You Can Predict Market Direction

predicting-stock-marketDespite what a lot of people write and say, you can successfully predict the direction―either up or down―of interest rates, stock market indexes, the price of gold, etc. You cannot predict what will definitely happen, but you can predict what is more likely or, even, what is very likely to happen. You cannot always predict what is more likely or very likely to happen, but you can predict it sometimes.

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If anyone tells you that they definitely know what is going to happen, it is a huge signal that they cannot be trusted. No one definitely knows, unless they are privy to related inside information.

In talking about predictions here, I am not talking about predictions of what will happen in the short-term. I am talking about predictions of what will happen in the longer run. What will happen with interest rates in the next trading day or week is almost entirely a roll of the dice. What will happen with interest rates in the years ahead is not.

Think Differently

To be good at predicting markets, you need to think differently than most people think. People tend to think in terms that are too black and white. For example, people tend to think that the stock markets will rise or fall in price; and/or they tend to want you to tell them whether the stock markets will rise or fall in price. This is wrong kind of thinking process to be engaged in. The right thinking process goes something like this:

(1) Is there a clear, significant advantage(s) to be played? If there is not, make no prediction or predict that the market will perform about average, which it may or may not. Average for interest rates is flat. Average for the S&P 500 was, from 1871 thru 2012, 8.92%―although there are better, more sophisticated views of what is currently average for the S&P 500. Average for commodities is the rate of inflation.

(2) If there is an advantage, how strong is it in the context of the other things affecting the market? In other words, how likely is it that the rise or fall in market price(s) will occur and, if it does occur, how large is the move likely to be? Plus, how likely and divergent are the alternate scenarios?

(3) Determine the amount of your related investment or revise the weightings in your investment portfolio based upon the strength of the advantage. If the advantage is small, bet a little or nothing on it. If the advantage is large, bet a lot on it; but remain sufficiently diversified.

“Bet” is a good word to use here. Investing is gambling; but, done correctly, it is gambling where you are the house―that is, it is gambling where the odds are slightly in your favor. Generally, just having your money invested in bonds, CDs, and/or stocks, versus as cash, puts you at an advantage. You are likely to end up with more money than you would have otherwise. Successfully predicting which direction a specific market is likely headed in is like knowing one team will be playing without its star player(s) when many other people do not know this. The team may beat the betting line anyway, but they probably will not. Now you are the house and you have an edge in one of the games being played.

Macro Drivers

In my investing experience so far, I have noticed five macro drivers that make markets predictable:

(1) Prices that have swung too far up or down based on emotions and/or momentum.

(2) Prices which are mathematically too high or low in comparison to those of competing investments.

(3) Prices affected by market intervention.

(4) Prices affected by a disinformation campaign(s).

(5) Prices that reflect the short-term versus a probably significantly different longer term.

Interest Rates

Interest rates are very likely to continue to rise. This is a relatively easy prediction to make. Yes, as of July 10, the 10-year Treasury rate had already increased over 105 basis points in two and one-third months and over 125 basis points, from its low point, in less than a year; but interest rates were, and continue to be, largely abnormally low due to market intervention by the Federal Reserve (Fed) and other factors. On May 7, LearnBonds published an article I wrote detailing what these factors were at the time.

In this article, “How Dangerous Are U.S. Treasury Notes and Bonds?”, I calculated that, based on CBO and Fed projections, 10-year Treasuries should be yielding 3.78%. Today, due to the passage of time, this number is 3.95%. Also, I noted that the CBO projected 10-year Treasury rates to be 5.2% from 2018 onward, and that this projection is consistent with Fed and other quality projections. On July 10, the 10-year Treasury rate was only 2.68%.

We do not know whether interest rates will be up or down in the days and weeks to come. We do know that:

(1) The Fed cannot keep buying Treasuries and residential mortgage-backed securities (RMBSs) anywhere near the current rate of $85 billion per month indefinitely.

