Why isn't everyone panicking more?

[Wuffle]

The biggest problem you will have with the under 60's is them kicking off after a while when they are not dead and have a chunk of inheritance to spend if it is going to kill as many as you think it is.

W.

[GoSeigen]

You do know that your capital is at risk in "bonds/fixed interest gilts" too? You may be diversifying, but might not be avoiding that "...lots of further downside to come..."

Bond duration?

Stocks down 30%, gilts unchanged?


zico: if your hunch turns out right then I don't think your approach is bad at all. You'll need to think about switching back though. I doubt gilts are offer a great long-term return at current yields.


GS

Not sure what you mean.

Its what happens to prices from here that matters surely? Gilts have been pretty volatile this week, any reason to expect them not to continue to be? Then you suggest gilts also don't offer a great long-term return, which suggest you are agreeing with me.

I don't have a crystal ball, for equities or gilts, just pointing out that gilts, let alone "bonds" are far from certain to preserve capital in the short, medium or long term. If you disagree perhaps you can quantify why you think that might not be a true statement.

I think we'd probably agree if we were to thrash it out, it's just the way you have expressed it makes it sound more like the typical gilt perma-bear sort of position, e.g. it would be fair to say that gilt yields are now so low that they offer little prospect of any gain and plenty of risk of loss; but to say that gilts are likely to fall because they trade above par (as you said very recently) sounds like the sort of thing people were saying about gilts before the GFC and which has been demonstrated to be completely wrong. Par is not a relevant number for bonds, it is the yield that matters. Bonds trading far below par can be a terrible investment; bonds trading above par can give excellent returns for many years.

Generalised bashing of gilts (and limping them with other bonds) also obscures certain unique and valuable features of them:
1. They have a range of duration, offering protection from volatility when needed or more risk if that is preferred.
2. Mostly they have unrivalled liquidity.
3. They normally carry minimal credit risk greatly simplifying their valuation.
4. In distressed markets they are very often anti-correlated to risky assets making them an excellent hedge.

But also, crucially, gilts do not exist in a vacuum. They compete in a market with other assets and even if gilt yields are very low they are still very likely to outperform if spreads are narrow and markets become distressed. The problem here is that this bet becomes increasingly unlikely and you have to be very lucky with the timing. This is where I agree very much: it's not a good bet -- but if someone wants to take it then I think persuading them not to requires a better argument than "gilts are overvalued" or "gilts trade above par".

Right now I think a nice way to express what is happening is that the market has become correlated at two separate extremes: bonds are practically indistinguishable from money a long way down the yield curve, whilst risky assets are all clumped together at the other end. Risky assets offer wonderful returns but terrifying volatility, while the cash-equivalents offer paltry returns and are now highly vulnerable to inflation.

The thing that bothers me most about the anti-gilt position at the moment though, is that I STILL don't perceive that gilts are held predominantly by dumb money. Also, issuance is not particularly high. I'm going to turn very bearish on gilts when everyone is buying them to save the country. We may be on the verge of that with the current crisis, investors like zico being the first of that wave. So for now I'm agnostic when it comes to gilts. I don't want them, but I'm not going to short them either.

And to zico I think I'd say if you want shorter gilts as a short-term hedge you might as well hold cash. I don't see much difference and cash is even more liquid than gilts/bonds.

GS

[GoSeigen]

Thanks for the helpful comments and advice. I know gilts/fixed interest aren't the same as cash, but in my pension fund, that's the nearest category available to "Sticking the money under the bed" which is my preferred option for a % of my assets, while I wait to see what happens next.
My investments here are in a Moneypurchase Pension Fund (which is much smaller beer than my final salary pension, but still significant enough that I don't want to lose a lot of money in it).

After my Friday trades, my fund now has 40% Gilts/Fixed Interest (up from 10%) so I'm thinking that whatever happens, the effect is proportionately less, and I've "damped down" my fund from the vagaries of the market.

If you don't have the option of cash because of the terms of your fund vehicle then yes, bonds/gilts are a close second. I don't see strong valid objections.

