75%.. then 1.00%.  This article explains how the market viewed Fed rate hikes: by assuming the pattern established after the 2008 financial crisis.  Given the author is a random "markets reporter", it may be worth verifying this theory - but it makes sense and could explain why the markets thought each and every rate hike was the last one.

On the other hand, stimulus created this inflation and its withdraw should kill it too. If not, the Fed has a huge pile of ammunition for QT, but that could be a rocky road too.

If you look at FRED data, the Fed stayed at $4 trillion in bonds for 6 years before the pandemic.  If that's their baseline, the Fed has $9 trillion now - it suggests they will sell $5 trillion in bonds over the next several years.  But the overall government stimulus includes Congress, and was much larger: $19 trillion including the Fed.

I recall reading one article suggesting QT would be $1 trillion over 12 months.  Like rate hikes, I expect the Fed is going to change it's opinion later, and use $2 trillion or so of bond selling over 12 months.  I've decided I'm waiting on the sidelines for now, rather than actively profitting off this like I did in March.

The downside to holding a conservative / hedged AA during these uncertain times might be a few percent, but the upside could be an opportunity to pick up stocks within the next couple of years at levels that could justify higher WRs.

Beware the echo chamber effect, where people who like to talk about bearish investing are more likely to reply.  We might both get a false sense of our view being more common.

I'm planning on lowering my asset allocation further - and I'm already half in cash.  If there is a crash, and it's worse than -25%, that will give me the chance to invest in a +33% or more recovery.  It will make up for 8% inflation and meager stock market gains (or losses) for the year.

But I could be wrong.  With all the government stimulus, maybe companies are farther away from trouble than I suspect.  Or maybe the crash is mild, topping out at -15%.  Both of those would be a failure on my part, with the damage proportional to the stock returns I missed.

[maizefolk]

On the other hand, stimulus created this inflation and its withdraw should kill it too. If not, the Fed has a huge pile of ammunition for QT, but that could be a rocky road too.

If you look at FRED data, the Fed stayed at $4 trillion in bonds for 6 years before the pandemic.  If that's their baseline, the Fed has $9 trillion now - it suggests they will sell $5 trillion in bonds over the next several years. But the overall government stimulus includes Congress, and was much larger: $19 trillion including the Fed.

If we look at previous precedents (for example, the housing crisis which I believe is when the approach of quantitative easing was first introduced), the Fed doesn't really sell down assets after it buys them. The fed doubled the size of its balance sheet during the 2008 crisis and it's never gotten close to pre-housing crisis levels.

That doesn't mean the fed won't sell off a bunch of assets and shrink the money supply in coming years, but don't think we can confidently assume it has to happen.

[vand]

I won't say bonds are getting exciting yet, but they are getting back to pre-pandemic prices. Total Bond is having one of it's worst years ever, especially adjusted for inflation.

Right now, my goal is to get to 20% bonds over the next 3 or so years, I am currently sitting at about half that. Equally split between:
ZROZ (25- to 30-year treasury bonds which pay no interest before maturity)
VWALX (High Yield Tax Exempt, actually in the dead center of the credit and duration risk chart, so no that high yield)
Inflation savings bonds

ZROZ has been at half my target allocation for 18 months, and I keep buying, and it keeps going down while other things keep going up. I decided long ago not to sell anything to rebalance into it, I am just buying with new contributions in 401k.
VWALX... pretty boring. I had enough in taxable recently to almost top this off, and has since declined a few percent.
Series I Savings Bonds... the place to be right now. Buying whenever possible given the low annual limits. Need to buy $10k for spouse this month.

I just can't make a case for traditional fixed income in the current environment.

Sub 3% yields while the new CPI number is 8.5%.. yeah, yields had better be rising.

The long term upside in bonds is abysmal for the amount of inflation and interest rate risk you are taking on.


Good money managers recognise this and are putting money into alternatives plays like renewables infrastructure as a result:
https://www.theaic.co.uk/aic/news/citywire-news/spiller-lambasts-naive-esg-as-capital-gearing-buys-renewables-and-oil-gas

[MustacheAndaHalf]

On the other hand, stimulus created this inflation and its withdraw should kill it too. If not, the Fed has a huge pile of ammunition for QT, but that could be a rocky road too.

If you look at FRED data, the Fed stayed at $4 trillion in bonds for 6 years before the pandemic.  If that's their baseline, the Fed has $9 trillion now - it suggests they will sell $5 trillion in bonds over the next several years. But the overall government stimulus includes Congress, and was much larger: $19 trillion including the Fed.

