By Guest Blogger Ryan Lewenza
With our expectations for a Fed rate hike of 25 bps in December, and two more 25 bps hikes in 2017, should clients/investors be selling their bonds? The answer is an emphatic no!
In my last blog post I highlighted the significant back-up in US government bond yields on expectations that Trump’s policies will lead to higher inflation down the road. For example, the US 10-year Treasury yield has surged 60 bps to 2.40% since the November 8 election day.
With the back-up in bond yields (and declines in bond prices) we’re once again hearing from the financial media and so-called “experts” that the 35- year bull market in bonds is about to end and that investors should rush out and sell their bond positions before it’s too late.
If I had a dollar for every time I’ve heard this in recent years I would have about $25 or just enough to buy a Trump “Make America Great Again” hat.
So Ryan, which is it? You see further Fed rate hikes but continue to recommend exposure to bonds?
Essentially, we believe interest rates have bottomed and will grind higher over the next few years but believe the Fed will be glacially slow in raising interest rates and see rates remaining low from a historical context. Here’s why.
First, we see interest rates remaining lower than normal because the US government simply cannot afford significantly higher interest rates given their ballooning US debt load. While the Republicans like to blame the Democrats for the out of control deficits and debt load, the reality is both parties have contributed to the massive US debt load. Under President Bush II, US federal government debt doubled from roughly $5 trillion to $10 trillion, and under President Obama, it doubled again from $10 trillion to the current $19.9 trillion level. Incredible! A couple of wars and a major economic meltdown can add up pretty quickly.
Now what’s interesting is that the interest expense on this debt as a percentage of the overall US budget has actually declined from roughly 20% in the 1990s to just 10% today. How can this be? The answer is that as government bond yields have declined to historic lows, this has more than offset the impact from the dramatic rise in debt over this time.
With the US government owing nearly $20 trillion, if interest rates were to jump materially from their current low levels this would dramatically increase interest servicing costs, putting serious stress on the US budget and spending programs. The Congressional Budget Office (CBO) projects interest costs to rise 250% from current levels if the 10-year yield rises to 4% by 2026. By 2030 they see interest costs representing over 14% of the federal budget versus 10% today, and rising further in future years. Given this, and the fact that the US population is aging, which will only add to increased costs in the coming years, the US government can simply not afford significantly higher interest rates, which we believe will help to keep them well anchored at historically low levels.
US Gov’t Interest Expenses Have Declined With Low Rates
Source: Bloomberg, Turner Investments
The second reason we see US (and Canadian) interest rates remaining relatively low is that they are approaching “fair value” based on our model for forecasting interest rates. I’m going to get a bit geeky here but I built a financial model using different inputs (e.g., inflation, economic activity), that has helped explain/predict the level of the US 10-year government bond yield. My model, which has a high level of predictability (high R-squared for you quant geeks), currently suggests “fair value” for the US 10-year yield of 3% compared to current levels of 2.4%. So, we see interest rates rising a bit further from current levels but for the US 10-year to be capped around 3% over the next year.
Turner Bond Model Suggests 3% 'Fair Value' US 10-Yr Yield
Source: Bloomberg, Turner Investments
Finally, another important reason why we see interest rates remaining low is due to the aging demographics in the US and across the developed nations. Economic growth over the long-run is driven by two key factors – population growth and productivity gains. Both of these factors are in decline, in large part due to our aging population. Below I illustrate this with US population growth declining from 1.7% annually in 1960s, to 1.4% in mid-1990s, to just 0.7% today, according to The World Bank.
The simple fact is that while Garth Turner can continue to pump out six meaty blog posts a week, many of his contemporaries are just not as productive as us 40-year olds, or those pesky millennials. A millennial these days can order a low fat mocha Frappuccino from Starbucks, pay a bill on their mobile phone, upload pictures from the previous night’s dinner at some trendy restaurant on Instagram, and try to save the world all at the same time! I can barely write this blog and drink my Earl Grey tea without spilling it all over myself.
So millennials, the next time you want to blame your parents and grandparents for leaving this world and the future in worse shape than their parents, remember to thank them for being old and them greatly contributing to the current record low interest rates that are allowing you to lever up and buy that million dollar home.
Sorry I went on a rant there, but to conclude, we see interest rates slowly grinding higher over the next 1-2 years, but see them remaining low from a historical perspective, and why we believe investors should not rush out and sell all their bond holdings. They continue to be important in portfolios as they help to provide balance and stability, while also providing a little insurance just in case the millennials are correct that the world is going down the tubes.
Declining Population Growth Should Help Anchor Rates
160 comments ↓
Nerd.
Sir Lew is an Earl Grey tea drinker which is a sissy brand of tea and definitely not for me. Your never going to get the woman until you game up to the manly tea box called King Cole.
That was funny AND informative!
I think it fascinating that people think “higher” rates means “high” rates.
Three rate increases still equals low rates…unless you are leveraged out the you know what.
InfLewenza,I posted this yesterday but it ties in with your post.
U.S debt and budget.
Been to the doctors office lately…
M42BC
https://howmuch.net
When I was young, people bought bonds for the income. I got a bit older and the income got a lot lower, but the advisors said look at your capital gains! Now they’re insurance and rates aren’t going to rise because the debtor couldn’t afford it? Who lends to a debtor who’s on the bubble but can inflate away his own debt?
To quote an investing maxim: Don’t panic, but if you are going to panic, panic first! If I had a peso for all the sovereign debt I’ve seen blow up after the brightest and most well compensated minds in finance said it couldn’t happen…
No, if you want to defend US Treasuries, best to argue that rich people own lots of them, rich people run the US government, rich people don’t want inflation, so we’re good. Except that a lot of vocal, Republican-type American rich people have been arguing for higher rates — and not just 1/4 or 1/2 point. How could the US government afford it without inflation. Well, they could cut Social Security and Medicaid, replace Medicare with a voucher system…
Nice post Ryan…..
Earl grey huh? I thought that was only at the office.
Selling your bonds? Hell no! If bonds are on sale now shouldn’t you be buying them rather than selling them?
https://www.bloomberg.com/news/articles/2016-12-02/vancouver-home-sales-decline-for-5th-straight-month-in-november
No wonder there are so many speculators. Make over $200,000K per year just buying and selling homes. But now who is swimming naked?
The effect on prices remains muted. The benchmark price for a single-family detached house in Vancouver rose 23 percent in November from the same month last year to C$1,511,100 ($1,137,000).
Year/year comparisons are now less vital than month/month. Stop looking in the rear view. It’s done. — Garth
How do you see the slow increase in rates playing out for interest sensitive Pref ETFs such as rate reset ZPR?
The Pit Bulls in this room will have a field day with this essay, as I am moving to the corner. Methinks that Sir Lew is hiding something in his Earl Grey more times than just a few.
Excellent article.
Continuing with this line of reasoning (which I agree with), do you anticipate another round of Fed QE to keep a lid on rates as the so-called “bond vigilantes” drive rates up (as is already beginning to happen)?
I ask, because in light of Trump’s proposed tax cuts, coupled with multi-Trillion dollar fiscal stimulus and the resulting soaring budget deficits that will add supply to US Treasuries, someone has to soak up the bonds, right? And as you alluded to, the public is in sell mode…
If so, do you see this as bearish for the dollar and bullish for gold? Or do you see a scenario where the dollar strengthens in tandem with QE4?
Also, you touched on aging demographics… How will a shrinking tax pool affect government finance at a time when social security obligations will be skyrocketing? Is there any scenario where the Fed doesn’t do QE4?
An increase in yield from 2.4 to 3 percent still implies a 20% drop in bond prices. Does this mean VAB will drop from $25 to $20? That’s worth waiting for.
Good stuff, thanks Ryan.
We appreciate your erudite commentary Ryan.
Finland isn't alone in trialing a universal basic income, Canada is trying it as well
If this goes through you can forget about holding assets in Canadian dollars. Canadian banks are already rolling out new trading accounts in various foreign currencies for the smart money. Beware.
Re: “First, we see interest rates remaining lower than normal because the US government simply cannot afford significantly higher interest rates given their ballooning US debt load.”
-This is just delayed currency devaluation. We all know they’ll never pay this back and we all know they can’t operate within their means (they have to borrow more every year). The only way to fix this situation is to print more money. Hold interest rates low, and money is not worth as much. “Hard asset” values increase (because people can borrow to purchase them). Increase interest rates and you’re printing money to keep up with the interest on government debt.
Look for a currency crisis if this situation with bond yields keeps going.
Interest rates and bond prices always move in opposite directions (because a bond is in essence a fixed interest rate for a fixed period of time, if rates are going up, then you can do better by purchasing a newly issued bond, than you can by purchasing an existing bond….so bond prices go down. If rates are going down, then existing bonds are worth more than newly issued bonds because they have higher rates).
