Buffett Says Avoid Long-Term Bonds

Discussion of the Bond portion of the Permanent Portfolio

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Re: Buffett Says Avoid Long-Term Bonds

Post by moda0306 » Mon Mar 28, 2011 7:57 am

dj wrote: since the peak of bond yields in 1981 we have had a bond rally - 30 years.  From 1953 to 1981 bond yields were rising.  Have you done any work comparing the returns of the bond market from 1953 to 1981 to the returns from 1981 to 2009?
It may not be great, but just keep in mind stocks were flat from '66 to '82.  Even meager bond returns would've helped.  Also, it probably depends on LT vs ST.  Maybe the 5 year should be the standard for comparison, as short and long bonds behave quite differently.
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Re: Buffett Says Avoid Long-Term Bonds

Post by moda0306 » Mon Mar 28, 2011 9:48 am

http://money.cnn.com/2011/03/25/pf/inve ... /index.htm

Another article... ridiculous.  Not that there aren't arguments to be made for it, but I think the "rates have to rise" argument is one of the most canned, underinformed statements out there.  Now we're hiring managers to dive in and out of different bonds to give us return because anything long-dated MUST rise?  Rates rising is a factor of two things:  Recovery and/or inflation...  Not to put it too simply.  Both are captured in spades by the other assets of the PP, but since so many insist on viewing long-bonds in isolation, they will probably forever be the asset everyone loves to hate.

I will still continue to compare "tweener" assets like short-term corporate bonds (somehow trying to capture inflation and prosperity, but also be safe in case of recession) to the PP. 
Last edited by moda0306 on Mon Mar 28, 2011 9:50 am, edited 1 time in total.
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Re: Buffett Says Avoid Long-Term Bonds

Post by AdamA » Mon Mar 28, 2011 10:12 am

That is the type of article that makes me want to double my LT bond holding. 

I'll bet five or ten years from now we'll be reading articles about how no one thought the 30 year could get as low as 2 or 3%. 
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Re: Buffett Says Avoid Long-Term Bonds

Post by moda0306 » Mon Mar 28, 2011 10:21 am

Adam1226 wrote: That is the type of article that makes me want to double my LT bond holding. 

I'll bet five or ten years from now we'll be reading articles about how no one thought the 30 year could get as low as 2 or 3%. 
Yup.
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Re: Buffett Says Avoid Long-Term Bonds

Post by MediumTex » Mon Mar 28, 2011 11:12 am

The thing that no one ever seems to talk about when it comes to the "rates can only rise from here" argument is that the argument has been exactly the same for the last 10 years (if not longer).

If it's such a good argument, I want to ask, why has it lost people money for so many years?

Rates WILL rise at some point, but before then they may fall or stay where they are for a long time.

On the subject of arguments that seem irrefutable, I remember Mark Haynes on CNBC was listening to a guy talking about financials being a buy at some point in 2008, and the guy's logic seemed pretty good.  After hearing him out, Haynes said something to the effect of "I understand your argument, and it makes sense.  The problem I have is that the last ten guys I have heard making that argument have been carried out on their shield."
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Re: Buffett Says Avoid Long-Term Bonds

Post by AdamA » Mon Mar 28, 2011 12:36 pm

Interesting demographic analysis (short).

http://seekingalpha.com/article/260371- ... _watchlist
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Re: Buffett Says Avoid Long-Term Bonds

Post by craigr » Mon Mar 28, 2011 7:45 pm

A couple things.

1) I've been holding LT bonds now for almost five years in the portfolio. At the time I heard the same things. The bonds have an average yield in the 4.5-5% range when I bought them. Over the past five years by doing nothing but sitting on my hands that would grow $10K invested to almost $13K. This doesn't include the great rebalance opportunity bonds gave you in 2008/2009 during the crash. People that have been holding very short bonds these past many years to supposedly protect themselves from rising interest rates have earned about 0% or negative after inflation.

2) I think these predictions of demographic declines of first-world countries without massive immigration are just silly. For the main reason that you can't simply import millions of unqualified immigrants and think that they could possibly replace the highly trained and educated retiring populations without consuming way more in social services than they contribute. I don't think the US is going to be saved by importing all of Mexico's poverty for instance. Nor is Europe going to be saved by importing the same from North Africa and Turkey.

If all it took were people to make a successful economy then these other countries would be economic powerhouses. As a company owner, I wouldn't be happy if I found out that the HR department was replacing my retiring workers with people that had no more than a sixth grade education on average and whose children had a near 30-50% high school dropout rate and nearly equal teen pregnancy rates. That is not a recipe for success.
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Re: Buffett Says Avoid Long-Term Bonds

Post by moda0306 » Mon Mar 28, 2011 8:03 pm

Craig,

So what happened to Japan?  They still seem to be an extremely hard working, resourceful, and peaceful people.  Yet their stock market has gone nowhere and they've had persistant lowering rates and deflation/disinflation.

