Sunday, February 15, 2015

Comment From "High Plateau Drifter"

"High Plateau Drifter" writes with a comment on Friday's post "No Longer Bullish On Bonds, But Was July 2012 the Top?":

I think it is best to keep a careful eye on the [mutual fund] flows.

Note the very large decrease in MF inflows from 2013 to 2014. Once MF inflows go negative for a significant period (6 months??) you will see corporate stock buybacks dry up since buybacks must produce option gains or the execs will quickly stop them. Thus MF inflows going negative, as they did in Dec 2014, for a significant period of time will ultimately stop buy backs as well and thus tank stock prices.

Plus, for the tripple whammy, in the unlikely event that the 90 day goes to 1% you will see a flood of cash go to the MMFs.

Thus in my view, an interest rate increase could be an additive factor, but boomers selling stocks and bonds to finance their lifestyles in retirement will be the major driver in this drama, precipitating the follow-on bearish flow trends.

Gotta be the panther lying in wait in the bushes, and not the roaring bear out in the open.


Stagflationary Mark said...

With more than $12 trillion sitting in MZM earning next to nothing, "they" can pry the long bonds (long-term TIPS and I-Bonds) from my cold dead fingers. That's the only way they are getting mine, since I am holding to maturity no matter what interest rates do or don't do.

Still feeling very comfortable about my prediction for 2015 that the 30-year nominal treasury bond yield will stay below 3%. Even with the recent selloff, I have a much larger safety buffer than when I made the prediction initially.

Soon to be retirees will be much more inclined to sell risk assets first, if I am any indicator. I owned more stocks than bonds when I retired in 1999. Now I only own bonds. Figured I better move to safer assets before the herd does.

And once again, since I am holding bonds to maturity, it is in my best interest to root for higher interest rates. I'll want to reinvest at higher interest rates when my bonds mature. Put another way, I will not be hurt by rising interest rates. I just don't think I will be that lucky to someday get them. Better to lock them in and know what I'll be getting than hope and pray for possible miracles. Retiring Japanese investors can relate to the theory no doubt.

High Plateau Drifter said...


You may be right.

Mutual Fund inflows and then stock buy backs, and then perhaps short rates inching up that would be a perfect trifecta to drive stocks lower.

It would take a wholesale psychological shift for market participants to view govt. bonds in the belly of the curve and longer as a risky asset for the bonds to break lower. Hard to predict when or if that might happen.

Stagflationary Mark said...

High Plateau Drifter,

I'm not believing a scenario where stocks and bonds sell off together. That's not to say it couldn't happen of course.

As a bond investor, I should never need to sell bonds to fund my ongoing retirement. They naturally mature as part of a bond ladder. History may show that I was foolish to own bonds, but at least it should not show that I required a greater fool.

A stock investor in my similar situation may very well require a greater fool though. There is no such thing as a stock ladder. Stocks do not mature. If a stock investor nees to cash out to fund a retirement then that requires a buyer. Better hope there are plenty out there, otherwise the stiock investor becomes the bag holder.

For what it is worth, as a retiree, I don't ever want to put myself in a position where I require a greater fool. Being a bag holder during retirement is not a risk I'm willing to take.

What are the odds? It's hard to know for sure, but there are plenty of Japanese stock market investiors who became bag holders, and they go all the way back to the early 1990s. Of course, in the early 1990s everyone just sort of assumed that Japanese stocks could only go up. Big mistake.

CP said...

Stagflationary Mark is the rare fellow who is in a position to actually live off of treasury coupons. Most baby boomers are counting on capital gains.

Stagflationary Mark said...


I can't live entirely off the interest, but I should have enough bonds to die broke (as I slowly burn through capital) That's just fine by me. It's not like I can take the money with me when I die.

I tend to think of savings as just savings. Save a penny, have a penny. Need a penny in the future? No problem. Save a penny now. I never thought of savings as a get rich quick scheme where a penny magically transforms into many pennies. With long-term interest rates so low, perhaps others should start thinking this way. The 80s and 90s are over. That era will not be soon repeated.

The rational thing to do when interest rates fall, especially for retired fixed income investors, is to save more and/or spend less. Since both options seem painful to most people, many have opted to take on more risk instead. Good luck on that. More risk is not without its risks, lol. Sigh.