As the US government debt pool slowly comes up for renewal, they are going to be borrowing at higher rates. They already cannot fund the operation of their government without borrowing. This just results in a debt spiral, which will require money printing to get out of.
It should be an interesting situation, because the US Federal Reserve banking system is essentially a fiat currency system.
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I guess it’s not as bad as Canadian geese being blamed for bringing down the plane on the Hudson…
M42BC
http://news.nationalpost.com/news/world/beaver-walks-into-maryland-store-finds-only-artificial-christmas-trees-and-proceeds-to-trash-it
Earl Grey is a tea?
I thought it was the colour of his hair…
M42BC
Hi Ryan … though I largely agree with your analysis, I suspect looking at the graph for your model, that the relationship between your model and reality may be no longer accurate as of around 2011.
Prior to that year, you have a tight relationship between the blue and green lines. However, from 2011 onwards there is a large divergence between the blue and green lines and indeed the relationship looks like it may have inverted.
Over to you!
Cheers,
Carol
Ryan,
It appears that your US bond yield model model has recently been off by over 100%. Approx 1.6% to approx 3.6%. You expect 10 year bonds to settle in at 3%, is it not possible that you might be off by a percent or two.
Secondly, is it possible there might be an appearance of conflict of interest in such that if a client was to take their bond position and put that into cash you firm would no longer be making a 1% fee on those funds.
As an example if you firm was managing 500 million and 40% was in bonds that would be 200 million. Now if that 200 million went into cash your firm would be out 2 million in fees.
Do you see how that might be a concern for a potential client?
The US debt is an illusion of about $20 Trillion created out of thin air with interest payable. It wouldn’t surprise me with a Trump moment if he knocked down the debt one day by declaring a new dollar reset evaluation.
Taiwan indicts ex-head of bank linked to Panama Papers
Published
Dec 2, 2016, 11:30 pm SGT
http://www.straitstimes.com/asia/east-asia/taiwan-indicts-ex-head-of-bank-linked-to-panama-papers
Thanks for the primer on bonds Ryan…however I (and millions of others) would never own such a thing. Bonds are simply tacit approval for govts to tax you 10 yrs down the road to pay for your “yeild”. Nope. Starve that beast.
Getting through U.S. Immigration
https://www.facebook.com/TheHookOfficial/videos/1619254381473347/?pnref=story
Context I appreciate the invite to your swingers club/pub on last blog but it’s my night off ;-)
– I made my donation at Dollarama today, lineup was long.
Want to know why Canadians are in for so much trouble?
DEBT, DEBT, DEBT, and even more DEBT, that’s why.
Here is a great story from Zero Hedge that explains it all:
http://www.zerohedge.com/news/2016-12-02/new-american-dream-life-hock
Quote: “We live in a society driven by debt.
Cars, for example, have become hugely expensive (even on the low end) relative to what people can afford – because of the easy availability of credit. Which is the nice word used to speak about debt, intended to encourage us to get into it.
It takes at least $15,000 or so to drive home in a “cheap” new car, once all is said and done. And most new cars cost a lot more money. Which most people haven’t got. So they get debt. A loan. Which, when it becomes commonly resorted to as a way to live beyond one’s means as a lifestyle, drives up the cost of life for everyone. Including those who try to live within their means.”
And if that article was not enough, here is a video that explains the typical situation of MOST Canadians:
(“I’m in debt up to my eyeballs… “)
https://www.youtube.com/watch?v=r0HX4a5P8eE&feature=youtu.be
Now when interest rates go up, like Garth has been saying all along, 80% of Canadians will have no choice; they will have to declare bankruptcy.
This GIF shows how much more the U.S is more dependent on Canadian oil since the turn of the century…
M42BC
https://howmuch.net/articles/oil-imports-gif-15-years
This one’s for you, Ryan.
https://youtu.be/R2IJdfxWtPM
Actually millennial are screwed because boomers are living much longer now and have left them an overpriced house which will be used to pay for their nursing home for longer than expected. Millennial is left with a crappy job market that is insanely competitive, inflated everything and high debt left behind. Make Canada great again!
IN regards to selling your bonds, they are right you may be wrong when a big market crash comes and your returns get killed because you have no bonds.
No Bonds for me
I have never owned a bond or a bond fund or a bond ETF in my 28 years of investing. And I won’t start now.
I shall continue to be an owner not a loaner.
But to each his own, and for most people some allocation to bonds may be appropriate.
When will the US voters begin to realize they have been had?
http://www.marketwatch.com/story/when-will-trump-voters-realize-theyve-been-had-2016-12-02/print
My take on rising interest rates is this may be a pivotal time for trend investing. Life Insurance companies/Sector ETFs should begin to do better
Damn,I’m only 18.5 million dollars short…
M42BC
http://www.remax.ca/bc/vancouver-real-estate/na-1316-connaught-drive-na-wp_id137383913-lst/
Self addressed as we I believe is reserved for members of royal families, bi-polar people or members of various (useless) committees
Sir Lewenza, you must then be a member of the first group.
I beg pardon for all previous and future comments on your blog
I think there is a second, larger trend looming that will lead to lower growth in the future: Thermodynamics. And unfortunately it’s something economists can’t hardly understand let alone do anything about. Here’s how it works and where I think we’re at:
The industrial revolution right through 2006 was a period of incredible economic growth, and that growth was underpinned by increasingly large amounts of cheap energy. First it was coal, and then later oil and natural gas. The Energy Return On Energy Invested (EROEI) was incredible. In the early days of the Texas oil boom it was perhaps 100. (You got 100 barrels of oil for every barrel you burned running the rigs and such).
This high EROEI meant anything was possible. 10 mpg in your Lincoln? No problem. Make electricity with oil? Go for it. Air travel? Why not? Air condition all of Florida? Absolutely. Energy was cheap and abundant and the supply kept growing every year. OPEC had to curtail production just to keep prices from crashing.
However, the days of 100 EROEI are behind us, despite the current oil supply glut. As the EROEI declines, more energy is required to produce say oil as an example, and less energy is left over to power other parts of the economy. Think oil sands and shale oil for example. The amount of labor, energy, and materials that must go in to extracting a barrel of oil from oil sand or shale is considerably higher than from conventional oil fields. Offshore oil as well.
We aren’t in any danger of running out of oil any time soon, but peak “cheap oil” was probably in 2006. We’ve made up the difference between rising demand and falling conventional production with things like shale oil, but it is probably not economic to do that at below $60 a barrel. (Which is why you should enjoy the sub-$60 prices while they last, they won’t).
So what will happen from here is that energy prices will slowly but surely rise as less of the energy mix comes from high EROEI sources and switches to low EROEI sources like shale oil, wind power, solar, etc.
Don’t believe me? Check out wikipedia:
https://en.wikipedia.org/wiki/Energy_returned_on_energy_invested
Looking at the first chart, hydro has a really good EROEI of 100, but there aren’t a lot of good hydro sites left that have not already been built. World oil production EROEI has declined to 40, it used to be much higher. New oil discoveries are even lower yet. Stuff like solar is so low we will never power an industrial society that way, a major breakthrough in solar efficiency would be required. Oil sands, ethanol and biodeisel are almost a complete waste of effort (other than that ethanol is a much cleaner and safer octane booster than lead or MTBE was).
So what’s going to happen is the net mix of energy sources is going to move towards wind at an EROEI of about 20 (and it’ll take a lot of windmills), down considerably from where it is today and down drastically from the start of the industrial revolution.
Conservation will play a key role going forward, but spending your hard earned money adding insulation to your house and selectively not heating certain rooms does not feel like economic expansion to anybody. Neither do Smart Cars. Electric cars are a real bummer when viewed from an EROEI point of view because not only is the wind power EROEI already pretty low but now you also need a much more complex and inefficient energy delivery system including transmission, battery storage, battery recycling every 5 years or less, etc. Way more complicated than a jerry can of gasoline.
All of this means an increasing amount of economic effort will be dedicated to energy production and conservation efforts, leaving less and less energy production available to the rest of the economy, which will therefore shrink in comparison. The process is already underway, but keep in mind this is a process that will unfold over 20-50 years. We aren’t out of cheap oil yet.
Unfortunately engineers make better economists than economists make engineers, so this whole subject has mostly eluded the economists. They only see the charts and GDP numbers, they do not understand the physics behind them (or at least not very many do).
As we slide down the EROEI curve, more and more resources will be required to produce growth in the economy and that will have a slowing effect. At some point in the future, GDP might be growing at 2%, but it’ll be 5% in the energy sector and some number much lower than 2% everywhere else, perhaps even negative. During the shale boom I think the US was already there. And that’s where we go again once Saudi Arabia realizes that throwing their remaining cheap oil on the market at maximum rates isn’t good for them long term.