I'm not saying they're doing horribly, but simply that when an economy is built and priced for a certain age mix it's difficult for a completely polar opposite age mix to grow a country out of the debt it took to advance the higher (now elderly and needy) population.
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Re: Buffett Says Avoid Long-Term Bonds

Post by craigr » Mon Mar 28, 2011 8:27 pm

moda0306 wrote: Craig,

So what happened to Japan?  They still seem to be an extremely hard working, resourceful, and peaceful people.  Yet their stock market has gone nowhere and they've had persistant lowering rates and deflation/disinflation.
They may have a different outlook on success. Nobody can look at Japan even these last 20 years and say they were living in desperate poverty. They still remain one of the most technologically advanced societies on the planet. So even if their stock market hasn't been great, that may not be how they measure their worth. I don't think anyone denies that they continue to produce technological marvels and innovation despite a bad stock market. But that certainly doesn't mean they are poor. They are a major US creditor nation. Maybe they just don't get as wound up about looking at stock returns. They save money in other ways. Certainly cultural factors could be at play.
I'm not saying they're doing horribly, but simply that when an economy is built and priced for a certain age mix it's difficult for a completely polar opposite age mix to grow a country out of the debt it took to advance the higher (now elderly and needy) population.
I don't believe for a second that Japan's problems will be solved by bringing in lots of foreigners with a different culture and much lower levels of education than the average Japanese. The US is conducting a social experiment in mass immigration (along with Europe) that isn't going to work. IMO.

Again when I was running my business it would never occur to me that it is a good idea to replace an employee that left with one that was far less qualified and likely to consume more resources than they contribute. Yet, that seems to be the immigration policies that people think are going to buoy these first-world countries. It's just not going to work and I haven't seen any argument yet to convince me otherwise. Yet I've seen many indicators that it's going to be a disaster. The demographic performance numbers and inability/unwillingness to assimilate in fact are huge red flags. Japan will be around long after the US has imploded due to finance issues. IMO. You're talking about a society that has existed in some form for over a 1000 years at least of recorded history. This was even after we nuked them twice and burned their cities to the ground in WWII. So why should I think that just because they have some debt and other obligations that's going to stop them? Japan isn't going anywhere.

Yeah, I'm politically incorrect. But I just don't think adding in millions of (usually poor) people without any qualifications into a massive and elaborate social support network is going to do anything but exacerbate problems. We should be WAY more selective about who we're letting in here and not just think that adding more warm bodies to the mix is automatically going to make things better. Because, chances are, it's not.
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Re: Buffett Says Avoid Long-Term Bonds

Post by moda0306 » Mon Mar 28, 2011 9:59 pm

Much of what you say about Japan is something I've thought in the back of my head for a while.  Are they really hurting just because their stock market is flat?  They sure don't seem to be on some levels.

That said, on the level of what to invest in, I don't think it's inappropriate to look at demographics, and I don't think people are saying "bring in poor young people and our problems will be solved," but simply that an aging population will have a deflationary effect on interest rates... good or bad. 

One exception I'll make is that our reaction to immigrants today could maybe be compared to the reaction to poor, uneducated Irish and Italian immigrants of years ago.  I tend to think the same thing about the lack of assimilation, but then there are times I visit places like certain parts of California and even here in MN and it seems that the "generational rule" seems to be coming true... that is, most immigrants' kids are MUCH more assimilated than they are.  It sure seems to mimic the images of "Irish" or "Italian" families and their "American" kids that didn't care about that stuff nearly as much as their parents did.... just something to think about.
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Re: Buffett Says Avoid Long-Term Bonds

Post by AdamA » Tue Mar 29, 2011 1:31 am

Craig/Moda--

Very thought provoking couple of posts.

A few questions:
craigr wrote: When I was running my business it would never occur to me that it is a good idea to replace an employee that left with one that was far less qualified and likely to consume more resources than they contribute. Yet, that seems to be the immigration policies that people think are going to buoy these first-world countries.
As I recall, you're a tech guy, right?  So, of course you would have needed very educated people working for your company.

Have we outsourced so much that we really have no jobs for "unskilled" laborers?  (I'm really asking, I don't know the answer). 
craigr wrote: The demographic performance numbers and inability/unwillingness to assimilate in fact are huge red flags.
It's hard for me to believe that someone from a poor country would immigrate to the US, and then be lazy about working.  I think that when someone comes from a place where there is simply no job opportunity, they are generally very greatful to have the chance to work.  Having said that, if the only jobs we have to offer immigrants are as computer programmers and electrical engineers, etc, then, I agree, we will continue to have problems, and they will only get worse over time.
craigr wrote: Nobody can look at Japan even these last 20 years and say they were living in desperate poverty.
I agree, and I think that counting on the US to mirror Japan economically in the coming years may lead to some inaccurate conclusions.  Although there probably is a lesson to be learned about the effects (or lack thereof) of QE, I think that our economic woes will be much worse than those of the Japanese.  Their country hasn't spent nearly what we have, and they are still a net creditor nation, owing most of their debt to their own people.  They also haven't been involved in expensive wars for the past decade.