GS

[dealtn]

Bond duration?

Stocks down 30%, gilts unchanged?


zico: if your hunch turns out right then I don't think your approach is bad at all. You'll need to think about switching back though. I doubt gilts are offer a great long-term return at current yields.


GS

Not sure what you mean.

Its what happens to prices from here that matters surely? Gilts have been pretty volatile this week, any reason to expect them not to continue to be? Then you suggest gilts also don't offer a great long-term return, which suggest you are agreeing with me.

I don't have a crystal ball, for equities or gilts, just pointing out that gilts, let alone "bonds" are far from certain to preserve capital in the short, medium or long term. If you disagree perhaps you can quantify why you think that might not be a true statement.

I think we'd probably agree if we were to thrash it out, it's just the way you have expressed it makes it sound more like the typical gilt perma-bear sort of position, e.g. it would be fair to say that gilt yields are now so low that they offer little prospect of any gain and plenty of risk of loss; but to say that gilts are likely to fall because they trade above par (as you said very recently) sounds like the sort of thing people were saying about gilts before the GFC and which has been demonstrated to be completely wrong. Par is not a relevant number for bonds, it is the yield that matters. Bonds trading far below par can be a terrible investment; bonds trading above par can give excellent returns for many years.

Generalised bashing of gilts (and limping them with other bonds) also obscures certain unique and valuable features of them:
1. They have a range of duration, offering protection from volatility when needed or more risk if that is preferred.
2. Mostly they have unrivalled liquidity.
3. They normally carry minimal credit risk greatly simplifying their valuation.
4. In distressed markets they are very often anti-correlated to risky assets making them an excellent hedge.

But also, crucially, gilts do not exist in a vacuum. They compete in a market with other assets and even if gilt yields are very low they are still very likely to outperform if spreads are narrow and markets become distressed. The problem here is that this bet becomes increasingly unlikely and you have to be very lucky with the timing. This is where I agree very much: it's not a good bet -- but if someone wants to take it then I think persuading them not to requires a better argument than "gilts are overvalued" or "gilts trade above par".

Right now I think a nice way to express what is happening is that the market has become correlated at two separate extremes: bonds are practically indistinguishable from money a long way down the yield curve, whilst risky assets are all clumped together at the other end. Risky assets offer wonderful returns but terrifying volatility, while the cash-equivalents offer paltry returns and are now highly vulnerable to inflation.

The thing that bothers me most about the anti-gilt position at the moment though, is that I STILL don't perceive that gilts are held predominantly by dumb money. Also, issuance is not particularly high. I'm going to turn very bearish on gilts when everyone is buying them to save the country. We may be on the verge of that with the current crisis, investors like zico being the first of that wave. So for now I'm agnostic when it comes to gilts. I don't want them, but I'm not going to short them either.

And to zico I think I'd say if you want shorter gilts as a short-term hedge you might as well hold cash. I don't see much difference and cash is even more liquid than gilts/bonds.

GS

Its not clear that others want to witness an argument about Gilts (or Bonds) particular on this board, but all I have done and will continue to do is make the point that Gilts are a long way from a risk free investment, which seems to be the default position of many, and seems to have become almost perceived wisdom these days.

Over many time frames they may turn out (with hindsight) to have been great investments, as we can witness looking backwards from now over a long period. That doesn't mean that will be the case going forwards.

Let us be clear though, Par is very much a relevant number for bonds. It very much is the case that par, or 100, will be the redemption price. The path to get there is less certain. To deny this is folly. Buying at a price above this, you will be receiving less back on maturity, and only compensated by any coupons received in the between time. With real interest rates negative along the curve holding to maturity you are losing purchasing power.

A guaranteed small loss might, again in hindsight, be better than a larger one in an alternative asset class, but could easily be worse. Furthermore selling before maturity could have a much more significant loss. To deny this is simply wrong.

We can thrash this out if you want, but I am certain that everything I have said in this reply is true.

[GoSeigen]

We can thrash this out if you want, but I am certain that everything I have said in this reply is true.