(2) The Fed plans to taper and, then, stop buying. The most recent economists’ consensus I read about projected tapering beginning in September ‘13 and stopping occurring in June ’14.

(3) The Fed plans to sell their portfolio of Treasuries and RMBSs and/or not replace these securities upon maturity.

(4) Via quantitative easing (QE), the Fed has successfully engineered the 10-year Treasury rate to be well below its mathematically correct rate of about 3.95%.

(5) Via QE, all or almost all other non-short-term interest rates have been successfully engineered lower as well.

(6) The target federal funds rate can barely get lower than the current 0.00-0.25%.

(7) The Fed projects the target federal funds rate to be about 4% in the longer run.

(8) An increase in the federal funds rate will further increase other interest rates.

The vast majority of people knowledgeable on the topic are predicting interest rates to rise. Normally, this would be concerning. When a vast majority of people predict the same thing in the investment world, it is often a contrary indicator. However, it is only a contrary indicator when too many people have invested based upon the predictions. The fact that the 10-year Treasury rate, and other non-short-term interest rates, are still well below their mathematically correct rates tells me that too many people have not invested based upon the predictions. I know that other non-short-term interest rates are below their mathematically correct rates based upon analyses similar to the one I did for 10-year Treasuries and the relatively normal or normal-enough non-Treasury-to-Treasury rates spreads.

To be clear, I am not predicting that the 10-year Treasury rate will rise to about 3.95% in the short-term. In brief, as long as the Fed is buying or, even, holding Treasuries or RMBSs, they are influencing interest rates lower; and I have almost no clue regarding what will happen with interest rates in the very short-term. “Learn Bonds prediction of the 10-year Treasury rate for the next year is between 2.5% and 3.5%.” This prediction was developed independent of me, reflects the likely continued rise in interest rates, reflects the fact there will be both up and down short-term moves in interest rates, and is elaborated upon here.

The Mathematical Pull

There is another indicator that interest rates are very likely to continue to rise. I call this indicator a mathematical pull. There are many sorts of mathematical pulls; but the one I am referring to here is the one between the expected return of the readily investable U.S. fixed-income bond market, assuming the bonds are held to maturity, the expected return of the U.S. stock markets.

In last week’s article, I calculated that the expected return of the readily investable U.S. fixed-income bond market is about 2.33% per year. Since last week, I made every warranted adjustment to this calculation that I reasonably could, even though I could only make the adjustments crudely.

Downward adjustments were warranted because (1) three of the indexes used have a constituent-bond-shortest-maturity of one year versus the desired one month and (2) municipal bond default losses in the future figure to be somewhat higher. An upward adjustment was warranted because commercial paper tends to have maturities as long as 270 days, versus the maximum 91 days of the commercial paper index used. Including CDs that were bought in competition with bonds and stocks, versus all CDs, (a downward adjustment) and including taxable high yield and not rated municipal bonds (an upward adjustment) are revisions that, ideally, would have been made; but they were not practical to make. The potential impact of all other warranted adjustments is extremely minor.

With the adjustments, the final number, as of close-of-business July 3, came out to 2.11% versus 2.33%. As of close-of-business July 8, this number was 2.17%. About 2.17% per year is what the average to-maturity bond investor will make. Updated to the close-of business on July 8, based on the approximate true (i.e., GAAP vs. operating) forward price/earnings (P/E) ratio of the U.S. stock markets, stocks figure to return 6.25% per year in dividends and capital gains―assuming P/E ratios, which are at least reasonable, remain the same. 6.25% is a lot better than 2.17%. Now that interest rates are no longer falling, and bond principal values are no longer rising, there will be a greater desire to be invested in the stock markets versus the bond markets simply because the stock markets are mathematically more attractive.

A good thing about investing based on a mathematical pull is that, even if the markets do not move in the direction you predicted, you still own or own more of what is probably the more lucrative investment. You tend to eventually come out ahead anyway.