Informative and enlightening…..
not to mention the fact that you’re secure in your masculinity to admit you drink Earl Grey tea to the unwashed masses…..
That house I just put up shows you how rampant the speculation is in Vancouver.
It is assessed at 12.3 million and was last sold in May 2014 for 11 million.
Relax listing says over 350 days but it’s fresh on Zolo.
I’m sure they did 7 million dollars in upgrades and are upstanding members of the community…
M42BC
Rants on millennials are tasteless, self righteous, and show a great lack of wisdom in my opinion. What’s your deal?
Addition (as if the first post wasn’t long enough).
So back when oil had an EROEI of 100, for every barrel of oil you burnt drilling for more oil, you got 100 back and 99 barrels of oil went to other parts of the economy.
With wind at 20, for every 20 windmills you build 19 can power the economy but one of them has to power the windmill factories. It is 1/5 the return.
Unless we come up with another high EROEI energy source, which doesn’t seem like it is on the horizon, economic growth is going to slow considerably, at least outside the energy sector.
Some people say Thorium nuclear reactors are the answer, but if so you would think someone would be able to build one and make money already. Some people say hydrogen fusion will be here in 10 years, but that’s been the case since the 70’s. Short of a revolutionary breakthrough, true global GDP growth outside the energy industry probably ended in or about 2006 (which is why the banking crisis probably followed in 2008).
22 Context on 12.03.16 at 4:46 pm
The US debt is an illusion of about $20 Trillion created out of thin air with interest payable. It wouldn’t surprise me with a Trump moment if he knocked down the debt one day by declaring a new dollar reset evaluation.
——————
Zimbabwe did that. They knocked 12 zer0’s off their currency and saved the country.
Very nice post. Thank you! Clear, persuasive and funny. The funny thing seems to gain momentum each week.
Sorry I went on a rant-Ryan
Huh?
Dude why are you apologizing for anything, I have so much to teach you grasshopper.
Another night at Seneca Allegany, Free Booze. I’ll be back with more lessons once I’m in the writing sweet spot. somewhere between the 3rd wine and the second shot of JD. My tolerance is of the charts.
So you agree the real estate prices will stay high until interest rates will go up significantly from today’s rates… 2.5-3% minimum…..
Please help me – I have 1,000,000.00 and want to invest it all in blue chip stocks that pay a dividends, what stocks should i buy? Thank you friends- sincerely helpme
York University will be taking applications in January 2017. They will be offering a Masters Degree in Real Estate and Infrastructure MREI, as a full one year course of study.
But that million dollar home would only be worth half that except for record low rates. I’m suppose to thank a boomer for inflated housing costs??
Gee whiz….thanks guys. I knew you lot were good for something.
I am completely confused on bonds. If I buy one and hold it to maturity, don’t I get my original money back and the coupon interest it pays all along? So why the big deal?
Penny Henny “It appears your bond model has been off by over 100%”
Yes your correct that it has been overestimating yields lately but that is because of the Feds QE policies with them buying trillions of govt debt. Their actions have artificially boosted bond prices and pushed rates to record lows. But now that they have ended their QE policies rates should normalize. Your other comment regarding being paid on cash, we always hold 5% of cash for buying opportunities and to help reduce volatility. If we decide to raise cash then that is a tactical call to reduce risk in the portfolio. If we’re correct on the call and reduce risk/downside on their returns then we’ve done our jobs and earned our 1%. Clients pay us to protect and grow their capital. If we do this correctly then we’ve earned our fees. – Ryan L
Very interesting and informative post Ryan – thanks! Looks like bank and insurance stocks are going to continue to do very well going forward!
Why would you own bonds when you can own all the Canadian Bank stocks that pays collectively over 4% and you also have long term stock growth. This year I’m up 23%(won’t happen again for years) and expect to average 9% over time. The only trick is you can’t sell in bad times when prices are low. You have to wait it out with the knowledge that stock market corrections historically reverse themselves over time and you still have the dividends to increase your wealth.
I have done this myself and have no regrets and look forward to a good future.
I’ll tell you when to sell your bonds: when the s&p 500 drops 40%. Rebalance heavily into more equity.
#33 Dark Matter on 12.03.16 at 6:06 pm
When will the US voters begin to realize they have been had?
///////////////////////////////////////////////
I generally stay away from politico topics but ‘Trumpism’ is actually pretty left if you really think about it.
Goberment: company xyz, you can no longer manufacture in abc. You must do so here, or else!
Goberment: company xyz, your foreign capital must return home and pay!
Goberment: populace xyz, yer jebs belong here and I’ll force them to be!
Goberment: populace xyz, your manual labour will be the backbone of this great land!
Hmm sounds sort of familiar doesn’t it?
Carol Edwards “Your model looks off since 2011”
Agreed but that’s due to Fed QE policies which manipulated bond prices and drove bond prices to record highs. However with the Fed ending its QE policies and the Fed now on the cusp of normalizing rates my model should get back on track with bond prices reflecting actual fundamentals. – Ryan L
My real (rate less CPI) 10 Year Bank of Canada Bond chart has been rising since it bottomed at the beginning of the year.
http://www.chpc.biz/real-10yr-rate.html
The previous attempt at real rates breaking out to the upside was for 24 months from Jan 2012 to Jan 2014.
This time we have ending action in some markets; Vancouver real estate for one http://www.chpc.biz/vancouver-housing.html
With a pending Trump White House and a move towards fiscal rather than monetary tools (in Canada as well), another market facing ending action is indeed the bond market.
U.S. Municipal bonds are plunging.
#15 Aggregator on 12.03.16 at 4:11 pm
Finland isn’t alone in trialing a universal basic income, Canada is trying it as well
The case for universal basic income (UBI) has been made by financial experts, economists, government officials, and tech moguls, alike. So far, except in the case of Finland, all the talk about UBI has mostly been talk. That’s all about to change now, with Ontario, Canada preparing for its own pilot basic income program in 2017.
If this goes through you can forget about holding assets in Canadian dollars. Canadian banks are already rolling out new trading accounts in various foreign currencies for the smart money. Beware.
—————————–
It will be global. Nowhere to run, nowhere to hide. That is their goal; A cashless society where the government will have complete control over every aspect of your finances… Basic income is how they will achieve it. First, they will give everyone free money. Then, they will increase the amount. Soon, they will hyper-inflate the debt away and only hard asset holders will have a pot to piss in. People with $1,000,000 bank balances will wake up one day to find that their purchasing power has been reduced to a point where they were once rich, now just like everyone else – and totally dependent on the government. Negative rates. Spend it or lose it. Can’t save it by converting it to cash – it won’t exist.
Direct confiscation of your funds, right out of your bank account will be their modus operandi when they shift into jackal mode… Basic income is the carrot – the lefty muppets will be clamouring for it, the STICK is the tyranny that will follow…
I hear that the really smart money is moving their money into assets outside of the central planners’ control. ;)
In typical environments where leverage is within its long run average you can argue that the rates will stay low because the government can’t afford higher rates
But make no mistake Ryan we are on the edge of a global loss of confidence in government bonds – it has already started in Europe and will accelerate over the next 12-18 months there from where it will jump to Japan and then USA and Canada
Sovereign Debt Crisis = rates go through the roof and it does not matter what the government can afford or that the demographics are poor
Many of the assumptions and theories taught to us about bonds and markets are junk
History shows tbe system always re-sets and collapses
Sovereign debt crisis always results in a spike in interest rates
This is most probable within 3-5 years across the G20
What was the R squared value (> 0.90 considered very good)?
Have you tried Polynomial Regression instead (you can project forward using it and get an R squared) rather than Solver, if using Excel?
If you know how to do the above, then would mind for once labeling the damn vertical axes when there are 2 of them and the horizontal when it not quite so obvious what it is.
;-)
bsant
Interesting post Ryan
“I can barely write this blog and drink my Earl Grey tea without spilling it all over myself.”
Ryan, we hardly know you, yet here you are spilling True Confessions.
Maybe next time Master Garth hires, he’ll get a woman financial crackjack genius. Everyone knows women are GREAT at multitasking!
I bought both VSB and XCB a few months ago for my portfolio.
Correct me if I’m wrong but VSB yield will grow, while it shrinks in value, right?
I know nothing about these holdings… I only bought them because Garth recommended them. I also haven’t seen any huge losses (so far), nothing like what I keep hearing everyone say how the bond market is “blowing up”.
I know Garths strategy is a long term one… but so far I’ve made more money on Dollarama when it dropped to $93.
Still filling in the pieces to my Garth strategy.. but going to wait for 2017… I think there will be some discounts then.
Nailed it! I knew Garth got it all wrong with low interests and housing prices! It was a blessing really, except in disguise.