Much of what you say is true but only in particular circumstances (e.g. if you consider only holding to maturity). To assert them as universal truths is disingenuous.

Invoking hindsight is similarly a bit of a slur if I may say so. It takes guts to form a contrary position to everyone else and invest practically all your assets accordingly. When it then turns out that the investment position was very profitable then frankly it's churlish for someone twelve years later to wave it away as merely "lucky in hindsight."

There was a highly followed individual, a former professional bond trader, from the old Motley Fool boards who sat in my car one evening in December 2017 and told me to sell all my gilts and buy the oil E&P Soco instead, using very similar arguments to yours. I ignored his advice and ploughed more into the gilts. I invite you to compare the out-turn for gilts and for Soco (now called Pharos) over that period.


GS

[dealtn]

We can thrash this out if you want, but I am certain that everything I have said in this reply is true.

Much of what you say is true but only in particular circumstances (e.g. if you consider only holding to maturity). To assert them as universal truths is disingenuous.

Invoking hindsight is similarly a bit of a slur if I may say so. It takes guts to form a contrary position to everyone else and invest practically all your assets accordingly. When it then turns out that the investment position was very profitable then frankly it's churlish for someone twelve years later to wave it away as merely "lucky in hindsight."

There was a highly followed individual, a former professional bond trader, from the old Motley Fool boards who sat in my car one evening in December 2017 and told me to sell all my gilts and buy the oil E&P Soco instead, using very similar arguments to yours. I ignored his advice and ploughed more into the gilts. I invite you to compare the out-turn for gilts and for Soco (now called Pharos) over that period.


GS

Ok, I have mentioned both hold to maturity, and selling before redemption. Not sure what you are trying to say there.

But more importantly I am not invoking hindsight at all. This is to do with investing now. It is uncertain going forward whether Gilts, or Bonds, will be a good choice going forward, and can only be answered in hindsight as the future evolves. This isn't about you, no matter what you might think. All I am doing is pointing out to those that might have little knowledge about the asset class that with returns uncertain, they are not risk free. I really made no comment about your "guts" nor have I any knowledge about the quantum of position you took.

You are, it seems, accusing me of something and labelling such as churlish. Can you point out what that is as I am struggling to spot it. Certainly nowhere would I recognise the quote of "lucky in hindsight" being something that can be attributed to me.

You can invite me to look at any multitude of things, but please don't flatter yourself to think I will take you up on many of them.

If you have invested successfully, then good for you, and if you are anything like me that will be all the more satisfying if others had told you it couldn't be done, or suggested alternatives which you chose to ignore. But please take your ire elsewhere as it seems you are wanting to introduce personal feelings and attacks where none are merited.

I wish you all the best in whatever asset investment decisions you make but I will continue to call out anyone that makes out that Gilts, or Bonds are without risk. That has never been the case, and certainly isn't so now.

[JohnW]

My words mean just what I choose them to mean, with apology to Lewis Carroll.
Perhaps 'risk free' and 'free of risk' are different, but some view them as interchangable.
Let's un-bundle bonds and fixed interest gilts for a start, which we didn't at the start, because clearly commercial bonds are more risky than normal at times like this when businesses will go bust. So, gilts....
At the start there was reference to 'fixed interest gilts'

capital is at risk in "bonds/fixed interest gilts"

I don't think there have been any floating rate gilts for 20 years, so maybe just talk about gilts. Or does 'gilts' refer to some non-UK, but still government bond, available with variable interest eg France?
'Free of risk' is clear enough, but can any investment be, or why would you get paid for not taking a risk? So let's put investing without risk aside, unless it's in a separate discussion about theory.
'Risk free' refers to (whoops, Lewis Carroll again) a (usually US) government bond because the default risk is seen as vanishingly low. Obviously, not zero, as any country could default and many have. And 'risk free' is certainly not free of interest rate risk. But calling it 'risk free' is basis for comparing other investment choices, and how much more return you need to accept the extra risk.
If that's what those words mean, can we say gilts are a long way from a risk free investment? Depends what 'long way' is I suppose.