How the Macro Drivers Apply: Interest Rates

Addressing one driver at a time:

(1) Prices that have swung too far up or down based on emotions and/or momentum.

This driver applies somewhat favorably. Interest rates may or may not have swung too far down based on momentum. They definitely swung too far down based on emotions. Many people were too enamored with their non-to-maturity-then-cash (non-TMTC) bond fund investments due to 30 plus years of falling interest rates and the associated capital gains. (See here and here for articles regarding TMTC funds.) They needed or need to lose a significant or large amount of money before ceasing to invest or lessening their investment in these funds.

(2) Prices which are mathematically too high or low in comparison to those of competing investments.

This driver applies very favorably as explained in the Mathematical Pull section above.

(3) Prices affected by market intervention.

This driver applies very favorably in the form of the Fed’s QE.

(4) Prices affected by a disinformation campaign(s).

This driver subtly favors interest rates rising. The Fed and some others have not said and will not say that interest rates are below their mathematically correct rates―and that you should not invest in bonds that you cannot hold to maturity and/or you should invest less in bonds until the correct rates return. One purpose of QE was and is to distort interest rates to aid the economy and, hence, employment. Explicitly explaining that interest rates are unfair due to QE runs counter to the purpose of QE.

(5) Prices that reflect the short-term versus a probably significantly different longer term.

This driver applies very favorably. Interest rates are projected to increase a lot in the longer run, but the short-term direction of rates is rather uncertain.

The Stock Markets

For the vast majority of the last few years, it was relatively simple to predict the likely direction of the stock markets. This direction was up. Now it is not so simple. The easy post-recession-and-financial-crisis earnings increases for companies are behind us, and whether valuations are currently low is somewhat questionable.

In last week’s article, I calculated the fair value true forward P/E of the total U.S. stock market to be 18.36. This number was based on what interest rates will likely be in 2018. Given the adjustments I made to my calculation of the expected return of the readily investable U.S. fixed-income bond market between last week and this week, this number is, more precisely, 20.25. This number includes additional crude adjustments for (1) Treasuries probably having a higher weight within the calculation in the future due to large U.S. budget deficits, (2) municipal bond spreads currently being high, and (3) the Mortgage – Agency MBS yield to worst projection in the chart in last week’s article seeming too high.

Also, last week I stated: “The stock market’s fair value is related to normalized interest rates―not the current (and temporary) unusual interest rates created by quantitative easing and other factors.” Being more precise, I would have said: “The stock market’s fair value is vastly more related to normalized interest rates―versus the current (and temporary) unusual interest rates created by quantitative easing and other factors.” After making an adjustment for the current unusual interest rates, the fair value true forward P/E is, more precisely, 21.74.

There is another factor I did not consider in last week’s article. Bonds tend to trade at a premium to stocks because bond returns are, generally, more certain. They are not more certain over the course of about three decades or more, but they are more certain over shorter timeframes. Some people will pay more for bonds for this reason. Determining how large the premium is requires a separate study; and, even then, we may not be able to determine a fairly dependable number. If we guesstimate the premium at 10%, the fair value true forward P/E is 19.77. As of close-of-business July 9, the approximate true forward P/E of the U.S. stock markets was 16.3. This is 21.27% less than 19.77.

19.77, even beyond accuracy-of-calculation issues, is an uncertain number. The calculation is based on what interest rates will likely be in the future. What interest rates will likely be in the future is uncertain and changes over time. Having a number like 19.77 in mind is important though. There is some fair value true forward P/E like 19.77. If the stock market increases in value beyond this number, it will, likely, eventually lose value or increase in value at less than the usual rate. Likely, many people will eventually say: “Why should I own stocks when I can own bonds with a similar or better, and more certain, return?”

In the years to come, the stock market may increase in value beyond a true forward P/E of 19.77 or the like. People who are investing in gold or longer-term-bonds-for-the-short-term are now betting against non-short-term price direction. Some of these people will now become more inspired to play the stock market. More significantly, as people see the value of their bond holdings fall, there may be an overreaction in favor of stocks―just as there was an overreaction in favor of bonds that is now waning.