#26 TurnerNation: – No problem but one of the gals from Sweden will be disappointed who are attending Grad School. They didn’t care for the tower units at all, so daddy bought them the townhouse home with two fireplaces instead. I will take care of both later tonight and sorry your taking the night off. Cheers!
Bond – James bond – shaken not stirred
How many of you realize that many of The Donald’s policies are aligned with those of the left from the 1980’s. Think back; the left (including a self-professed Commie from York University who wrote books on the subject) were wanting a return of manufacturing jobs, protective tariffs on foreign goods, a halt to illegal immigration undercutting their union jobs, they were in opposition to Free Trade, etc.
Trump just won again, the recounts are a non event.
Next win will be Nov 18 iirc.
In the meantime he will keep racking up small wins that score huge points with the working class (those millions of average Americans that the Clinton campaign wrote off as deplorable) while the ‘dishonest media’ goes into hysterics claiming his Presidency that hasn’t even started yet is a disaster.
CNN already has a full time ‘Conflict of Interest Watch ‘ set up so you know they will over play that card before The Donald takes office. Giving him free reign after that.
I guess journalists really aren’t that smart.
Sorry for all the political talk but seriously,once you have your portfolio set up do you really need to update or worry about it every day? I sure hope not.
The election is far more important and entertaining.
#61 Pete
Excellent point and true for the most part. I only suggest that Trump is a little bit of a libertarian, but an all over the map pragmatist as well.
This is one of the many fascinating aspects of the election. Trump is completely changing the Republican party base.
If he succeeds it looks like the R party will be the party of the average American, the lower and middle class with a handful of self made rich folks.
The Democrats are clearly the party of the rich elites now, who believe that anyone who disagrees with them must be either racist, stupid, or most likely both.
I have my money on the average Joe and Jane to be the long term winners.
Please get help your for your illness of the mind. Stop being a total troll
I guess he decided to continue to avoid posting any source
Unfortunately I predicted it :(
#45 Help me please on 12.03.16 at 7:08 pm
Please help me – I have 1,000,000.00 and want to invest it all in blue chip stocks that pay a dividends, what stocks should i buy? Thank you friends- sincerely helpme
Split it equally and put it in the Big 5 banks. Over decades nothing beats that
The coming crash of the dollar and hyperinflation will merely be the start of the real nastiness to come.
Mass starvation and wide spread death across the land will crazy as it sounds, seem like the good old days compared to what comes after that.
But that’s for sometime in the 2020’s
Not to worry
Not yet.
I generally stay away from politico topics but ‘Trumpism’ is actually pretty left if you really think about it.
I agree. Trump is no Republican. He’s a Democrat in Republican clothing. No doubt.
The coming crash of the dollar and hyperinflation will merely be the start of the real nastiness to come.
I think the CAD may have stabilized. Our economy isn’t that bad and the strengthening US economy will continue to pull us up. BoC will no longer cut but raise rates. The CAD looks good from here.
But the FED is separate from the U.S. Government so why would they keep rates low so the gov can pay less interest? Why would the FED care? And if government spending does increase inflation then wouldn’t the FED have to increase rates to control that inflation?
Surely you’re not suggesting that economic productivity is about age… as opposed to what the economy engages in doing? Ie housing, manufacturing, innovation, etc
# 51 Bankish
This has been my strategy also and it has worked beautifully for me. Reinvest the dividend if you are not retired, take the cash flow if u are retired.No need to pay anyone to rebalance my portfolio twice a year and sleep soundly every night.
Ryan….if rates need to be suppressed to manage the debt servicing costs….the risk of higher than targeted inflation becomes significant….and bond yields will continue to spike. Thus….what do you say about the carry trade? Also….in the last 4 weeks alone we have seen an estimated erosion of $1.2 T in wealth. How can this not be significant?
I am curious to know how you got permission from Garth to post this excellent article? If someone else suggested that the US can’t afford to raise rates because of their burgeoning debt we would be called a billion licker?
When you un invite your wife’s sister to your sons wedding and she sends a scathing email saying she’s coming any way. My final response.. This anit fiction. The shit I got to deal with on daily basis is all I’m saying. It’s why I drink.
She’s a left wing phyco would can’t keep a man.. I’ve replaced the real names to protect the innocent. But this was my response to total evil.
…….
Dear Si’s in law.
I’m not sure you totally understand the gravity of this scathing attack on my wife is with this email is to me.
Let me be clear, a simple I’m sorry would have worked. Don’t think you have ever once in your life put those two words together. You are one of the few people who know about my sons grave health issues.
Yet you continue to shove shit in your fragile sisters face, who had absolutely nothing to do with inviting your x husband from 30 years ago to the stag.
Your rant the night you called up my wife freaking out about it is forgivable we know your crazy, but using your daughter, our God daughter to do your vial dirty work is unforgivable. You really crossed the line this time.
You are so not coming to this wedding. I’m hiring security to make sure it don’t happen.
You sent our God daughter that we have done everything for to the host on Thanksgiving to put on crocodile tears and try and throw my wife under the bus knowing my son can die at any moment to satisfy some mental delusion you are having at this particular moment in time.
You need serious help.
We disrespected You? Huh? Really? . Why was your x from 30 years ago at your daughters wedding walking her to the alter if he’s the monster you say he is.
You’re pure evil. If you try and contact my wife I’ll put a restraining order on you. Your son is welcome to the wedding. Your daughter too if she can find the strength to put two words together. “I’m sorry.” But your not. Ever. Good bye.
God daughter get your mom some help. And if you look around the house and don’t think she needs it. Get some for yourself.
Your poor baby brother….
Uncle Smokey.
#33 Dark Matter — “When will the US voters begin to realize they have been had?”
I love the collective media navel gazing over this. For a year it regaled us with tales of cheating, lying Trump (and a few about cheating, lying Hillary). Then Trump pulls it off, and they’re all OH NOES! If only we’d told the bumpkins even MORE about their candidates, they’d have made the right choice!
Is it possible that your average swing voter was thinking “they’re both lying, but I like his lies better”?
nonplused:
Thank you for your work and comments. I will not be buying a Fort Mac home soon. Suncor has lowered its cost of production from ~ $27/bbl to about $22/bbl over the last year. So suppliers and labour has faced $ suppression.
On thermodynamics, I recall asking my parents as a 7 year old, does hot water make cold water warmer than cold water makes hot water colder. That was before I was taught that heat lost equals heat gained.
I was lucky in that my mom’s first degree was in physics.
It is hard to escape some rules.
I can barely write this blog and drink my Earl Grey tea without spilling it all over myself.
———————————————————-
I didn’t spill my tea (don’t recall if it was Earl Grey) but broke into a fit of laughing when I read that comment. There’s no rule that says financial blogs have to be boring!
To my rival. Fellow Nictonite who’s gone rogue. Hillary supporter.
https://youtu.be/BP0IXOr9O8U
When you and a demented crew member from Nictonite fly to area 51 only to get nuked in the safety of your orange plasma flier and you start singing this tune.
https://youtu.be/R044sleOW6I
Your partner freeks out.
Parksville Prankster “How do you see higher rates impacting prefs and zpr?”
Higher rates should be supportive of the preferreds and zpr. Perpetuals should underperform while fixed resets should do well so I see zpr doing well over the next year. – Ryan L
When you need all eyes off you on the Las Vegas strip to save crunt, you blast this song all over while while Barrington youthfullizes the old.
https://youtu.be/AdKNlGfkyhc
Booze and tunes. Only thing keeping me from playing superman on train tracks.
Life is hard. I’m hard, my wife will disagree. But live me anyway. That’s all that matters. The loons on the left dont get it.
Nothing else matters bit. Blue hair and rage. Let’s see how far that gets you Freek.
I’m of the view that government bonds, at least in Canada, still have another leg down to go. Until they hit bottom. Despite the past month or two of sell-off in response to pressures that largely are originating from and are unique to the USA.
Why? As Canadian house prices continue to deflate, and as questions arise over the value of housing-backed debt, MBS and various corporates may very well come under pressure. The Canadian dollar itself is quite under-owned — appearing in negligible, if not almost zero weightings of global reserves, and Canadians are highly indebted in Canada to domestic lenders (debt is a short on the CAD$!). As deflation sets in and debt needs to be repaid (ie: shorts closed), the Canadian dollar, and proxies for the Canadian dollar such as CAD$-denominated government bonds, are apt to become quite a bit more interesting. Throw in foreign buying demand due to a weakening of the USD$ and global rebalancing, and I still think we could see sub-0.8% GoC 10-year yields before Canada hits bottom. I know it might be hard to fathom, but the 10-year GoC could definitely approach 0% as CPI goes profoundly negative in a falling spending, rising CAD$ environment.
If the Liberal government manages to repeat its magic of the 1990s, of balancing budgets (so far, Trudeau’s fiscal record is actually much better than expected, given the state of much of Canada’s economy in O&G and RE), that would serve to further decrease bond yields and strengthen the CAD$.
