Over the past several months, much has been said about the stock market, and for good reason. What can be lost in the shuffle is what has been going on concurrently in the bond market. It’s at least as bad. Therefore, if you’re worried about stock valuations, you should probably be really, really worried about bond valuations. There are, in my view, a lot of borderline reckless income ‘investors’ out there who hold bonds simply because of industry dogma. Bullshift applies to bonds, too.
Some observers fear inflationary pressure on the horizon. I’m less convinced, but still, real yields have moved higher due to both an improved growth outlook and additional expected fiscal stimulus. Today, many people seem comfortable in referring to the environment as the ‘end of the bull market’ in bonds. The obvious next question is: ‘does that mean we are at the beginning of a bear market in bonds?’. To me, this is a distinct possibility.
For nearly 40 years, interest rates have been dropping throughout the western world. Now, we’re at the point where, as a practical matter, they can’t really go lower. We’re also at a point where, policy guidance from central bankers notwithstanding, rates might have to rise sooner than we thought if the inflationary pressure some expect begins to materialize.
Given my previous comments about TINA and investors needing to buy something (anything) to make a buck, some have pointed out that bond valuations are even more outrageous than stock valuations. The argument is a silly one. Investing in something that one might not invest in under ‘normal’ circumstances doesn’t make it more attractive (even on a relative basis) if the alternatives are even more outrageous and the times more abnormal. The reverse beauty contest (i.e., directing money toward the alternatives that are least ugly) is not only contrary to common sense, it is both dangerous and reckless from an investing perspective.
Stocks are risky because valuations are extreme and bonds are riskier still because valuations are even worse. People are blithely investing in both because they feel obligated to invest in something. They are holding their noses amid the valuation stench and closing their eyes as the roller coaster ascends the highest of hills. It’s as if you wouldn’t experience a drop if you don’t see a drop coming. That’s the thing about coasters – the dips come whether your eyes are open or not. There’s trouble on the horizon – likely even the near horizon. I think it would be better if people opened their eyes.