If we look at previous precedents (for example, the housing crisis which I believe is when the approach of quantitative easing was first introduced), the Fed doesn't really sell down assets after it buys them. The fed doubled the size of its balance sheet during the 2008 crisis and it's never gotten close to pre-housing crisis levels.

That doesn't mean the fed won't sell off a bunch of assets and shrink the money supply in coming years, but don't think we can confidently assume it has to happen.

I think it's important to study this, to form an opinion about what the Fed will do.  Looking at the rate hikes and how the market was fooled repeatedly into not pricing in more of them, I think the market could get QT wrong, as well.  Going to sources of data, I confirm Mar 18 2009 as the start of QE:

"On March 18, 2009, the FOMC announced that the program would be expanded by an additional $750 billion in purchases of agency MBS and agency debt and $300 billion in purchases of Treasury securities. These purchases would be unsterilized and this date more appropriately marks the beginning of QE in the US."
https://en.wikipedia.org/wiki/History_of_Federal_Open_Market_Committee_actions#Quantitative_Easing_1_(QE1,_December_2008_to_March_2010)

The Fed starts with a $0.86 trillion balance sheet in mid 2007 according to this primary source data.  But notice what happens in 2018-2019, as the Fed's $4.4 trillion in bonds are sold down to $3.8 trillion.
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

This CNBC article talks of the start of a yield curve inversion in March 2019.  Months later, the Fed stopped selling bonds and started buying them again, winding up at $4.2 trillion before March 2020 hit.
https://www.cnbc.com/2019/03/25/the-us-bond-yield-curve-has-inverted-heres-what-it-means.html

To me, it looks difficult for the Fed to unload bonds without inverting the yield curve... and after a few months of inverted yield curve, the Fed has a choice to make: trigger recession with more bond selling, or switch to bond buying to prevent it.  Back in 2019, inflation was low and the Fed decided to ease off on QT.

Inflation just rose to 8.5% last month.  That was a combination of supply problems from 2021 (which were not "transitory" - the Fed was wrong), Russia's invasion of Ukraine hurting commodity futures (oil & wheat), and finally China's biggest lockdown to date with an unclear path out.  That's a lot of inflation pressure, although things can change in the upcoming months.

[maizefolk]

Agreed. It looks like biggest sell off the Fed has ever managed was on the order of 600-700B over 18 months (less than 20% of their holdings at the time) and it triggered a correction and scared them into going into reverse.

To be able to sell $5,000B over any reasonable time frame I think they'd need to be at peace with throwing the economy into a major recession. It may come to that at some point. Triggering a serious recession was what it finally took to break the cycle of inflation in the '70s and '80s.

But I don't think the current Fed has the appetite to do that. And I don't think inflation has started to be painful enough for the voters to support politicians who would put in a new fed chair who might be willing to do so. It took the better part of a decade of high inflation in the USA before it happened last time.

[vand]

The Fed doesn't need to actually sell bonds to reduce its balance sheet, as the bonds they do hold will naturally mature over time.

Of course, this is in theory. We all know they they will begin purchasing assets again to support markets when the next crisis arrives.

[MustacheAndaHalf]

To be able to sell $5,000B over any reasonable time frame I think they'd need to be at peace with throwing the economy into a major recession. It may come to that at some point. Triggering a serious recession was what it finally took to break the cycle of inflation in the '70s and '80s.

But I don't think the current Fed has the appetite to do that. And I don't think inflation has started to be painful enough ...

I would hope the 1970s inflation was a cautionary tale, rather than encouraging delay.  In that very different time, Saudi Arabia was forcing gas prices higher, and Russia was menacing the world... hey, wait a minute...
I see that as a cautionary tale, and one which Jerome Powell would be very familiar with - he knew Paul Volker, who was Fed Chair at that time.

Here's my evidence for the Fed being willing to hurt the economy to fight inflation:

Mr. Powell was asked this month if the Fed was prepared to do whatever it took to control inflation — even if it meant harming growth, as Mr. Volcker did.

“I hope that history will record that the answer to your question is yes,” the Fed chair replied.

https://www.nytimes.com/2022/03/14/business/economy/powell-fed-inflation-volcker.html

[MustacheAndaHalf]

The Fed doesn't need to actually sell bonds to reduce its balance sheet, as the bonds they do hold will naturally mature over time.

