The Great Long Term Investment Grade Bond Debacle of 2022

Safe havens aren't supposed to do this.

Long term return for VWESX since inception in 1973 near the end of 2018 reached north of 8%.

In 2022 ytd return is -27.28%.

The whole spectrum of bonds as represented by VBTLX is down ytd 14.79%.

Traditional investors with a 60/40 portfolio are down over 20% through yesterday because stocks and bonds both are falling.

Cash is king again.

 

If 42% of your wealth comes from the stock market, YOU ARE AN IDIOT and deserve everything that's coming to you

 The is-is-ought fallacy in action.

In today’s environment, the notion that the stock market isn’t the economy doesn’t hold up anymore :

“In the last 20 years, we’ve had a financial economy that has grown significantly,” said Joseph LaVorgna, chief economist for the Americas at Natixis. “You could have argued a few decades ago that the stock market was not the economy, and that was very accurate. That is no longer the case today.” ...

Through the end of 2021, the share of household wealth that comes from directly or indirectly held stocks hit a record 41.9%, more than double where it was 30 years ago, according to data from the Federal Reserve. A host of factors, from the advent of online trading to stock-friendly monetary policy to a lackluster global economy, has made U.S. equities an attractive place to park money and earn nice returns.

Asset allocation is about diversification, and if 42% of your wealth is tied up in stonks, YOU ARE NOT DIVERSIFIED, no matter how diversified is the stock portion of your portfolio.

The Talmud had it right: One third in hand, one third in land, and only one third in business.

Be it then, as Sir Robert says, that anciently it was usual for men to sell and castrate their children, Observations, 155. Let it be, that they exposed them; add to it, if you please, for this is still greater power, that they begat them for their tables, to fat and eat them: if this proves a right to do so, we may, by the same argument, justify adultery, incest and sodomy, for there are examples of these too, both ancient and modern; sins, which I suppose have their principal aggravation from this, that they cross the main intention of nature, which willeth the increase of mankind, and the continuation of the species in the highest perfection, and the distinction of families, with the security of the marriage bed, as necessary thereunto. 

-- John Locke, First Treatise of Government

42 is not the answer to everything.

 

Bob Brinker's advice to stay fully invested in stocks in 2008 beats Jim Cramer's to sell

Bob Brinker famously said on his radio show Moneytalk during the 2008-2009 market meltdown that "no one could have predicted this".

As a market timer, he's taken a lot of heat for this statement, including from me, but it is time to reassess his 2003 call to return to a fully-invested position in the stock market and to stick to it in 2008 despite the meltdown.

How has that worked out? 

"Fully invested" means different things to different people. This is because it is a question of asset allocation. Asset allocation strategies are by definition highly individualized to meet objectives while minimizing risk, and they depend on many factors including income and age, which change over time and thus necessitate adjustments to the strategy periodically. So to be clear, a person who allocates 50% of all resources to stocks at any given time is fully invested when that is so. But that means that a person who has much more tolerance for risk and normally invests 90% of all resources in stocks by definition has a greater percentage of all his resources in stocks, yet both individuals are "fully invested".

OK, so let's take the hypothetical person born in 1949 who just retired at the age of 65 in November 2014. That person has had theoretically 43 years of continuous investing life, let's say beginning from November 1971 after landing that first job out of college in the spring of that year.

Now whatever this person had allocated to stocks over the course of those 43 years, using the S&P 500 as a proxy for the part allocated to stocks, he or she has averaged a nominal return of 10.68% annually with dividends fully reinvested through November 2014, including the crash periods of 2000 and 2008.

But back in March 2003 this person was turning 54 years old and was worried about the future after the stock market crash he had just experienced. And let's say he had ridden his investments all the way down in that crash by being fully invested through the 2000 debacle. From 1971 to that point in 2003 his average annual performance had been 10.94%.

Had he heard Bob Brinker's advice to be fully invested going forward and stayed the course he had been on, how did remaining in the market as before repay him as part of the overall average performance of 10.68% which he ended up achieving annually on average through November 2014?

The answer might surprise you: The average annual performance of the S&P 500 from March 2003 through November 2014 has been 10.01%. The market crash of 2008-2009 might certainly have unnerved this investor, who was then turning 60, to the point of utter capitulation, for it reduced his performance from 1971 through March 2009 to 9.11% per year on average.

It's clear, however, that cutting and running after the fact in 2008-2009 was not the answer. That was Jim Cramer's answer in October 2008, on morning television no less, but it wasn't Bob Brinker's.

Simply staying the course was like putting back on a point and a half for every year of the 43 year investing life of our hypothetical investor in a matter of just five years.

Kudos to Bob Brinker. Raspberries to Cramer.

The latest snapshot of the asset allocation of the United States is "risk on"

Total bond market per SIFMA through 3Q2014: $38.65 trillion (49.8%)

Total stock market capitalization per ^W5000 right now: $26.07 trillion (33.6%)

Cash per MZM money stock: $12.89 trillion (16.6%)

Total: $77.61 trillion

If you add in Households, Owners' equity in real estate, you add another $10.98 trillion for a total pie of $88.59 trillion, thus 43.6% to bonds, 29.4% to stocks, 14.6% to cash, and 12.4% to real estate.

From the perspective of the Talmud this allocation is very unwise because it is much too light on cash and owners' equity. The amounts allocated to business, to cash and to your homestead should each be about 33%, indicating that we are very heavily "risk on" indeed.

Food for thought.

The Current Asset Allocation of The United States

Allocated to bonds of all types, through 2Q2014:   $38.17 trillion.

Allocated to stocks (current Wilshire 5000 X 1.2): $25.46 trillion.

Allocated to cash (MZM):                                               $12.72 trillion.

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Total:                                                                        $76.35 trillion.

That's 50% to bonds, 33% to stocks, and 17% to cash.

The trend since 2010 has been away from bonds at close to 59% to 50% now, mainly into stocks, while amounts allocated to cash have increased the percentage just a few points.

Talmudic Asset Allocation Strategy

A third in land, a third in business, a third in reserve. (h/t Mebane Faber)

"And Rebbe Yitzchak said, A person should always divide his money into three: one third in land, one third in commerce, and one third at hand."

-- Babylonian Talmud, Bava Metzia 42a (quoted here)

The Current Asset Allocation Of The United States

Total bond market: $38 trillion (Bloomberg/SIFMA here)

Total stock market: $21 trillion (Wilshire 5000 x 1.2)

MZM money stock:$12 trillion (StLouisFed here)

That's 17% to cash, 30% to stocks, and 53% to bonds.

With stock and bond markets at all time highs, the country really ought to be raising cash.

America's Current Asset Allocation

Approximately $37 trillion to bonds (year end 2011): 54 percent.

Approximately $21 trillion to stocks (April 2012):      31 percent.

Approximately $10 trillion to cash (August 2012):     15 percent.

Where The Money Is: America's Asset Allocation as of 12/31/10

Cash: $8.8 trillion (14.4 percent).

Stocks: $17.1 trillion (27.9 percent).

Bonds: $35.3 trillion (57.7 percent).

Asset Allocation: The Big American Picture, Built on Debt

Cash:   14 percent ($8.3 trillion)

Stocks: 27 percent ($16 trillion)

Bonds: 59 percent ($35 trillion)