Of course, as explained in my earlier post, falling yields on government bonds won’t help retail, RE-backed borrowers. As rising risk premia (and even OSFI restrictions on leverage) will offset any decreases in funding costs for mortgage lending institutions.
So yeah, don’t count bonds out. They belong in balanced portfolios, just like gold, stocks, RE, etc. But don’t get too carried away either.
When a short cop straits shooting up your room cause he don’t know who Denzel Washington is. Your safe in the comfort of your orange plasma flier while they empty every clip this is the the song they hear. In big time decibels.
It’s in the book
https://youtu.be/bg5eF4Ld-Fw
Speaking of bonds give me a headache, the preferred share issues I purchased are doing well – for now. I hear people have had miserable experiences through ETF’s. All I can say is that preferred EFT’s seem to be treated as a proxy on future interest rates. Interest rates go up, preferreds go down. It is not that simple.
Last year about this time, I began to target preferred resets (cumulative) because they were discounted. I purchased 9 issues over the next few months. The results are gratifying (~ 50% capital gain). Unfortunately, I only committed about 40k$ to the endeavour.
I use Quicken Home and Business software to track every dollar except cash transactions. I am good to go with a cashless society as I only spend less than $30 a month using cash. Quicken allows me to analyze my finances. I thought I would look at individual share returns.
I have one that returned 3000% but I only have 8 shares with a current market value of $4. I had the chance to load up – arrgh. C’est la vie.
I neglected to include in my comment above a pithy paragraph. At least IMHO.
I consider Shell as an astute outfit. No, not at the level of Garth, Doug and Ryan but far from being a slouch.
About 10 days ago it said the capex era north of Ft. Mac is in the rear view mirror. Sorry, construction labour but you can go on the hunt of a job at the Site C Dam.
From here on in, in Shell’s view, it is time to high grade and make some cash. One nice thing about shovelling, trucking and moving a filthy froth is that an oil sands operation produces a small amount of money over a very, very long time, say about 40 years for a mine.
Still not buying a homestead here in the Taiga.
Only thing I dearly regret is not getting a lenord Cohen’s tunes into the book.
Next one will have a shit load of his tunes and Gord Downey s
I’m Canadian after all. Proudly so.. Insipte of the mental cases running all levels of govt.
Woo Hoo!
Still time to speculate on TO real estate based on your low interest rate model.
They I decide to retire look over to my wifes newly cut bangs and black hair die.
We got to go.
https://youtu.be/wJVpihgwE18
“On thermodynamics, I recall asking my parents as a 7 year old, does hot water make cold water warmer than cold water makes hot water colder. That was before I was taught that heat lost equals heat gained. “
The concept of entropy is useful here. Yes, there was no net loss of heat from mixing the two temperatures of water. But the combined entropy of the mixture was less than that of each individual component prior to mixing.
I guess he decided to continue to avoid posting any source
Unfortunately I predicted it :(
Plenty of sources have been given over the years, as well as original research from myself and others. Ross Kay has publicly stated the same, derived from independent research (with a completely different method, based on micro-analysis, not macro-analysis), and is willing to put his name on it. As I said then, and I’ll say again, please get help.
And for my final song of the evining. Heard this one at 13. Long before I new anything about anything.
Its in my brain every waking moment… Since then. Works for me. I know shit.
https://youtu.be/G5NtzB-voZo
#41 Pete – Isn’t Trump going to sell ‘Federal’ lands to pay debt, being as its apparently unconstitutional for government to own most land, and buying it was a big part of where debt came from?
#27 Freeman — “We live in a society driven by debt.”
Consumer and government debt. Before that it was corporate debt, to build airlines,* railroads,* canals,* steamships,* and sailing ships.* Before that, kings and emperors went into debt to fight wars. Before large scale debt but after the invention of agriculture, we spent our time and resources building monuments (e.g. pyramids, and long fortified walls). Societies apparently need stuff to spend their productive output on, no matter how useful or useless.
* – and lots of them turned out to be uneconomic propositions
Midnight confession, poor millennials. Never got to hear this shit. Blue haired Freek show teachers is why.
Smokey is in the house.
Enjoy
https://youtu.be/5nZnqtDdsws
Naked under my white robe while kids that associate with victim hood paint my fence. Come in lads I’ll show you the way.
I’m a knight.
https://youtu.be/MjUqfRrWwcM
When a Nictonite swims in a salt water pool.
https://youtu.be/hnP72uUt_pU
When you can love everyone no matter how messed up there brain is. You’ve made it.
Don’t need God to tell me that. Take my kid ass hole.
I’m not punching you. But my wife is going kill you.
She’s in the book.
Ha
From bonds and millennial, the discussion closes in on thermodynamics. That’s a new one.
Completely OT:
The concept of EROEI is as fundamental as the 2-nd law, except for the energy users. Any living organism must, (cannot be stressed enough), get more energy than it expands, in order to exist.
Humans, by means of intelligence (the capacity to imagine the future by taking reference from the past and the present) are capable of shifting the EROEI to the future. This is called “capitalism” in the present narrative, but it was always the same, all empires (past civilizations, really) have had the same narratives (including their heroes, but minus the paper-and-bytes promises, these are relatively new). The positive EROI is done by way of promises of more in at some point in the future (always), for as long as the promises are not invalidated (up until now, this was the case). In this case, the promises will be invalidated, and the energy will not be there, because of its own EROI.
TL;DR: Basically, no one will lift a darn finger for the great dream of the day, if (s)he does not get some more out of it. And this time around, the energy will not be there if they ever will find a reason to lift the finger after the dust settles.
Cohen tell God not to take my kid before the wife.
It won’t well end fit him..
https://youtu.be/ZX0CfFdk-jw
EROEI? Even the creator of the peak oil theory figured fossil fuels were only a stopgap until we switched to nuclear. No, not fusion or thorium or any other exotic unproven technology; just plain old uranium fission. It’s an option. If it remains our only option when other energy sources become untenable, it is what we will be using.
When the ucc says I’m taken one of yours
You look back and say.
https://youtu.be/1dAwI_jqcFQ
Does that mean a potential 65 cents to 1 CAD? That’s cheaper houses for upset hillary supporters moving to Canada.
I could go for a rate reset on currency and the dollar!
Re: #48 kothar on 12.03.16 at 7:19 pm
Yes as long as the company doesn’t go bankrupt and is in good financial shape when the bond returns. Long term yields will go nowhere as the yield curve flattens. The 30 year yield will probably stay below 3 percent for the next century due to the laziness of the present day millennials and no demand for money.
Re: #68 ChrisPitzel on 12.03.16 at 8:52 pm
The big 5 banks are one of the worst places on Earth you could possibly put money. All the smart investors are short the Canadian banks. The end result should be a loss of around 80 (eighty) percent of your money if you’re long Canadian bank shares. Less in the case of the TD bank as they have a large exposure in America.
#86 Mark on 12.03.16 at 10:32 pm
Plenty of sources have been given over the years, as well as original research from myself and others.
Thanks for confirming that you have no sources. Repeatedly.
Just for readers. To stop discussion simply 1) ask for source of data and poster will a) declare sources already provided and b) call you a troll.
I called it.
Nov 7th, 2013 4:37 pmPlenty of sources have been provided. No fiction. Not claims. Facts. Your trolling should be disregarded.
http://forums.redflagdeals.com/vancouver-housing-bubble-1194032/343/#p17716101
Dec 17th, 2013 8:39 pmI cite tons of proof and plenty of sources.
http://forums.redflagdeals.com/prediction-future-toronto-prices-2030-a-1143123/7/#p18017236
Nov 26th, 2013 4:07 pmPlenty of data out there. Why don’t you just open your eyes and look at it.
http://forums.redflagdeals.com/canadian-real-estate-boom-defying-naysayers-1351104/147/#p17849279
Mar 24th, 2014 8:12 pmI’ve provided plenty of sources and information. And there most definitely is such a thing.
http://forums.redflagdeals.com/vancouver-housing-bubble-1194032/362/#p18562057
So now the royal “We” is talking about himself in the 3rd person.. amazing!
” That’s all about to change now, with Ontario, Canada preparing for its own pilot basic income program in 2017. “
The whole idea behind “universal basic income” is that government gets smaller as you don’t need nearly as many programs such as income supports, social workers, etc., to manage the legions of people who, for whatever reasons, can’t earn income of their own.
Implemented properly, “universal basic income” actually reduces the burden on government finances versus the alternative of running a ‘big government’.
Not really sure how a more fiscally government, in theory, under “universal basic income”, would be negative for the Canadian dollar or the Canadian economy. If anything, a rational integration between universal basic income, minimum wage, and other social programs would be quite beneficial to the Canadian economy.