Of course, this is in theory. We all know they they will begin purchasing assets again to support markets when the next crisis arrives.

That was true earlier, but the Fed minutes released last week told a different story.
The Fed discussed quantitative tightening (QT, aka selling bonds) of $60 billion/month, or about 0.72 trillion per year.  That is above the peak rate of $50 billion/month in the former 2017-2019 QT, so it's also evidence the Fed is prepared to do more this year.
https://www.washingtonpost.com/business/what-the-feds-quantitative-tightening-plans-mean/2022/04/07/4774f172-b627-11ec-8358-20aa16355fb4_story.html

I think 2017-2019 the Fed didn't have to fight inflation.  And even last year, the Fed mistakenly waited for "transitory" inflation to fade.  But now inflation has run 7% for over a year, with numerous factors compounding it.  Even if the Fed wanted to help the stock market, it's priority is fighting inflation.

I guess for me, the open question is when will most people feel inflation.

[maizefolk]

To be able to sell $5,000B over any reasonable time frame I think they'd need to be at peace with throwing the economy into a major recession. It may come to that at some point. Triggering a serious recession was what it finally took to break the cycle of inflation in the '70s and '80s.

But I don't think the current Fed has the appetite to do that. And I don't think inflation has started to be painful enough ...

I would hope the 1970s inflation was a cautionary tale, rather than encouraging delay.  In that very different time, Saudi Arabia was forcing gas prices higher, and Russia was menacing the world... hey, wait a minute...
I see that as a cautionary tale, and one which Jerome Powell would be very familiar with - he knew Paul Volker, who was Fed Chair at that time.

Here's my evidence for the Fed being willing to hurt the economy to fight inflation:

Mr. Powell was asked this month if the Fed was prepared to do whatever it took to control inflation — even if it meant harming growth, as Mr. Volcker did.

“I hope that history will record that the answer to your question is yes,” the Fed chair replied.

https://www.nytimes.com/2022/03/14/business/economy/powell-fed-inflation-volcker.html

Knowing what needs to be done is a necessary but not sufficient condition for actually doing what needs to be done.

I know somebody who has run a marathon. I know what it takes to train up for and run a marathon. If somebody asked me "Are you going to run a marathon in the future?" My answer might sound a lot like Powell's "I hope that history will record that the answer to your question is yes."

Volker's policies likely played a key role in the electoral defeat of the president who put him into his role (Jimmy Carter). He was personally protested and vilified. The country suffered more for years to end the longer term suffering of high inflation.

But let us see what happens. If the fed sells $60B in bonds per month, it'll take them nearly seven years to sell the $5T you think they're likely to sell in the next several years. To sell that much in three years they'd need to come out of the gate at something more like 140B/month or rapidly accelerate sales once they start. Personally, my guess is that the fed doesn't manage a drawdown of more than $0.5T in assets before changing course.

[MustacheAndaHalf]

maizefolk - Yes, that's a good representation of our views.  I think the Fed will go over $120B/month of QT, surprising markets.  Listening to Bloomberg, one analyst thought the Fed might do the opposite: continue with rate hikes, but not QT.

I would counter the marathon metaphor by saying it is the Fed's job to get inflation under control.  Unemployment is historically low at under 4%, while inflation is the highest in 40 years.  If the Fed continues to act slowly, we'll see inflation for years... but maybe they'll claim inflation is about to fade any month now.  I think they'll act, but there's a case to be made that they don't.

The Fed seems to think it can raise interest rates without hurting employment.  That is being mocked as "immaculate tightening", in the same way there's a religious miracle called" immaculate conception".  The Fed is probably wrong according to any economist, but the idea they need a miracle strikes me as apt.

[maizefolk]

The Fed seems to think it can raise interest rates without hurting employment.  That is being mocked as "immaculate tightening", in the same way there's a religious miracle called" immaculate conception".  The Fed is probably wrong according to any economist, but the idea they need a miracle strikes me as apt.

On this last point I think we are in complete agreement. Its only in which imperfect option the fed is goin to choose when they're forced to face that fact that they cannot accomplish everything they might like simultaneously.

It sounds like we both understand the others' position and since we're discussing the future decisions of human beings there is probably no way to find out which of us is right (if either of us is right) other than to wait and see.

If you choose to put your money into this investment thesis, good luck! I'll be up front that I'm not changing any investment decisions based on my own predictions. But I'm at essentially 0% bonds to begin with, which is already where I'd want to be in a world with low interest rates combined with sustained or accelerating inflation.