IMO, now is probably a good time to invest in Japan.
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craigr wrote: Yeah, I'm politically incorrect.
Yeah, I'm sure a lot of people would read that post and think so, but you raise some very good points, and it kind of sucks that it's so hard to have an honest discussion about this kind of stuff without being accused of that. 
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Re: Buffett Says Avoid Long-Term Bonds

Post by moda0306 » Tue Mar 29, 2011 9:06 am

I know it's hollywood, but when one watches movies like Gangs of New York, it makes me wonder whether we've ever NOT had a pretty large section of the population that is a bit of an underclass... undereducated, underassimilated, prone to violence, etc.

The other night when I went to a movie I saw two Somali girls (maybe 15 years old... there are a lot of Somalis in MN) with their "head-dress" on, but otherwise you would have thought they were completely normal.  They were speaking perfect english, gossiping like teenage girls, and other than their clothing and skin seemed just like any other teenage girl.  Most Somali adults, on the other hand, seem very disconnected from the normal MN population.  Im NOT arguing for further immigration, but simply that it seems that these things work themselves out over a generation or two, and we may not be looking at the permanent cultural and economic underclass that it may currently seem like we're looking at.

A few things I'd be interested to know is what Japan's unemployment rate and "quality of life" have been during this time of stock-market malaise.  Maybe we're looking at the wrong statistics.
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Re: Buffett Says Avoid Long-Term Bonds

Post by MediumTex » Tue Mar 29, 2011 11:33 am

moda0306 wrote: A few things I'd be interested to know is what Japan's unemployment rate and "quality of life" have been during this time of stock-market malaise.  Maybe we're looking at the wrong statistics.
I read an interesting story about a young man in Japan who was an engineer.  Although he was good at his job, he just couldn't seem to get on with a company in more than a temporary low-paid capacity. 

Finally, he moved to Taiwan where he found many opportunities and felt that it had allowed him to get his career back on track.

I think what we are going to see in coming years in Japan is not an influx of immigrants from other countries, but rather an exodus of young Japanese who are fed up with their stratified society that creates enormous amounts of stress but provides many fewer opportunities than it did in the past for people just starting out.  This dynamic will only aggravate Japan's underlying demographic problems.  When an economy is experiencing a structural contraction, ironically I think it is often the youngest who are hurt the most (even though in theory the young people should be valued since there are relatively fewer of them relative to other age groups) as more powerful members of society scramble to protect their pieces of the economy.  This manifests itself in the form of people not retiring when expected to, and not being promoted out of lower and mid-level positions when historically they would have been.

If you Google around you will find many stories of youth culture in Japan and how a fatalism and despair has set in in recent years as a result of young people feeling the same high expectations from their families as previous generations felt, but many fewer opportunities to fulfill those expectations.
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Re: Buffett Says Avoid Long-Term Bonds

Post by moda0306 » Tue Mar 29, 2011 12:05 pm

Interesting, MT... thanks for the input.
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Re: Buffett Says Avoid Long-Term Bonds

Post by craigr » Tue Mar 29, 2011 2:30 pm

moda0306 wrote:One exception I'll make is that our reaction to immigrants today could maybe be compared to the reaction to poor, uneducated Irish and Italian immigrants of years ago.
The immigration today is not comparable to the past for a variety of reasons. I'm not necessarily anti-immigrant (although I do think we should cut off all legal and illegal immigration immediately with a moratorium as we did from the 1920s-1960s for a while). But I do think we should be far more selective ala. Switzerland about granting easy citizenship and who we are letting in.

America has had several waves of immigration followed by strictly controlled flows in between. But in these earlier waves there were no massive social support welfare services in place. The last great wave of immigration in the early 1900s for instance saw almost half of all Italian immigrants return home because they couldn't hack it here. With no welfare and public assistance to fall back on they just couldn't afford to be here and left. This weeded out the people we didn't want here and ensured those that had the abilities stayed. This probably happened with other groups as well.

But today that is not the case. We have very generous welfare benefits available to everyone. So there is this huge magnet to come here and stay because chances are it's better than what you have at home. So instead of weeding out those that can't hack it, we are subsidizing them and this encourages the problem.

Finally, national unemployment is at 10-15% and wages at stagnant inflation adjusted levels for decades (or even falling?) especially in low-skilled sectors. Do we really need all these people coming in attacking that sector of the workforce?
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