#45 Help me please on 12.03.16 at 7:08 pm
Please help me – I have 1,000,000.00 and want to invest it all in blue chip stocks that pay a dividends, what stocks should i buy? Thank you friends- sincerely helpme
You didn’t say which market.
I will assume TSX, and then the short answer is….
… pizzas!
And the long answer is:
You go to google finance stock screener, and filter for:
300M+ marketcap
4%+ dividend
3%+ revenue growth rate
10%+ operating margin
50%- debt per equity.
… and there they are: 10 companies only, that meet these requirements.
They are large, pay well, grow, have a healthy margin and have little debt.
Just the companies you would want!
Alaris Royalty Corp.
Boston Pizza Royalties Income Fund
CI Financial Corp
CT Real Estate Investment Trust
Computer Modelling Group Ltd.
Evertz Technologies Limited
Medical Facilities Corp
Pembina Pipeline Corp
Pizza Pizza Royalty Corp
TransAlta Renewables Inc
You’re welcome!
#86 Mark on 12.03.16 at 10:32 pm
The concept of entropy is useful here
————————-
only useful for showing you to be an insufferable blowhard. (who, once again, gets it totally backwards)
entropy is not relevant to the question posed. funny that you would raise it in a pathetic attempt to make yourself look ‘smart’ , but fail spectacularly.
—————————-
But the combined entropy of the mixture was less than that of each individual component prior to mixing.
——————————
no mark, no. wrong again. bad mark. go to your bed. bad dog.
in this case entropy increases, not decreases.
why don’t you show us you source you poncy twat.
clearly you do not understand what entropy is, yet in a sad, sad attempt to come off as superior you bring it up in a discussion with non-chemists/engineers.
FAIL.
truly pathetic.
http://www.learnthermo.com/examples/ch08/p-8a-3.php
ps: shouldn’t you be sending out more resumes?
bad mark. bad.
pps: this is the best blog on the web , why do you keep dropping turds in our awesome pool?
T-Bills represent risk free rate.
Risk will increase with more global uncertainty.
If Austria and Italy go nuts that will matter to austere EU. Spain with no Government. UK-EU renegotiating trade unknown. French right rising in popularity.
Trump unpredictable. Market posturing with large gains expecting him to increase wealth which has not yet happened.
China and India with currency issues.
If the perfect storm happens we could be in for a more rapid rise in rates than people think to model.
Here is hoping it does not happen.
bsant
RENTING IN Vancouver = high rents, mold answer sexual favours, extra work, shady landlords
http://www.straight.com/life/798866/renters-vancouver-we-thought-wed-got-good-deal-until-my-roommate-and-i-started-getting
Good grief, 13 treats under the sofa? You know, the pup doesn’t even look that interested. My cats would be all over a single crunchie! Am I underfeeding? Back to bonds…they really seem to suck, but apparently I need them, so I’ll defer.
TurnerNation its almost 4:00 AM and the party is going strong here at the townhome. Looks to be an all night bash with the twin sisters, and am glad you took the night off.
Ryan, nothing wrong with being an EG tea drinker. But you haven’t lived until you have it with peach schnapps. Just add one shot to a mug full of EG tea, hot (you can channel Jean-Luc Picard here if you like) then drink it slowly while also listening to As It Happens on CBC – perfection!
Yesterday Trader Jim asks:
#111 Steve French
As a lefty who sounds honest and willing to debate, what do you think of Trump breaking 40 years of diplomatic protocol and annoying authoritarian/dictatorial China to chat with the leader of Taiwan?
How does that compare to Obama breaking 40 years of diplomatic protocol to cosy up to Raul Castro, an unrepentant dictator?
http://abcnews.go.com/Politics/president-obama-thought-awkward-handshake-raul-castro/story?id=37986277
Is the left intentionally staking out the pro-dictator territory?
Somehow I think that might be a mistake.
——–
I’d reckon that Western nations should in fact stand up to the Chinese dictatorship. I’m a lefty but not in favour of Leninist-Maoism, political repression, mass starvation or insane cultural revolutions.
I don’t think Trump actually knows what he is doing. The USA needs to take a principled stance against totalitarianism and non-democratic single-party rule. Yet it doesn’t even seem like Trump is receiving any intel or advice from the State Department at this point.
Tensions are building with China’s island-building etc. But Trump risks destabilising a very sensitive status quo in East Asia / South China Sea. Events could quickly spiral out of control, to nobody’s benefit.
The USA has long established security relationships with many countries in the East/Southeast Asian region, extending back to World War 2 and the Vietnam War. Something like $6 trillion of world trade passes annually through the South China Sea.
You want to see some major carnage on world stock markets?
A miscalculation in the South China Sea is a very good way of making that happen.
When Will They Raise “Continuing with this line of reasoning (which I agree with), do you anticipate another round of Fed QE to keep a lid on rates as the so-called “bond vigilantes” drive rates up”
No I believe QE is done (at least for now). First the simple fact that the Fed is looking to normalize rates is proof that QE is not in the cards for now. Second the reason the Fed is hiking rates is that the economy is picking up (unemployment rate qt 4.6%, Q3 GDP was 3.2%) and inflation is likely to rise which all supports some tightening. Finally, I think the central bankers are starting to realize that they are not gods, and they can’t just fix the economy with more and more monetary stimulus. I feel like there is a growing acceptance that monetary policy has run it course and likely something else is neccesary (i.e. infrastructure spending which i written about). But it’s not to say they will never do QE, just not in the cards for the foreseeable future. We would have to see another significant economic downturn to justify more QE IMO. – Ryan L
ps: on Cuba, as with China, I think Western countries should stay engaged, maintain diplomatic and trading relations, stand up for human rights and look for opportunities to support genuine pro-democratic change.
That is, an appropriate balance between principles and realism.
David MacDonald “An increase in yield from 2.4 to 3 percent still implies a 20% drop in bond prices. Does this mean VAB will drop from $25 to $20?”
It won’t drop by that much. First my forecast is on the US 10-year, not the Canadian 10-year, which I see remaining quite a bit lower than the US. And since VAB is Canadian bonds, Canadian interest rates are more relevant. But if Canadian interest rates rose by roughly 50 bps, VAB would drop roughly 4% since its average duration is 8. If Canadian interest rates go up a full 1%, then VAB drops by 8%. Duration is a great financial tool for estimating bond price changes based on a 1% interest move. This is why we currently recommend bonds with much shorter duration as they are less sensitive to interest rates. Our largest bond position is VSB which has a duration of 3. – Ryan L
Hi Ryan,
Thank you very much for the analysis. The question I have is regarding preferred shares. Would you advise selling XPF and switching to CPD or ZPR instead?
Your answer would be very much appreciated. Thanks in advance.
kothar “I am completely confused on bonds. If I buy one and hold it to maturity, don’t I get my original money back and the coupon interest it pays all along? So why the big deal?”
You are 100% correct! If your holding to maturity you don’t care if prices go lower in the short-term. You know more about bonds then you realize. We hold bond ETFs which are based on the underlying bond prices. As rates rise, bond prices go down, along with the ETF price. So that’s what I was more focused on in the piece. But for you who is going to hold to maturity and not worry about the price today versus the $100 you get in 3 or 5 years time, then your fine. – Ryan L
Geek wants to know “What was the R squared value (> 0.90 considered very good)? Have you tried Polynomial Regression instead (you can project forward using it and get an R squared) rather than Solver, if using Excel?”
The r-squared is .84. You can see from the tightness of fit between the two lines (actual and predicated) up till 2011 which is when the Fed starting implementing QE which distorted prices and yields. I have tinkered with polynomial but I generally just stick with linear regression. I’m ok at quant/excel/solver but by no means a statistician or real quant geek. – Ryan L
#94 Tony on 12.04.16 at 12:32 am
Re: #68 ChrisPitzel on 12.03.16 at 8:52 pm
“The big 5 banks are one of the worst places on Earth you could possibly put money. All the smart investors are short the Canadian banks.”
You don’t know what your talking about!
As someone who has had skin in the game for many years my investment has increased from the $100,000s to the $1,000,000s. I,m up over $240,000 this year and in a bad year i make $50,000 in dividends but I don’t sell anything.
On Thursday there seemed to be a short squeeze on the U.S stock market.
If you check out google finance for CM on the New York stock exchange as of Nov. 25 there were over 19,000,000 CM shares shorted representing 37 average days (515,000 shares approx. daily) of trading. Thursday over 5,000,000 shares traded hands as the U.S. price rose 3.44% and hedge funds there seemed to be covering their short positions. They also will have to cover the dividend payment in January if they hold on to the stock.It continued Friday with over 2,300,000 shares changing hands.
If you had purchased $1000.00 worth of RBC shares in 1996 today it would be worth $33,000. That’s a 17% annual gain over 20 years.