[ChpBstrd]

Lots of us (myself included) are locked onto a 1970's narrative, but here's an interesting take on the subject saying we should look at the late 1940's as our predictive model for what happens next.

https://seekingalpha.com/article/4501103-lessons-on-fighting-inflation-skip-over-volcker-to-1946

TL;DR it still involves double-digit inflation, a recession, and bear market, but it was a relatively soft landing and as "transitory" as one might imagine. 

[Radagast]

I won't say bonds are getting exciting yet, but they are getting back to pre-pandemic prices. Total Bond is having one of it's worst years ever, especially adjusted for inflation.

Right now, my goal is to get to 20% bonds over the next 3 or so years, I am currently sitting at about half that. Equally split between:
ZROZ (25- to 30-year treasury bonds which pay no interest before maturity)
VWALX (High Yield Tax Exempt, actually in the dead center of the credit and duration risk chart, so no that high yield)
Inflation savings bonds

ZROZ has been at half my target allocation for 18 months, and I keep buying, and it keeps going down while other things keep going up. I decided long ago not to sell anything to rebalance into it, I am just buying with new contributions in 401k.
VWALX... pretty boring. I had enough in taxable recently to almost top this off, and has since declined a few percent.
Series I Savings Bonds... the place to be right now. Buying whenever possible given the low annual limits. Need to buy $10k for spouse this month.

I just can't make a case for traditional fixed income in the current environment.

Sub 3% yields while the new CPI number is 8.5%.. yeah, yields had better be rising.

The long term upside in bonds is abysmal for the amount of inflation and interest rate risk you are taking on.


Good money managers recognise this and are putting money into alternatives plays like renewables infrastructure as a result:
https://www.theaic.co.uk/aic/news/citywire-news/spiller-lambasts-naive-esg-as-capital-gearing-buys-renewables-and-oil-gas

Like everything, I don't know when or where the bottom will be, and I think that dollar-cost-averaging is the best way to catch it. Unless it is a decade or more out... which it could be. If there is an unexpected deflationary recession, ZROZ could easily double from current prices.

[vand]

Lots of us (myself included) are locked onto a 1970's narrative, but here's an interesting take on the subject saying we should look at the late 1940's as our predictive model for what happens next.

https://seekingalpha.com/article/4501103-lessons-on-fighting-inflation-skip-over-volcker-to-1946

TL;DR it still involves double-digit inflation, a recession, and bear market, but it was a relatively soft landing and as "transitory" as one might imagine.

I can't get access to the article, but it's an interest proposition.  I think it's important to recognise that the world has changed beyond recognition since even the 1970s, never mind the late 1940s.  Understanding history here is just as important as understanding economics.

One important contributing factor to the 1940s boom out of WWII was that the US had a huge amount of productive capacity at that time.  As the war was never fought on US land, all their productive capacity remained intact, and then in the years following the war, manufacturers were able to retool from supplying military hardware to producing goods and services for consumers which sparked a huge productivity boom (... and futhermore, they had a huge customer base as Europe was rebuilding from the war.. it's well documented how impressively US living standards were raised in the 20 or so years following the War.  I honestly can't see that sort of growth playing out again over the next 20 years.

[ChpBstrd]

Lots of us (myself included) are locked onto a 1970's narrative, but here's an interesting take on the subject saying we should look at the late 1940's as our predictive model for what happens next.

https://seekingalpha.com/article/4501103-lessons-on-fighting-inflation-skip-over-volcker-to-1946

TL;DR it still involves double-digit inflation, a recession, and bear market, but it was a relatively soft landing and as "transitory" as one might imagine.

I can't get access to the article, but it's an interest proposition.  I think it's important to recognise that the world has changed beyond recognition since even the 1970s, never mind the late 1940s.  Understanding history here is just as important as understanding economics.

One important contributing factor to the 1940s boom out of WWII was that the US had a huge amount of productive capacity at that time.  As the war was never fought on US land, all their productive capacity remained intact, and then in the years following the war, manufacturers were able to retool from supplying military hardware to producing goods and services for consumers which sparked a huge productivity boom (... and futhermore, they had a huge customer base as Europe was rebuilding from the war.. it's well documented how impressively US living standards were raised in the 20 or so years following the War.  I honestly can't see that sort of growth playing out again over the next 20 years.