An obvious question is: “Why not just use P/E ratios based on historical data to make judgments as to how fair-valued the stock market is?” You often see statistics quoted like the average S&P 500 P/E ratio for the last x number of years, but these statistics are not very useful. The ease-of-investment and costs for the various types of investments were different in the past. For instance, previously, there were no or few exchange-traded funds (ETFs). Also, as I have demonstrated in this article, the value of the stock market is dependent, in part, on the value and price direction of competing potential investments. The value and price direction of competing potential investments varies a lot. U.S. interest rates generally fell for over 30 years. This phenomenon ended only recently, and it had a negative effect on stock market P/E ratios.

How the Macro Drivers Apply: Stock Prices

Addressing one driver at a time:

(1) Prices that have swung too far up or down based on emotions and/or momentum.

There is still an emotional hangover that disinclines people from investing in stocks due to the relatively large 2000-2002 and 2007-2009 market crashes. This effect is waning, which subtly favors stock prices rising.

(2) Prices which are mathematically too high or low in comparison to those of competing investments.

As illustrated above, stock prices are low in comparison to the future expected return of the readily investable U.S. fixed-income bond market, even with an adjustment for bond returns being more certain than stock returns. This favors stock prices rising.

(3) Prices affected by market intervention.

Fed QE injected and is injecting additional money into the system, which aided and is aiding the economy and led and is leading to greater competition to buy stocks. This favors stock prices rising, until about three to six months before the Fed stops injecting money. Market prices tend to rise or fall about three to six months in advance of market-impacting events like this occurring.

Fed QE continues to make non-short-term interest rates lower than their mathematically correct rates. This is both a positive and a negative for stock prices rising. Some people have been chased out of bonds and into stocks due to abnormally low interest rates. Other people are invested in bonds or more invested in bonds because they have not experienced enough pain in bond principal losses yet.

The significant tax increases that took effect at the beginning of this year and sequestration are an indirect form of market intervention. The U.S. economy would be significantly stronger if not for the tax increases, and stock prices would, probably, be higher. This negative effect on the economy is dissipating over time. This favors stock prices rising. The sequester budget cuts occur thru 2021. They favor stock prices falling.

(4) Prices affected by a disinformation campaign(s).

There is no significant related disinformation campaign.

(5) Prices that reflect the short-term versus a probably significantly different longer term.

U.S. GDP growth is projected to be stronger next year and even stronger the year after, which favors stock prices rising.

Conclusion

I know that interest rates are very likely to rise. As of close-of-business July 8, the expected return of the readily investable U.S. fixed-income bond market was about 2.17%. The 2018-projected expected return is about 5.04%. This is a huge difference. In addition, interest rates are being manipulated, temporarily, by the Fed, to be lower than they normally would be. The extended analysis above confirms and strengthens the conclusion that interest rates are very likely to rise.

I think that stock prices are likely to increase more than is usual. Based on the future expected return of the readily investable U.S. fixed-income bond market, the fair value true forward P/E of the U.S. stock markets is about 19.77. This 19.77 figure has a fair amount of uncertainty associated with it though. As of close-of-business July 9, the true forward P/E of the U.S. stock markets was 16.3―21.27% less than 19.77. The extended analysis above confirms and strengthens the conclusion that stock prices are likely to increase more than is usual.

 

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Comments

  1. RA says

    Everybody thinks interest rates must inevitably rise which means that they probably will not. They would rise if the US could pull off 3% GDP again. But that may be unlikely. Given that the US is now Japan, we will likely have similar rates. A low growth world means low rates. In addition, we have a stock market which we can predict will likely only produce single digit returns and perhaps not much better than interest rates. This means the Fed will have to keep rates low to try to goose the market as much as possible. We are talking about decades into the future.