Tony it’s your money but try to stick to the facts!
#97 Mark
How about a “universal basic job” people would actually learn something
and be productive.
But we all know “Money for nothin’ and your chicks for free” gets way more votes.
#99 bdwy sktrn on 12.04.16 at 2:38 am
#86 Mark on 12.03.16 at 10:32 pm
The concept of entropy is useful here
————————-
only useful for showing you to be an insufferable blowhard. (who, once again, gets it totally backwards)
entropy is not relevant to the question posed. funny that you would raise it in a pathetic attempt to make yourself look ‘smart’ , but fail spectacularly.
—————————-
But the combined entropy of the mixture was less than that of each individual component prior to mixing.
——————————
no mark, no. wrong again. bad mark. go to your bed. bad dog.
in this case entropy increases, not decreases.
why don’t you show us you source you poncy twat.
clearly you do not understand what entropy is, yet in a sad, sad attempt to come off as superior you bring it up in a discussion with non-chemists/engineers.
FAIL.
truly pathetic.
http://www.learnthermo.com/examples/ch08/p-8a-3.php
ps: shouldn’t you be sending out more resumes?
bad mark. bad.
pps: this is the best blog on the web , why do you keep dropping turds in our awesome pool?
—
Yeah Mark.. total fail.. it’s a classic problem and you have it backwards….seriously dude, do you live in an upside down parallel universe.. The george costanza universe
Ryan – Finally a post acknowledging what I’ve been saying for years – that a low interest rate environment can last decades following a major financial event such as the GFC. And that interest rates are far from recovering to “normal” levels (assumptions about normalcy were one of the first mistakes made by early options traders). However there is one thing missing from your post. You stated that interest rates will slowly grind higher (which is true) however they won’t do so in a linear fashion. You have to account for fluctuations in the economic cycle.
” But it’s not to say they will never do QE, just not in the cards for the foreseeable future. “
You have to define what you mean by foreseeable future. FOMC forecast periods usually cover the next 36 months.
#45 help me please A million dollars
This must be your first visit here to ask for blue chip stocks. If you have been following this blog even for a week, you will know that a diversified ETF portfolio spread out with 60% global equities Canadian/US/international and then about 40% fixed income is the SAFE route to go. Some bloggers are steering you wrong by going into single stocks. Get professional advice – Garth will help you out.
Diversify, diversify, diversify, diversify diversify diversify
I hope you get my point. 1 million dollar windfall is rare. Don’t screw up by listening to unqualified people – friends or advisers who are not competent
So, you want to open a small business.
While our actor PM doles out bread and circuses:
http://www.blogto.com/city/2016/12/toronto-goes-wild-justin-trudeau-distillery-christmas-market/
…Small local business to be crippled by Provincial and Federal Liberal hammers:
(I actually bought a bottle of this pure, local 100% whiskey from Toronto Distillery – it’s good.)
http://www.blogto.com/eat_drink/2016/12/toronto-distillers-worried-new-tax-will-put-them-out-business/
“For local distillers, a new tax of 61.5 per cent on Ontario-made spirits sold in distilleries could mean the end of days. The tax is bundled into the Liberal Government’s Bill 70 budgeting, which would reduce the amount of money independant distillers pay to the LCBO when a bottle of their booze is sold, but increase the tax they have to pay from sales in their own shops. ”
…
Once again we see elite multi national corps and our real rulers, the elite families like the Molsons, Labatts, Segrams, Bronfmans et al are protected.
Keep voting…
Big bump in gold after the Trump Taiwan comments….once this skyrockets, the massive simultaneous inflation of stocks and gold will have occurred…..
What do you recommend as solid USD REIT and preferreds given the pending interest rate increases over the next few years?
Leo Tolstoy
Leo Toiletspray
Walmark of Sadkatoon
Chris Pitzel
Are you Donnie 740 that used to tangle with Mark on the other forum?
I made a mistake the other day and clicked on one of your links.
Some of Mark’s statements on that blog were real eye openers.
I will think of him the next time I’m in Atlanta Walmart…
M42BC
Thanks Ryan,
At some point in the not too distant future (next year or two?), I assume the Fed will need to gradually unwind the QE they implemented. Will this unwinding not not work in reverse and add more upward pressure on long term interest rates? Is this factor included in your model?
Dear Ryan,
Thank you for sharing your wisdom with us. I really appreciated it.
In your last post you said “a must have in portfolios right now are real return bonds (RRBs)”, but I am having trouble assimilating that advice. My (amateur) reasoning is as follows:
Canadian Real Return Bonds have long “Weighted Average Maturities”. For instance, iShares Canadian Real Return Bond Index ETF (XRB) has a Weighted Average Maturity of 18.54 yrs.
“Bond ETFs do not mature. Individual bonds have a fixed, unchanging date at which they mature and investors get their money back.” [1]
“Bond ETFs, however, maintain a constant maturity, which is the weighted average of the maturities of all the bonds in its portfolio. At any given time, some of these bonds may be expiring or exiting the age range that a bond ETF is targeting” [1]
“As a result, additional bonds are continually being bought and sold to keep the portfolio’s maturity constant.” [1]
“You aren’t guaranteed to get your money back (with a bond ETF). Because bond ETFs never mature, they never offer the same protection for your initial investment the way that individual bonds can. In other words, you aren’t guaranteed to get your money back at some point in the future.” [1]
Given all the above, how can it be a good idea to buy a bond ETF with almost 20 years of Weighted Average Maturity when the interest rates are beginning to rise?
I understand that XRB (for instance) will benefit from the inflation that lies ahead, but at the same time XRB will get nailed by the increasing interest rates.
Ryan, I am sure there’s something you know that we don’t.
Please, share some light on the matter: how can it be a good idea to buy Canadian Real Return Bonds ETFs when the interest rates are destined to rise?
Thanks.
Yanniel.
[1] – http://www.etf.com/etf-education-center/bond-etfs-vs-bonds-which-are-better?nopaging=1
Ryan,
For greater clarity on my earlier question, I do not think QE unwinding will all happen over 1 or 2 years, but rather start during this period. I assume the unwinding process could take a decade or more.
http://www.bankofcanada.ca/rates/related/inflation-calculator/
2015 -2016 Inflation 1.49 % Fed funds .41 %
1979 – 1980 Inflation 10.79% Fed Funds 20%
The Fed funds rate — it rose to TWENTY PERCENT in 1980
~ to twice the inflation rate
the Fed funds rate now .41 %
~ 1/3 the inflation rate
It `s interesting that today your bond is loosing 1.08% a year
while in 1980 your bond was ahead 9.21%
The Doghouse Quant Model suggests there is something rotten in Denmark.
Reply to:nonplused on 12.03.16 at 6:23 pm
…
Conservation will play a key role going forward, but spending your hard earned money adding insulation to your house and selectively not heating certain rooms does not feel like economic expansion to anybody. Neither do Smart Cars. Electric cars are a real bummer when viewed from an EROEI point of view because not only is the wind power EROEI already pretty low but now you also need a much more complex and inefficient energy delivery system including transmission, battery storage, battery recycling every 5 years or less, etc. Way more complicated than a jerry can of gasoline. …
________
You made some good comments on EROEI and is shows you know something about that topic, and I agree that conservation will play a key role. But your comments on electric cars are so off base that I had to reply. It’s like you just made stuff up because you don’t like them.
First of all, the vast majority of pure electric cars don’t even have a transmission (they are direct drive). They also can be charged from any source of electricity (hydro, wind, solar, etc.). They are many times more efficient than gas cars, and don’t require oil changes. They save you time because you don’t need to keep going to a gas station. Takes mere seconds to plug in for a charge at night. They are way, way less complicated than gas cars. I only need to go once per year for minor maintenance (that is normal for EV’s). The batteries last a LOT longer than 5 years. My own EV is over 5 now, and while I’ve now saved $10,000 by buying hydro instead of gas, I have not replaced the battery. Just be sure to buy a car with a battery pack with a liquid thermal management system. Your battery should last at least 12-15 years in that case.
Lastly, it takes way less energy to transmit electricity on a grid than it does to ship oil by ship or pipeline. There’s never been a power line ‘spill’ that ruined a river either! And you also don’t need to use huge amounts of electricity to refine that oil, use it to charge the car instead.
Context..next time. There’s a bday party tonight and four xmas parties next week (all open bar and food) including one at Thompson hotel rooftop.
Btw there’s big condo development plans and signs just south of your love shack on Niagara between Bathurst and Tecumseh. All old buildings to be torn down. Density.