I'll be a dick to the author and copy/paste the article (minus some excellent graphs, sorry).

Many in the financial markets have referred to the current pandemic as a war, which has been used to justify creating "war time" fiscal and monetary policy solutions. The recent surge of inflation has led the media and market pundits to fall back on comparisons to the 1970s, resulting in shrill cries of inflationary panic. America has suffered through bouts of inflation before, but most "experts" are only looking back at the precedent from their lifetime: the inflation of the late 1970s and 1980s that was conquered by the draconian policy measures of the Paul Volcker-led Federal Reserve (FED). While the rise in inflation during that time may invite comparisons to today, its root causes-including funding the Vietnam War and the Great Society, delinking the dollar from gold, and an energy crisis-were a decidedly different set of circumstances.

A more appropriate corollary from history may be 1946-1948, the post-World War II inflationary episode resulting from supply shortages due to manufacturing disruptions during peace-time retooling, rebounding demand for consumer goods, high levels of savings, soaring money growth, and the cessation of price controls. With the exception of price controls, this sounds a lot like the scenario playing out today. As for how the 1940s inflation episode ended, supply and demand ultimately came back into balance, and a more primitive version of the Fed-which did not have fed funds rate targeting in its toolkit-slowed the economy by curbing money and credit growth and shrinking its balance sheet. Price increases slowed in 1948 and actually declined in 1949. A brief and mild recession ensued. Equity prices generally remained stable throughout the period. This would be a welcome outcome today, but the execution of monetary policy over the coming months will determine whether inflation ends gently or with a serious recession and further market instability.

The pent-up demand of post-war America was extraordinary: Between 1945 and 1949-a period when the U.S. population was approximately 140 million-Americans purchased 20 million refrigerators, 21.4 million cars, and 5.5 million stoves. This was quite a turnaround from wartime America, when durable goods were so hard to come by that certain items like refrigerators and radios were dropped from the Consumer Price Index (CPI) basket.

At the same time, excess savings generated during the war led to the inevitable growth in liquid assets, a situation that resembles today's post-COVID surge in savings.
Savings Soared in Wartime and Pandemic

Savings Soars In Wartime and Pandemic

Personal Saving Rate (Guggenheim Investments, Haver Analytics. Data as of 12.31.2021.)

The credit demand by borrowers across the peacetime economy - to farms, homeowners, real estate investors, industry, and even speculators - increased sharply in 1946 and 1947, which further stoked inflationary pressures.
Curbing Credit Growth Was Key to Turning Inflationary Pressure

Curbing Credit Growth Was Key to Turning Inflationary Pressure

Private Debt, YoY% Change (Guggenheim Investments, Haver Analytics. Data as of 12.31.2021.)

Prices of goods in the CPI Index, which spiked in 1940 and 1941 due to increased wartime manufacturing, were held down during the war by price controls established by the Emergency Price Control Act of Jan. 30, 1942 and maintained by the Office of Price Administration. Most price controls were lifted in 1946, which led to a spike higher in commodities and other products that was sharper than in any period of similar length since 1918 (which also was associated with the end of a war).

In its 1947 Annual Report, the Fed reported that "inflationary developments, which had begun because of wartime shortages of goods in relation to income, were carried forward through 1947 by a rising spiral of costs, prices, and incomes, supported by use of past savings and by substantial credit expansion." The combination of a surge in demand, reduced supplies of goods, excess liquidity and credit, and the abolishment of price controls allowed CPI to skyrocket. Inflation, which was 3.1 percent year over year in June 1946 almost one year after the end of the hostilities, peaked nine months later at 20.1 percent in March 1947.
Wartime Inflation Proved to Be Transitory

Wartime Inflation Proved to Be Transitory

All-Items Consumer Price Index, 12-Month % Change, 1941-1951 (Guggenheim Investments, St. Louis Fed. Data as of 2.25.2022.)

The spike in inflation followed a period of explosive growth in the monetary base-essentially all currency in circulation and reserves on bank balance sheets, which is the foundation of money supply. Mirroring the growth in the monetary base was the growth in securities held on the Fed's balance sheet, which grew 300 percent from $6.2 billion in 1942 to $24.5 billion in 1945, a much larger increase than the 100 percent jump from pre-pandemic 2020 to today. (To extend the comparison even further, from pre-financial crisis in 2007 to 2022 the Fed's balance sheet increased almost 900 percent, compared to 1,260 percent from pre-Depression 1928 to 1945.)
Fed Typically Grows Its Balance Sheet in Times of Economic Distress

Fed Typically Grows Its Balance Sheet in Times of Economic Distress Fed Balance Sheet

Growth Rates 1928-1945 vs. 2007-2021 (Guggenheim Investments, Bloomberg, St. Louis Fed. Data as of 12.31.2021.)