    • Kurt Shrout says

      It is people like you that enable others to sometimes successfully predict the markets. You are grossly misinformed, among other things. Re: “Everybody thinks interest rates must inevitably rise which means that they probably will not.” “Everybody” does not think so, but the vast majority of knowledgeable-on-the-subject people do. Please do not exaggerate. It signals that you cannot be trusted, your understanding is poor, and/or your communication skills are poor. Also, I already addressed this concern in the article above. Please do not make comments that ignore what the article said. Please reread the second paragraph above the section heading “The Mathematical Pull”. If you did not read the entire article, you should not have commented. It is inappropriate to do so. Re: “They (interest rates) would rise if the US could pull off 3% GDP again. But that may be unlikely.” U.S GDP is projected to grow more than 3% in 2015. Not only that, U.S. GDP is, in a way, growing more than 3% this year and projected to grow more than 3% next year. For instance, the IMF projects U.S. GDP to be 1.7% this year. They also estimate that the tax increases and sequestration will take about 1.5% off of GDP this year. 1.7% + 1.5% = 3.2%. Also, U.S. GDP definitely does not need to be over 3% for interest rates to rise from the still abnormally low levels. Re: “Given that the US is now Japan, we will likely have similar rates.” Please see “(7) The Belief That the U.S. May Become Like Japan” in my previous article titled “How Dangerous Are U.S. Treasury Notes and Bonds?”. I provided a link to this article in the second paragraph below the “Interest Rates” section heading in the article above. Re: “In addition…” For one, the Fed’s mandates regard inflation and unemployment, not the stock market (although a pricier stock market helps the economy a tad). I pass on replying any further.

    • Kurt Shrout says

      This is a good topic for discussion. As I said in the article: “Bonds tend to trade at a premium to stocks because bond returns are, generally, more certain. They are not more certain over the course of about three decades or more, but they are more certain over shorter timeframes.” Some individuals only invest in bonds (and do not invest in stocks) or invest more heavily in bonds because they are not comfortable with the greater uncertainty and volatility associated with stocks. Some institutions need to invest a greater amount in bonds because they need to know that a certain amount of money will be available at certain dates in the future. Once a person reaches a certain age, their retirement portfolio can, possibly, safely hold only bonds; but it cannot safely hold only stocks. On the other hand, there are people and institutions that take advantage of these things by buying more stocks than they would otherwise. In light of these factors and anything else related you can think of, what percentage do you think is best? Also, feel free to provide a rationale along with the percentage, although you do not need to. I invite other readers to participate in this discussion as well.

  2. RA says

    Oh, I see. Because GDP is forecast for 3% in 2015 that is what is going to happen. That’s the part I guess I did not realize. And the Fed does not target the stock market? Well, maybe you should tell Mr. Bernanke and Mr. Greenspan. Both have made admissions that they target the market and Bernanke has made it remarkably overt by stating that QE would boost stock prices.

    I like the way you refer to your own articles as reference points for the facts. As for credibility, I suspect you like many others are going to be eating humble pie. But you’ll be doing it along with “knowledgeable on the subject” people admittedly.

    Good luck with your predictions. Maybe you should take up football betting. It’s a lot more profitable.

    • Kurt Shrout says

      You questioned whether U.S. GDP could grow more than 3% again. I demonstrated that it clearly could. As I said above, the stock market is not a part of the Fed’s mandate. The Fed knows that, when they inject more money into the system, they influence stock prices higher―and that this aids the economy and, hence, employment. Influencing stock prices is not a main thrust of the Fed’s actions though. It is one of many side effects. Basically, the Fed makes funds more readily available and less expensive or less readily available and more expensive, thereby aiding or hindering inflation and the economy as a whole. I referenced my own articles simply so I would not have to write what I already wrote and to shorten the length of my reply. You should be smart enough to recognize this. It seems you were too hardheaded to read the passages I referenced, just like you did not really consider what I wrote above. You are just arguing. I encourage everyone to never argue. Learn, think, and discuss instead.