It very much is the case that par, or 100, will be the redemption price. The path to get there is less certain. To deny this is folly. Buying at a price above this, you will be receiving less back on maturity, and only compensated by any coupons received in the between time.

True enough for me, but for people not so familiar with bonds, it's perhaps worth pointing out that whether you lose out on principal but get compensated with coupons, or you buy new bonds at par and then receive a lower coupon rate, the money you make or lose is the same in both cases; other wise there'd be price changes with trading to make them the same.

Furthermore selling before maturity could have a much more significant loss.

I don't think one would argue with that because it's not clear what we're comparing selling before maturity with.

[1nvest]

But yesterday, I sold about 40% of my share holding to buy bonds/fixed interest gilts in my pension scheme, because it still seems to me that even though I missed the boat in a big way, there's still lots of further downside to come, and indeed Wall St had a further tumble just after I sold.

You do know that your capital is at risk in "bonds/fixed interest gilts" too? You may be diversifying, but might not be avoiding that "...lots of further downside to come..."

Bond duration?

Stocks down 30%, gilts unchanged?

zico: if your hunch turns out right then I don't think your approach is bad at all. You'll need to think about switching back though. I doubt gilts are offer a great long-term return at current yields.

GS

Nearing the end of fiscal year when a 50/50 risk-on/risk-off portfolio might be being rebalanced. For a risk-on equal blend of FT100, FT250, S&P500 and gold, the year to date total return figures are of the order

Gold +26%
FT100 -24%
FT250 -26%
S&P500 -2% (stock losses largely offset by declines in Pound relative to US$)

So if that is 50/50 with cash deposit/shorter dated bonds then even assuming 0% return from cash deposits a portfolio decline of around -3% for the year (using high street building society bond 5 year ladder and you might have earned +2%, which would have reduced the 50/50 portfolio year to date loss down to around -2%).

Where predominately for rebalancing you'd be reducing gold and reducing cash/bonds (rolling less of the maturing cash bond proceeds into another 5 year bond) in order to top up FT100 and FT250. NOT selling stock to add to bonds. In having seen FT100 and FT250 both decline around -25% total return, that cash is buying 1 / 0.75 = 33% more shares than the number of FT100/FT250 shares that cash would have bought a year ago. Given a relatively small difference in S&P500, hardly worth bothering to rebalance that (leave as-is).

For tax efficiencies consider perhaps rebalancing before the end of March, or in the new financial year (after 5th April), or perhaps even a combination of both - whichever might be the more tax efficient.

Once done with the review/rebalance, forget about it all until March 2021 (there are plenty of other things to worry about at present).

[simoan]

We’ll forget it happened in 10 years

Whilst I'm not looking to currently sell out of my investments due to the issue, I've got to say that when I read that one Italian is currently dying every two minutes from the virus, I also don't consider this to be something that we'll easily forget in such a hurry either...

Cheers,

Itsallaguess

I recently read the most excellent book Factfulness by the amazing Hans Rosling. It's a real shame one of the world's experts on pandemics, and co-founder of Medecins Sans Frontier who fought the Ebola virus in Africa, left this world too early due to cancer three years ago. It's a must read for everyone IMHO in current times and for five of your English pounds it can be downloaded straight to your Kindle free from Covid-19 but with all the lurgy associated with Amazon

Now, Hans wouldn't have liked the above statement of fact, or many of the other statistics quoted on various TLF threads recently. Using emotive language like an "Italian dying every two minutes..." whilst horrible, you need to compare it with something before it means anything. How many Italians normally die every two minutes, for instance? That would be good to know so we can see if two dying per minute is actually that exceptional. I suspect it is but we need another number for comparison.

All the best, Si

[Itsallaguess]

Now, Hans wouldn't have liked the above statement of fact, or many of the other statistics quoted on various TLF threads recently. Using emotive language like an "Italian dying every two minutes..." whilst horrible, you need to compare it with something before it means anything.

How many Italians normally die every two minutes, for instance?

That would be good to know so we can see if two dying per minute is actually that exceptional. I suspect it is but we need another number for comparison.