The rise in the monetary base and the Fed's balance sheet during wartime was to be expected, not unlike the growth in money supply and quantitative easing during the present-day pandemic response.
Fed Slowed Monetary Base Growth After Wartime Spike

Fed Slowed Monetary Base Growth After Wartime Spike

Monetary Base 1936-1953 (Guggenheim Investments, St. Louis Fed. Data as of 2.25.2022.)

The inflationary period subsided rapidly after the March 1947 peak, with disinflation giving way to outright deflation from May 1949 to June 1950. How did the inflationary period end? First, pent-up demand subsided, supply came on board as prices rose, and production and manufacturing capacity transitioned from wartime to peacetime activity. In other words, the market's "invisible hand" worked as expected.
High Prices Are Weighing on Demand, Unlike the 1970s

High Prices Are Weighing on Demand, Unlike the 1970s

Consumer Sentiment Survey: Buying Conditions for Vehicles, Houses, and Household Durable Goods (Guggenheim Investments, University of Michigan. Data as of 12.31.2021.)

Second, monetary policy tightened, but using a few different elements than what we are used to seeing. As explained in the 1948 Fed Annual Report: "Federal Reserve policies during most of 1948…were directed toward exerting restraint on inflationary credit expansion while at the same time maintaining stability in the market for government securities." The problem of restraining (or expanding) credit growth, as explained in the Fed's 1948 Annual Report, was solved through managing the supply of bank reserves, which were essential for bank liquidity and controlled through the Fed's balance sheet. "The exceptional and assured liquidity of the banking system, which is an element of strength in a period of recession, can be a source of danger in a period of boom."
The Inflation Policy Cycle

Throughout economic history, inflation has proven to be a condition that is caused by, and addressed with, the same dynamics-rising and falling demand as a result of price movement, the market's adjustment of interest rates, and monetary policy rate-setting. A rational and disciplined approach to inflation recognizes that each of these dynamics plays a vital role.

The Inflation Policy Cycle

Guggenheim Investments

Notably missing in all of the discussion of Fed policy during this period is a discussion of interest rate management. During the war, the Fed was an active purchaser of Treasury debt to help fund expanded deficit financing. With the encouragement of the Treasury to help keep borrowing costs down, in April 1942 the Fed formally pegged the T-bill rate at 0.0375 percent. The Fed also informally pegged long-term rates as well. As post-war inflationary pressures grew, the Fed was limited in its ability to slow money and credit growth by these interest rate pegs, and in 1947 the Treasury finally agreed to let market forces determine short-term rates of Treasury bills. As a result, the yield curve flattened, monetary aggregates fell, and credit conditions tightened. A brief and mild recession followed, from November 1948 to October 1949.
Yield Curve Flattened After Removal of T-Bill Target

Yield Curve Flattened After Removal of T-Bill Target

3-mo T-Bill yield and the 3-mo/10 yr curve (Guggenheim Investments, St. Louis Fed, Haver Analytics. Data as of 2.25.2022.)

Interestingly, while short-term rates rose significantly, real rates remained in negative territory until November 1948 when a mild recession resulted in price deflation. While equities entered a brief bear market, stocks generally stabilized, resuming their rise in mid-1949.1
After a Brief Bear Market, Equities Stabilized and Resumed Rising

After a Brief Bear Market, Equities Stabilized and Resumed Rising

S&P 500 Index (Guggenheim Investments, Haver Analytics. Monthly averages shown.)

The monetary policy takeaway from the 1946-1948 post-war period is that a significant variable in that inflationary episode was the supply-demand imbalances caused by the virtual cessation of production of consumer durables to build an "arsenal for democracy." In post-war America these imbalances ultimately were resolved with the normalization of monetary policy allowing free market forces to balance supply and demand for consumer goods and stabilize market prices. As in the 1940s, the market's invisible hand will ultimately do the same today if free market forces are allowed to signal production adjustments as long as policymakers do not interfere.

