Bonds In Conversation : It’s All About Debt
The vision for the world is the “New Neutral” a.k.a. Secular Stagnation.
I envisage this as a time where there is more money than assets left to buy, companies are being privatised via M&A deals and new companies are being funded by venture capital seeded by savvy investors, leaving very little on the table for the retail investor by the time they IPO.
M&A deals and VCs are funded by leverage and debt, which are then sold as bonds to the retail investors.
The retail investor profile is typically the baby boomers and some Gen X-ers who are happy to maintain a steady stream of income which makes bonds the perfect asset.
It is true, the stock market is not the place to get rich these days (” In fact, you’re almost certainly buying an asset that has already made someone else rich well before you ever had the opportunity to own a claim on that asset’s cash flows.”)
Unless you are lucky to be holding on to the M&A deals which are up 79% in turnover this year (average premium of 25%), because the small caps are not exactly flying if you are following the Russell 2000 Small Caps Index which has corrected 10% since its high in Mar (and not the S&P 500).
And the retail investor is fueling the debt craze with their dollars, giving junk credits no reason to pay down their debt or an excuse to borrow more.
Warnings have come out of the central banks this week, BOE, Bundesbank, in the FOMC minutes and a rare warning out of MAS on foreign property buying, even as debt continues to be issued in leveraged buyouts and payment in kind instruments (paying off interest with more debt). There are cautions and warnings out of everywhere this week, on London real estate, Chinese real estate, on leveraged buyouts and junk etc which matters very little, in my opinion.
It is not hard to see that the only access would be bonds for the average person with money to spare, borrowed or owned which makes it easy to understand the urgency of some of my friends to jump onto the private investing bandwagon, a whole new jaw dropping world of deal making to me.
There is over US 1 trillion in central bank liquidity in the markets looking for a home. Equity markets are shrinking (buy backs and M&As) and the only asset class that is exploding is debt, such that Wall Street banks are betting on bonds for the future, which makes sense for an aging population, keen to fund someone else to profit for only a small teeny reward.
This is a new world and its all about debt for now.
In Singapore, we had 2 new issues out of HDB for a 5Y SGD paper and Midas for ahigh yield 6% 2.5 year paper. Besides that, markets are engrossed with the nationalisation of the bus service and rumours of the same with MRT.
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Hi TH,
I feel that the market is very irrational now. It means most investors have thrown their cautions away, ignoring/discounting all the bad news and warnings. This could be the sign that crisis is coming. Just don’t know what will be the trigger or last straw.
We are still waiting for your “Lesson 10” about “Investing in crisis”. What are the “do” and “don’t”? Where are the “mine fields” and “traps” that we should avoid? How to prepare and benefit from a crisis? Hope that you have the time to write for us.
Thanks.
Well, Keynes did say the market can remain irrational longer than we remain solvent.
There is usually no trigger for a real crisis eg. 1987. It just explodes like a true crisis does.
Will get that piece up probably next week.
Still trying to get a job. Am writing another investment piece which you may find useful. Look out for it later or tomorrow.
Not really a Lesson 9.5: Mindset of investing in a crisis
$0.02 worth
Disclaimer:
Free comments is not advice. Engage professionals for specific investment advice.
STAY CALM AND KEEP TRADING
The market behavior in a crisis swings to extreme rational driven by a host of factors and usually solvency of institutions (bankruptcy, counter party risk) and solvency of individuals (collateral calls, margin call) is at the core of why price levels are extreme.
9.5.1 — Use only a fraction of normal position sizing
If at all thought about (usually ignored by most retail investors) position sizing is figuring out the tradeoff between having enough money exposed to make returns worth the effort and having little enough that a loss of capital does not terminally injure the investor’s portfolio
If the crisis is full blown, then the extended range of swings actually makes up for the smaller position because the prices moves more and so between entry and take-profit there is more to be made per unit of risk open.
Adjust further by how quickly market liquidity can dry up. The mirage of the good times is thedanger to be lulled into thinking the market maker is always going to show a bid.
Better still is to be the one ready to make a bid at opportunisitic levels.
*** There is no “science” or formula but generally even a limit of 1/4 of the normal position yu would take is reasonable
This also means that there will be some trades cannot enter because the min size is now too large for the crisis-adjusted open position limit
example
normally can buy a SGD bond for $250k and then crisis hits and see a bond sold down for a risky name but think maybe can.
The position limit of 1/4 means only $63k but then this market may lock up faster than more liquid market such as a position in EURUSD forex or a stock index etf like the SPY on NYSE. So should cut back further on how much money to place.
If using only 20% position adjusted limit, then the maximum can buy is $50k and need to wait for the price of the bond to hit $0.,20 (maybe in extreme markets) otherwise walk away and find something else.
9.5.2 – flexible mind
no matter how right thinking the position can be wrong because the market is always right and as investor can end up losing all the money
remind me a time on the trading desk when the market was locking up and had to figure out where was the real price. I thought should accumulate a position because price had already sold down. talking it out with someone next to me the idea was to test the down side first so instead started selling into the bids and lucky thing because the price just gap down further
to be con’t
Well said like a true trader !!