#106 Ryan Lewenza on 12.04.16 at 8:41 am
When Will They Raise “Continuing with this line of reasoning (which I agree with), do you anticipate another round of Fed QE to keep a lid on rates as the so-called “bond vigilantes” drive rates up”
No I believe QE is done (at least for now). First the simple fact that the Fed is looking to normalize rates is proof that QE is not in the cards for now. Second the reason the Fed is hiking rates is that the economy is picking up (unemployment rate qt 4.6%, Q3 GDP was 3.2%) and inflation is likely to rise which all supports some tightening. Finally, I think the central bankers are starting to realize that they are not gods, and they can’t just fix the economy with more and more monetary stimulus. I feel like there is a growing acceptance that monetary policy has run it course and likely something else is neccesary (i.e. infrastructure spending which i written about). But it’s not to say they will never do QE, just not in the cards for the foreseeable future. We would have to see another significant economic downturn to justify more QE IMO. – Ryan L
—————————-
Thanks for the reply.
Agreed. But absent some novel scheme, like issuing 50 year or *wait for it* 100 year bonds (assuming anyone will buy them), I’m having a difficult time understanding how they can do the kind of fiscal stimulus they’re proposing in a rising rate environment and maintain the ability to service the debt, without some kind of default, debt restructuring, QE, dollar devaluation or all of the above.
But Trump is the “king of debt”, so who knows… We shall see. Got the popcorn ready. lol
It is interesting to learn that interest rates on bonds are determined by the ability of the debtor to pay, not on the willingness of the bond purchaser to loan.
But hey, when the bonds purchaser is the central bank does it matter?
Of course it does, they do teach that in the CFA courses.
Even with that rates will rise somehow, Trump is inflationary, that spells still higher rates and decline in bonds.
Rates increase = bond decline. It is that simple.
So get rid of your bonds.
If I had a dollar every time I heard the lies of the official inflation statistic I would have been a billionaire already.
Bonds will only decline in relative terms (they can not yield higher values than the growth infinitely) and after period of boom one of bust will come.
short bonds. Trump will push the boundaries of inflation, this is why stocks are going up.
My cool location for a townhouse which I would buy if the price was right has one that came up on a private lane. Its three levels, 4 bedrooms, fully renovated, and freehold at 24 Annex Lane. The price is out of my range at $1,580,000 as had no idea, but at least its beside the subway.
Just to clarify what I mean:
Trillions of $ of fiscal stimulus will require Trillions of $ of additional bonds to finance it. All of those bonds hitting the market would, in theory, cause rates to rise even higher, just based on supply and demand.
So how can they keep rates low AND do fiscal stimulus?
In other words, I don’t think fiscal stimulus is possible without monetary stimulus.
Are you Donnie 740 that used to tangle with Mark on the other forum?
Sure sounds like it. It was well known that that individual by that RFD account (“donnie740”) was mentally ill (and obviously still is, with the stalking behavior thus exhibited!), and had begun personating someone who he mistakenly thought was me. In some sort of effort to defame when he was found to be on the losing end of an argument. It was very disgusting and completely uncalled for.
I said it earlier, and I’ll say it again, GET HELP. Hopefully Garth reads this and cracks down on what is an obvious case of personation for the purposes of his trolling.
“But Trump is the “king of debt”, so who knows… We shall see. Got the popcorn ready. lol”
Trump claimed to be under-leveraged when the topic came up in his speeches. Claimed to only have debt of $500M against a portfolio estimated well in excess of $3B.
If anything, a regime of lower asset values and higher interest rates would help Trump with his relatively low levels of leverage.
His supporter base tends to be more productive than consumptive, so they’d benefit from higher rates/tighter Fed policy as well.
…if they want to keep rates low, that is.
#116 Londoner:- There is no such thing as the future or the past. All is created out of the present state of being, as all become instantly one event through time and space.
Bond Math
For bond INVESTORS who hold to maturity, changes in interest rates are not directly relevant.
The attractiveness of a (safe) bond is determined at the outset by its yield.
The 18% bond yields of circa 1980 were great investments because of the 18% yield and the low inflation which ensued. The drop in interest rates that created a TEMPORARY capital gain was not directly a factor. That bond matured at par.
The 1.66% yield on a ten year Canada bond will not be a good investment through maturity under ANY scenario. Even if there is massive deflation, it will only beat cash by the said 1.66%. That is NOT worth the risk of tieing up the money for ten years.
If you want portfolio stability, CASH provides the ultimate in stability and is available for future investment with NO CHANCE of a capital loss.
I might consider certain corporate bonds. But I would not even think about putting a penny into government bonds at these paltry yields.
Was the descent to multi-generation low interest rates orderly and foreseen? Was the ascent of interest rates to multi-generation highs in the early 1980s orderly and foreseen? We do not really know what will happen over the longer run. That is why we diversify with a slight nod to historical risk return profiles for various asset classes using the longest data set we can find. Full stop.
The hardest thing to do as an investor is sit on your hands throughout it all.
Agreed, chart pretty tight if you ask me and considering what your are modeling, 0.84 a v. good number indeed. Your model; therefore, pretty darn good if you ask me.
Good to read some did not eat the book covers at school; rather, flourished to the betterment of themselves and others.
As usual, like what you say and do.
PS: Learn to label the damn chart axes for the undersigned whose eyes are not what they used to be and at times, a bit slow on the uptake.
bsant
Maybe in perfect world but you didn’t count Trump effect. Garth pls don’t let this guy decide for my account.
Mark writes:
I said it earlier, and I’ll say it again, GET HELP. Hopefully Garth reads this and cracks down on what is an obvious case of personation for the purposes of his trolling.
And I have mentioned earlier that I’m only recently invested in anything other than real estate and am here to learn and hopefully avoid bad choices.
That said I totally fail to see what any of the various names posting anti-Mark crap add to the conversation.
At least Mark;s crap adds something…
It almost stalking, right? Across multiple years and over multiple forums? Wow, and you expect me to listen to anything else you might have to say? Wow again.
Between Smoking Man whinging about no sales on his booklet and these guys its a lot of posts to scroll through.
#127 TurnerNation:- Well they had better blowup that huge warehouse across the street as that area sucks, and wouldn’t walk that area at night. The twins furnished the townhome with top of the line IKEA and it cost them nothing, because daddy happens to be a family member.
So is this a reversal of Garth’s position on interest rates and real estate prices in the long term? If they normalize at 3%, then we will not see a large drop in house prices after all
Hardly. — Garth
#27 Freeman on 12.03.16 at 5:26 pm sez
“It takes at least $15,000 or so to drive home in a “cheap” new car, once all is said and done. And most new cars cost a lot more money. Which most people haven’t got. ”
I never understood the desire for a new car, particularly on Van Island or Lower Mainland.
You can get a nicely used Mercedes for around $5000 and because of mild weather and no salt, they are in great shape. In other places, the body may be a bit rusted but I bet the mechanicals are fine.
Austria rejects far-right candidate in presidential election
In the end, the outcome of the almost year-long election campaign was clear within 10 minutes of the last polls closing. According to the public broadcaster ORF’s first exit poll, Van der Bellen had gained 53.4% of the vote with over 60% of voting districts counted – too strong a lead to be turned around by Hofer, who had 46.6% of the vote. By 7pm local time with almost 100% counted, Van der Bellen was still on 53.3% – an improvement of 3% on the May vote. In Vienna 65% supported Van der Bellen and only 35% voted for Hofer.
At the run-off vote in May, 50.35% of the population voted for Van der Bellen and 49.65% for Hofer. The Austrian public defied predictions that cold temperatures and fatigue with almost a year of campaigning would stop many from casting their votes: voter turnout was 73.8%, up from 72.65% in May.
guardian
4 December 2016 • 10:27pm
The US Army Corps of Engineers said on Sunday that it won’t grant an easement for the Dakota Access oil pipeline in southern North Dakota.
The decision is a victory for the several thousand camped near the construction site, who’ve said for months that the four-state, $3.8 billion project would threaten a water source and cultural sites.
The pipeline is largely complete except for the now-blocked segment underneath Lake Oahe, a Missouri River reservoir. According to a news release, Assistant Secretary for Civil Works Jo-Ellen Darcy said her decision was based on the need to “explore alternate routes” for the pipeline’s crossing.
Yanniel “I understand that XRB (for instance) will benefit from the inflation that lies ahead, but at the same time XRB will get nailed by the increasing interest rates.”
Normal or nominal bond yields consist of two parts – inflation expectations and real yields. If bond yields rise due to an increase in inflation expectations, which is what is currently happening, then real return bonds should rise in value. If however nominal bond yields rise due to an increase in the real yield, with inflation expectations remaining the same or declining, then RRBs will decline in value. Given we see the former happening, we like RRBs right now. These can be volatile as these drivers change over time, so I like them now given my current outlook, but we would change our tune if the latter occurred. – Ryan L
Damn, geek talk is stimulating!
#146 Ryan, thank you. It is now crystal clear.