Importantly, the monetary policy prescriptions of the post-war Fed were focused on the supply of money and credit, not the price of money and credit. As I wrote recently, by managing money supply to control inflation, the Fed could allow market forces to determine the appropriate overnight rate while monitoring inflation. You cannot control both the supply and price of any commodity, including credit. Market feedback, if allowed, would guide the Fed on how to manage the money supply by adjusting reserve balances through changes in the size of its balance sheet.

After the Fed removed controls on short-term interest rates in 1947, the market was able to do its job and naturally stabilize output and establish a new price equilibrium. As the chart below shows, the Fed successfully brought down the growth rate of money supply in the post-war era to below zero, without controlling short-term rates.
Monetary History: Post-WWII Is Closest Comparison to Today

Monetary History: Post-WWII Is Closest Comparison to Today

M2 Money Supply, YoY% Change (Guggenheim Investments, Haver Analytics. Data as of 1.31.2022.

Today, M2 growth, which peaked at levels not seen since World War II, has been declining. With the Fed likely to embark on a path of reducing its balance sheet while simultaneously raising the policy rate, the risk is much greater that the result will not be a quick, mild recession like we saw in 1949, but a much more serious downturn associated with greater market volatility, and a potential financial crisis. Given the record levels of leverage in the corporate sector and the rich valuation of financial assets along with surging prices in real estate and other speculative assets, the prospects for policy error are high.

The Fed is already getting important market feedback, as evidenced by different measures of inflation expectations. As shown by the 5Y/5Y TIPS breakeven, and the New York Fed's consumer inflation survey, the market is fairly comfortable that the Fed can manage this inflationary episode.
Inflation Expectations Are Well Managed Today

Inflation Expectations Are Well Managed Today

Guggenheim Investments, Haver Analytics. Data as of 1.31.2022 for NY Fed, 2.18.2022 for TIPS.

Interestingly, over the years the three-month T-bill yield has moved roughly in line with the annual rate of change in Core Personal Consumption Expenditures (Core PCE), but never have they diverged like we see today, a sign of confidence in the transitory nature of the current inflation spike.
The Market Is Signaling Lower Inflation Expectations

The Market Is Signaling Lower Inflation Expectations

3-Month T-bill vs. Core PCE YOY% change (Guggenheim Investments, Haver Analytics. Data as of 1.31.2022.)

Policymakers would be wise to look to the past to design policy that can successfully end the current surge in prices. Attempts to contain inflation in the 1970s were focused on targeting short-term rates instead of limiting credit creation through controlling the Fed balance sheet and the money supply. This policy was an obvious failure. In the post-financial crisis period, policymakers seem to have lost faith in the power of markets to set prices and balance supply and demand, and have gained too much faith in their own ability to do the same. Perhaps a rational and disciplined approach adhering to monetary orthodoxy as demonstrated in the 1940s would greatly reduce the risk of policy error, avoid the inflation spiral of the 1970s, and reduce the risk of yet another financial panic in the near future.

[MustacheAndaHalf]

The Fed seems to think it can raise interest rates without hurting employment.  That is being mocked as "immaculate tightening", in the same way there's a religious miracle called" immaculate conception".  The Fed is probably wrong according to any economist, but the idea they need a miracle strikes me as apt.

It sounds like we both understand the others' position and since we're discussing the future decisions of human beings there is probably no way to find out which of us is right (if either of us is right) other than to wait and see.

If you choose to put your money into this investment thesis, good luck!

My 63% cash thanks you.  That's most of my active portfolio, which is far more relaxing than having dozens of individual stocks to tend.

Just so I understand your approach better, are you passively investing regardless of the Fed actions this year?  Or will circumstances in the next few months feed into your investment decisions?

[MustacheAndaHalf]

Lots of us (myself included) are locked onto a 1970's narrative, but here's an interesting take on the subject saying we should look at the late 1940's as our predictive model for what happens next.

https://seekingalpha.com/article/4501103-lessons-on-fighting-inflation-skip-over-volcker-to-1946

TL;DR it still involves double-digit inflation, a recession, and bear market, but it was a relatively soft landing and as "transitory" as one might imagine.

Searching for "Scott Minerd" shows a link to the story in his twitter feed, which does not put up a "sign up" or pay wall for me:

https://www.guggenheiminvestments.com/perspectives/global-cio-outlook/lessons-fighting-inflation-skip-over-volcker-1946

[vand]

Big Picture: Long term trend has reversed and more pain to come... but nobody is talking about it!

https://www.youtube.com/watch?v=Q_KsIncu_DQ

[ChpBstrd]

Big Picture: Long term trend has reversed and more pain to come... but nobody is talking about it!

https://www.youtube.com/watch?v=Q_KsIncu_DQ

He talks about yield "capitulation" as if the Fed had nothing to do with it. Also some sloppy use of language implying typical YT conspiracies, etc.