      • Chris Adams says

        Kurt: Thank you for your thorough, well-researched article. It is nice to hear the opposite side’s view on the direction of interest rates. If you were not so disparaging to RA then I’d have a lot more respect for you.

        Since I know it took you a lot of time to make this article and to do your research and calculations I am going to provide other factors that you should consider when writing further articles:

        1. The retail investor is wary of Equities’ underwhelming performance since the tech bubble burst culminating in a secular bear market (with cyclical bull markets in between). Although I think I it is foolish to eschew equities for bonds, I can understand that they are tired of the large drawdowns and higher volatility that stocks have (well technically speaking there are bonds that are more volatile than stocks, however it is not as widely owned).
        2. You should check out Crestmont Research. They have a good alternative to the Shiller PE ratio. Their research includes that either deflation or high inflation needs to occur in order to lower PE ratios enough spur a secular bull market. Also, over the long run Corporate earnings should track GDP (although there is counter evidence from GMO that I weight more).
        3. Misinformation campaign? I am not sure what you are talking or that you even know what you are talking about since the details are vague and haphazardly unsubstantiated. Your contention, “The Fed and some others have not said and will not say that interest rates are below their mathematically correct rates―and that you should not invest in bonds that you cannot hold to maturity and/or you should invest less in bonds until the correct rates return. – See more at: http://www.learnbonds.com/you-can-predict-market-direction/#sthash.40MiFx0s.dpuf”, misses the point that the FED wants to force people out of Treasuries and Agency Mortgage Backed Securities. Furthermore, there are a preponderance of bond bears. I can only count the number of bond bulls on my hand. Not even David Rosenberg is bullish on bonds anymore. If you are referring to the hyperinflationistas who said to not own bonds and to buy gold when the 30 year rate was 5% then I agree. See point 1; people aren’t holding bonds to speculate (except for crazy people such as myself). Everybody hates Treasuries and it is the only asset class where the majority thinks that they are contrarians.
        4. Yes, the US is not Japan. They don’t have as many structural, demographic, and energy security issues. However, Japan has embarked on fixing the first two problems as well as implementing a relatively more vigorous QE than the Federal Reserve. Their 30 year Japan Government Bond rates have been around 2% for over a decade. Now it is at a piddling 1.84%.
        5. There is merit in the argument that the FED is keeping rates down through QE. One just has to look at the debacle over the last two months over the Tapering speculation. However, if the Federal Reserve hadn’t intervened during the Great Financial Crisis of 2008 and especially if Congress hadn’t implemented fiscal stimulus then rates would probably be even lower. Furthermore, the FED doesn’t have complete control of interest rates unless they have an explicit cap like they did during the early 40′s and 50′s when they were less independent. If things get better to the point where we reach pre GFC trend growth then we can very well see significantly higher rates.
        6. It is generally accepted by Economists that interest rates should track GDP growth. That is a convenient theory that is leading some astray during these unusual times. Treasuries are a gift from the US Government to savers and banks. They could just as easily increase the money supply rather than issue debt. Because Treasuries have a negative correlation to global equities during most market environment as well as no default risk investors should not expect to receive a that much of a real yield for shorter to longer maturity TSYs. Since we are in a slow growth economic regime and we have a big debt to GDP ratio then financial repression through negative real yields for shorter term securities is not a bad option.
        7. You believe that the FED and CBOs economic growth projections are going to be accurate? Have you been living under a rock for the last decade?
        8. Your analysis ignores what the market is doing right now. Interest rates are 4 standard deviations above the 50 day moving average. What does that tell you? There are bond Closed End Funds that are selling at double-digit discounts to Net Asset Value. Darlings of fixed income for the last couple of years until recently, Mortgage Real Estate Investment Trusts, although harder to valuate since they publish their NAV quarterly, are trading at ridiculously low discounts to Book Value leaving a large margin of safety. There is no reason for a (retail?) investor to sell a dollar for 90, 80, 70, or sometimes even 60 cents except that they took on more risk than they understood that they could tolerate and are now panicking to avoid further losses. These are signs of capitulation, not further weakness.
        9. History shows that rates can indeed go lower. The 30 year TSY bottomed out at around 2% mid-20th century. German Bunds are yielding around 2.4%. JGBS and Swiss Government Bonds have sub 2% yields. We are still in a down-trending yield environment and since we are a mature economy I find it highly unlikely that we will ever go above 5% yields, nor double digit yields. If you want that you can invest in Vietnamese debt.
        10. If you are a bond bear are you advocating selling bonds short? Were you engaged in the widow maker trade of shorting JGBs? I’ve seen in one of your articles that you are a fan of investing in defined maturity Exchange Traded Funds, which like other investments have their pros and cons (personally I like it that people prefer to buy and hold Treasuries and other bonds until maturity rather than re-balance annually into the next year’s maturity since I can get a better roll return and downside buffer). What will you do if rates go down further, no matter how certain you are that the opposite will happen and have to reinvest your principal? If anything I would be recommending that people stick to their target allocations instead of trying to time the market. Also, it would be a good idea to substitute a part of their equity portfolio for high yield bonds which have had a historically higher risk-adjusted return than stocks for nearly a century (more than two interest rate cycles); short term high yield have done even better. International bonds I am not so constructive on because of the non-accretive to returns currency risk. Research has shown, however that hedging the bonds back to $USD has provided a better risk-adjusted return than holding US bonds only since you are holding multiple countries’ bonds with different growth and inflation rates than the US. Then again Vanguard’s international $USD hedged bond ETF BNDX has a lower YTM than similar maturity TSYs which means that they will have a slightly higher duration. For those who are more savvy investors I am a proponent of the Risk Parity approach that Ray Dalio has pioneered.
        11. Even if yields go up if you reinvest the interest and principal payments, although it will be painful at first, you will be buying higher yielding debt. Even during the 70′s bond bear market if you had invested in the Lehman (now Barclays) Aggregate Bond index until interest and inflation rates peaked at mid-double-digits you would have had a flat return. Given the diversification and ability to earn higher returns I think that is a good tradeoff. Of course if you need the cash sooner than an intermediate term bond fund then you would be wise to invest in debt instruments that have a sooner time to maturities.

