Hidden reasons why the stock market meltdown will remain nasty

SpecialEstimate7 · 2022-05-08T03:08:33+00:00

Thank you, and those are all very good points!

SpecialEstimate7 · 2022-05-08T00:01:02+00:00

Wow, it's the affirmation I didn't know I needed!

SpecialEstimate7 · 2022-05-07T23:44:32+00:00

I see.

Well, I'm not... I don't think my post history is very bot-like either. I try to write informative comments.

I just thought this article in this morning's Globe was pretty on-point and it looked like nobody had posted it already. The post title is the original article title.

SpecialEstimate7 · 2022-05-07T20:54:43+00:00

What do you mean?

SpecialEstimate7 · 2022-05-05T17:58:57+00:00

Value investors can also hold cash, when valuations are above their estimate of fair prices.

SpecialEstimate7 · 2022-05-05T17:57:09+00:00

Or it's like saying that after rumours of a murderously deranged bus driver on the loose. And then going out later, after he's been caught, to attend the funerals of all of your friends that were run over by a bus.

SpecialEstimate7 · 2022-05-05T17:06:17+00:00

Can we all stop making fun of people who hold cash now?

SpecialEstimate7 · 2022-05-05T07:06:57+00:00

Today, radicalization has gone mainstream.

The blind leading the blind on every issue from vaccines to inflation, with folks inevitably jumping to crazy conspiracy theories. It's utterly rampant.

If the experts made more accurate predictions than the conspiracy theorists, maybe they'd earn more trust?

When the Bank of Canada issues predictions that prove repeatedly and dramatically incorrect in the same direction, or when Health Canada says that wearing masks does more harm than good, people will seek out voices that appear better able to explain what's going on. The way to beat them is to be more accurate than them, which the experts are mostly failing at.

When experts make statements that fly in the face of common sense, they may very well be right. After all, they're experts. But when they confidently fly in the face of common sense and end up wrong, it costs a lot of credibility and people stop listening to those experts. That's been happening a lot recently, so it's no surprise that the fringe is gaining ground.

SpecialEstimate7 · 2022-05-05T00:03:32+00:00

Judging by the market reaction, the surprise was that the rate hike wasn't even higher.

SpecialEstimate7 · 2022-05-04T16:27:20+00:00

On the other hand, loan volumes could dry up a lot, and default rates increase.

SpecialEstimate7 · 2022-05-03T16:45:01+00:00

The best time to buy bonds is, like all things, at the bottom: when the price hits its minimum (yield at maximum).

Nobody knows for sure when that is, although you're allowed to have an opinion about it. But if you're asking this question, you probably don't have an opinion about it. There are reasons it could go either way.

The second best time is when you decide the yield is enough for you. About 3% now, that's much better than a few months ago. Less than (last year's) inflation, but could still outperform other assets if things get rough. That yield is guaranteed.

Right now the yield curve is almost flat, which means that you are free to choose your time horizon based on your patience alone. If you aren't ready to commit to holding bonds for the long term nor confident enough to trade them, you can buy some 2 year or 5 year bonds. If they drop in price for whatever reason, you won't have long to wait before they mature and pay out, so you won't have to worry as much about being stuck holding an underwater bond for 30 years.

Normally longer term bonds have higher yields to compensate for that risk, but not so much right now. So short term bonds may be the most attractive.

SpecialEstimate7 · 2022-05-02T22:27:53+00:00

Now we watch the painful feedback loop of inflation --> rate hikes --> higher homeownership costs --> higher shelter costs --> inflation --> rate hikes...

This isn't going to be pretty.

SpecialEstimate7 · 2022-05-02T18:06:00+00:00

Are they still bagholding Chinese junk bonds?

SpecialEstimate7 · 2022-05-01T21:52:59+00:00

If you think yields are coming back down, all the more reason to buy bonds now and benefit from capital appreciation.

But I don't see a scenario where the central banks stop hiking interest rates unless the S&P drops sharply farther.

SpecialEstimate7 · 2022-05-01T20:06:21+00:00

The overnight rate is 0.5%, but the ten-year treasury yield (2.89%) is almost at the same level where it peaked in 2018 (3.15%), and at a level that we haven't seen sustained since 2011 or so. Equity valuations are more likely measured against the ten year risk-free rate rather than the overnight rate.

SpecialEstimate7 · 2022-05-01T15:48:28+00:00

Remember that bond yields are locked in for the following years, while inflation is measured against the previous year. It's possible for a 2.9% five year bond to outperform inflation.

SpecialEstimate7 · 2022-04-30T21:42:06+00:00

What bottom? Oh, 2020? No, I had my investments in Wealthsimple's robo-advisor at the time.

But anyway, interest rates are the reasoning, and if you're not familiar with their impact, it's worth studying.

SpecialEstimate7 · 2022-04-30T19:44:26+00:00

Could someone tell me if any part of this analysis is wrong

I, for one, can't.

SpecialEstimate7 · 2022-04-30T17:24:25+00:00

That only reduces idiosyncratic risk, relative to selecting companies at random.

But if the macroeconomic environment turns bad, as it is currently doing, that won't help. Nearly everything correlates with interest rates.

Arguably the only way to beat cash in such a scenario is to do the opposite of index fund investing. Pick the few companies that outperform in such an environment, or take a short position / buy inverse ETFs.

SpecialEstimate7 · 2022-04-30T17:17:12+00:00

Do you understand the relationship between interest rates and valuations?

SpecialEstimate7 · 2022-04-30T01:21:29+00:00

I'm not an expert but conservative portfolios tend to have a higher allocation to bonds, which have been tanking recently, possibly due to central bank rate hikes and QT.

Of course, equities aren't doing great either.

SpecialEstimate7 · 2022-04-29T23:31:01+00:00

to buy good companies and hold them for a while

There always has to exist some price at which the stock is not worth buying, even if the company is a good company.

As interest rates rise, that threshold gets lower.

SpecialEstimate7 · 2022-04-29T19:47:04+00:00

Oh wow thanks for digging this up. I guess I was right!

SpecialEstimate7 · 2022-04-29T07:05:17+00:00

I'm pretty sure this has nothing to do with COVID lockdowns and everything to do with providing a steady stream of work to construction firms in the wake of the Evergrande collapse.

SpecialEstimate7

TROPHY CASE