[MustacheAndaHalf]

Big Picture: Long term trend has reversed and more pain to come... but nobody is talking about it!

https://www.youtube.com/watch?v=Q_KsIncu_DQ

He talks about yield "capitulation" as if the Fed had nothing to do with it. Also some sloppy use of language implying typical YT conspiracies, etc.

I spent minutes looking for "Francis Hunt" the investor, but found nothing from a reputable website.  Skimming reviews for his website, he wants people to pay him $10,000 for a year of his online courses based on his background as a trader using technical analysis.

Here's an ebook for $2 that has lots of good reviews:
https://www.amazon.com/Trading-Technical-Analysis-Masterclass-financial-ebook/dp/B07NVDSW8Y/

And for those students who spent $10,000 another book might be more appropriate:
https://www.amazon.com/Technical-Analysis-Dummies-Business-Personal/dp/1119596556

[habanero]

Wonder how many who bought bonds as a safer, quite boring less volatile asset class had a 20% loss in real terms during a few months on the list of possible outcomes.

[maizefolk]

Wonder how many who bought bonds as a safer, quite boring less volatile asset class had a 20% loss in real terms during a few months on the list of possible outcomes.

My guess is that the sort of person with a big allocation to bonds isn thinking in nominal terms rather than "real" terms. So they're blaming almost half that loss on the greedy retailers or bad government rather than blaming the bonds themselves.

[habanero]

I bought bonds last week!

Invested all of 0.6% of my stash in bonds, 50/50 global and domestic (the globals ones FX hedged to my home currency). Kinda prefer the domestic ones despite limited selection. Fees are pretty low (0.1%) and we have less rampant inflation than most of the western world (about 2.1% core, 4.5% headline) and a good chunk of rate hikes already priced in plus rate hikes are likely gonna hit harder here since almost all mortgages are adjustable so the effect on household finaces are more substantial I guess. We shall see.

Duration on the domestic ones about 5 years and 7 for the global. Both at around 4% yield afaik.

The global portfolio is pretty similar to BNDW I assume, but FX hedged on top.

[vand]

Jesus. If you think stocks are having a bad day, check out long term bonds today...

[ChpBstrd]

Jesus. If you think stocks are having a bad day, check out long term bonds today...

ZROZ is down 3x it's ANNUAL yield... today.

[bacchi]

I follow McClung's strategy, which suggests selling stocks to buy bonds when the portfolio is +20% for the year.

VGSH (short term US treasuries) is -0.15% today (and -3.1% vs SPY's -12.4% for YTD).

[habanero]

Jesus. If you think stocks are having a bad day, check out long term bonds today...

ZROZ is down 3x it's ANNUAL yield... today.

30y (and pretty much 5-30y for that mattrer) are still "only" yielding just north of 3%. This can still get much, much worse. And bonds aint offering much cushioning for equites these days. At least not if the bonds have some duration.

[vand]

I follow McClung's strategy, which suggests selling stocks to buy bonds when the portfolio is +20% for the year.

VGSH (short term US treasuries) is -0.15% today (and -3.1% vs SPY's -12.4% for YTD).

Well, cash is -0% today... which is much better than most other asset classes.. it doesn't mean it's a good idea to hold more than a sliver over the long term (or even the medium term, at this rate) - cash has lost 98% of its purchasing power over the last century due to inflation - and some currencies have lost much more.

Likewise, without the tailwind of higher coupon payments, T-Bills will get killed by inflation. It may be a more gradual decline that long term bonds, but that is why it is so much of danger - most people only think in nominal terms and forget the insiduous lost of purchasing power that inflation is doing - boiled frog etc

[maizefolk]

Well, cash is -0% today... which is much better than most other asset classes.. it doesn't mean it's a good idea to hold more than a sliver over the long term (or even the medium term, at this rate) - cash has lost 98% of its purchasing power over the last century due to inflation - and some currencies have lost much more.

Based on the March inflation data, the current best guess is that cash was -0.04% yesterday but we won't know for sure until mid-June when the May inflation data is posted.

[MrGreen]

Jesus. If you think stocks are having a bad day, check out long term bonds today...

Moving to TIPS keeps looking better and better!