        • Kurt Shrout says

          What I said to RA were the correct things to say, but I disliked saying them. I took a peak at some Crestmont Research and GMO items. I will take a further look at their materials going forward. The Fed does not want to “force people out of Treasuries and agency mortgage-backed securities”. They simply want to lower the interest rates for these and other bonds. The disinformation campaign point is a subtle one. Think of it this way. If the Fed was not influencing interest rates lower to aid inflation, the economy, and employment, they and some others who feel responsible to support Fed policy (like some other government officials) would be telling you that interest rates are unfairly low. Hence, you get the partial effect of a disinformation campaign without a formal disinformation campaign. Largely, the U.S. is not like Japan was because Japan had about 0% inflation and almost zero population growth. We do not need to see pre-financial-crisis GDP growth rates to get higher interest rates because interest rates are, still, artificially suppressed (Information I presented previously illustrated this.); but pre-financial-crisis-like GDP growth rates will create even higher interest rates potential. The Treasury cannot “…just as easily increase the money supply rather than issue debt” because of the potential for inflation. Also, Treasuries are not much of a gift to investors because other bonds offer better average historical and projected net returns. Fed, CBO, IMF, and economists’ consensus projections are, actually, relatively accurate. Some people get a false impression about this because they over-recognize when the projections are significantly incorrect and under-recognize when the projections are about correct. Also, they do not understand or forget that the projections are based on certain necessary assumptions (e.g., laws will not change). Also, they do not understand or forget that the projections can be derailed by difficult-to-predict downside risks like a recession or financial crisis. I do not have time to respond to the remainder of what you wrote; but I did read and genuinely consider it. At this point in time at least, I am sticking with exactly what I wrote in the article above. Frankly, in reading your comments, I eventually got the impression that you are biased by some sort of personal financial agenda, and that we need to take what you say with a large grain of salt. Thanks for taking the time to comment in such detail.

