What We Know
Bitcoin – Selling off 20% today after a meteoric rise. But what is it?
Some new store of value? New mode of transacting? How is it priced? I don’t know it well enough to explain it. And I don’t care. It hasn’t been around long enough to tell if it’s a viable investment. I’m content to watch how, or if, it develops.
Stocks – Robert Shiller’s (Noble Prize economist) PE ratio is near an all-time high; Buffet’s fair market value measure (Stock market relative to GDP size) says stocks are in trouble – yet Buffet says stock values make sense with low interest rates; Jeremy Siegel (“Stocks for the Long Run” author, Wharton professor, and WisdomTree strategist) says US stocks are fairly valued given interest rates, and other developed markets offer better value; Jeffery Gundlach of DoubleLine believes emerging markets have a lot of upside, US stocks are due to correct, and Europe is a value trap.
Bonds – Buffet has said bonds are more overpriced than stocks. The benchmark 10-year treasury yield at 2.35% is less than half its long-term average of 5.0%. When rates rise, you can lose money on your existing bonds. In fact, long-term bonds saw 10-15% declines in the most recent rate spike. Safer to keep durations short-term and ladder exposures until rates normalize.
REITs – REITs tend to move lower when rates rise (in the short-term). Eventually, factors that drive rates higher will feed into higher real estate rents. Patience! With current REITS yields around 5.0%, the spread income relative to 2.35% on 10-year bonds is at the high end of the historic range.
What We Don’t Know
When rates move up or by how much….and at what speed they’ll move. The last five years have been a trend less up and down movement. Strategist after strategist has wrongly predicted rising rates. As rates move, investors will do a re-think about the risk and return of stocks vs. bonds. How fast it happens and by how much nobody knows.
What We’ll Be Watching
The new Federal Reserve Chairman is expected to keep monetary policy on the same path. The goal is to reduce its $4 trillion balance sheet, which means selling bonds. Bonds are like a teeter-totter: when you sell the price goes down and yield (interest rate) goes up. However, with strong demand from buyers, rates may not rise as feared. A European or Japanese investor getting 0.2% to 0.4% on domestic bonds, might like buying US bonds at 2.35%.
Portfolio re-balancing is the discipline of selling high and buying low. It’s more challenging when multiple asset markets appear fully or overvalued. The most important thing is that your asset mix is aligned with your goals, and you can be sure that we’ll stay consistent with this discipline.
Jerry Matecun – Founder, President
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