      • RA says

        Give me a break. I presented a counter argument and you don’t like it. I read your article. The entire premise of your argument is faulty. Anyone that reads you comments can see that you are full of yourself. You are likely a overconfident young man not over the age of 35 who thinks he’a know it all.

        Manipulating the stock market is clearly not the Fed’s mandate. But let’s not be so naive as to think that it doesn’t do it. Look at the levels of the market at times when QE took place and read Bernanke’s statement that a primary reason for it was to drive prices higher. Listen to Alan Greespan when he says that the stock market is the primary driver of the US economy. The Fed targets the market directly and takes direct action for it to achieve certain levels. If you do not understand that, you are destined to make foolish predictions based on mathematical certainties. The Fed can and will take action to make certain that the stock market is at certain levels and the way it will do it is by keeping rates low.

        Also, you make the assumption that the Fed will have to sell its bonds. The Fed is never going to sell those bonds. They have basically been retired. That’s just a few of the things you have wrong but I’m not going to write an article myself to refute it.

        The future doesn’t give a Buffalo nickel about your belief in reversion to the mean. Rates will definitely rise at some time in the future. Don’t look for a 30-year Treasury over 4% in the next 10 years. In the next 100 years, sure.

        • Kurt Shrout says

          Your comments reflect that you did not read and understand everything in my article or my replies to you. You did not present counter arguments. You simply stated your opinion, ignoring the facts and thinking I presented. Worse, you made many statements that were factually incorrect or inadequately supported. You continue to do the same in your reply above.

  3. David Waring says

    Hi RA. While we may have to put a more stringent policy in place in the future, currently we do not remove any comments from the posts unless they are marked as spam. Generally after someone has one comment approved all their future comments are automatically approved. In your case your comments are still being held for moderation by wordpress, likely because someone has been marking your comments as spam on another wordpress blog. With this in mind it may take a little longer than normal for your comments to show up on the blog. My apologies for the delay. Thanks Dave

    • Kurt Shrout says

      RA: I approved your comment, then I realized someone at LearnBonds had previously disapproved it (I may have misinterpreted the system though.); so I went with LearnBonds judgment, as I should. It is better for you if your comment is not published. It reflects poorly upon you. Personally, I am attempting to stick with a policy whereby I censor nothing but things like vulgarity and the unwarranted promotion of violence. This may be impractical for me to do though. Your comments were a good illustration of this. You should have never commented on my article to begin with. You have no interest in genuinely discussing any of its numerous aspects, and you keep writing things that ignore what is in it. (You say x; but I already spoke to x.) If you do not agree, fine; but simply remain silent if you are not genuinely interested in discussing the article. It is a poor use of my time, your time, and the remainder of the audience’s time if you do not. Also, some of your comments were unnecessarily negatively personal. The issue has nothing to do with whether I have a thick skin or not. The negative personal things are also not a good use of my time, your time, and the remainder of the audience’s time―and they are bad for your image and the image of LearnBonds.

      • Kurt Shrout says

        RA: LearnBonds did not disapprove your post. I may have misinterpreted the WordPress system. (In fact, I think I did.) Regardless, we are now instituting a new policy for comments beneath my articles. The policy is: “Comments are desired, but I do not guarantee their publication. If your comment[s] indicates that you did not read and genuinely consider the all of the article’s contents, I may not publish it. Also, you do not need to agree; but do not be derogatory. The comment section is meant for legitimate questions or concerns and well-intended discussion.” This policy is not censorship because I am explaining in advance that some comments may not be published and why. Others have similar policies.

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