Yep - appreciate what you're saying here.

What if we compared it with the number of Italians that were dying from the virus every two minutes, three months ago?

That would be a big fat zero, I believe...

Cheers,

Itsallaguess

[simoan]

What if we compared it with the number of Italians that were dying from the virus every two minutes, three months ago?

That would be a big fat zero, I believe...

Cheers,

Itsallaguess

Yep. As for many other countries in the world, the rate of deaths from the virus has gone up infinitely. See what I did there with a simple divide by zero? You can't get a much bigger number than that! Hans would be proud of me

All the best, Si

[Itsallaguess]

What if we compared it with the number of Italians that were dying from the virus every two minutes, three months ago?

That would be a big fat zero, I believe...

Yep. As for many other countries in the world, the rate of deaths from the virus has gone up infinitely. See what I did there with a simple divide by zero? You can't get a much bigger number than that! Hans would be proud of me

As I said earlier, I agree that there's something in your point, but I also think it's difficult to get to the heart of this whilst thinking purely in statistical terms.

If we boil it down to a single life, would that help further the discussion in more general terms?

What if we discuss an elderly gentleman with an underlying condition that might have meant he would be unlikely to reach the 'average' life duration, but he might well live for another five years given his current condition and the medication he's taking for it.

If he got this virus, let's assume that it would be highly likely that he'd die within a week...

I've not read the book you're describing, but can you please explain why Hans would say it's not worth us being concerned about the risk to this single elderly gentleman, or why we shouldn't give any real importance to the issue if he were to die from it today?

I'm genuinely interested why a virus that is both very contagious and also that clearly shortens life expectancy in an important section of global society should not be important in terms of trying to tackle it...

Cheers,

Itsallaguess

[zico]

After an initial 4.5% drop today for the FTSE 100 , the Fed took some decisive action with a "Whatever it takes" unlimited commitment to buy government-backed debt, which moved the FTSE 100 up sharply to be just 1% down on the day.
This bounce lasted less than 2 hours.
At the moment, governments around the world keep announcing what would normally be massive ground-breaking plans, and the markets bounce briefly as they absorb the good news, and then continue their slide. It's like throwing stones into a lake.

Meanwhile, a very interesting tweet from Trump (his caps, obvs).

WE CANNOT LET THE CURE BE WORSE THAN THE PROBLEM ITSELF. AT THE END OF THE 15 DAY PERIOD, WE WILL MAKE A DECISION AS TO WHICH WAY WE WANT TO GO!

This sounds to me like he's preparing to prioritise saving the economy and the stock market at the expense of the population. Can he do that? What would be the effects? It would almost certainly be a very different approach to the rest of the Western world, and Asia, so how would the world look if Trump adopted a "Take it on the chin" approach?
I don't know the answer, but I can't see this reducing the uncertainty for businesses and world trading.
Interested to hear how other people think this might work out.

[Parky]

Now, Hans wouldn't have liked the above statement of fact, or many of the other statistics quoted on various TLF threads recently. Using emotive language like an "Italian dying every two minutes..." whilst horrible, you need to compare it with something before it means anything. How many Italians normally die every two minutes, for instance? That would be good to know so we can see if two dying per minute is actually that exceptional. I suspect it is but we need another number for comparison.

All the best, Si

No idea about Italy, but figures from the Office for National Statistics for the UK for 2018 are that 541589 deaths were registered in the UK in 2018, that's 1.03 every minute if my arithmetic is correct.

[redsturgeon]

After an initial 4.5% drop today for the FTSE 100 , the Fed took some decisive action with a "Whatever it takes" unlimited commitment to buy government-backed debt, which moved the FTSE 100 up sharply to be just 1% down on the day.
This bounce lasted less than 2 hours.
At the moment, governments around the world keep announcing what would normally be massive ground-breaking plans, and the markets bounce briefly as they absorb the good news, and then continue their slide. It's like throwing stones into a lake.

Meanwhile, a very interesting tweet from Trump (his caps, obvs).

WE CANNOT LET THE CURE BE WORSE THAN THE PROBLEM ITSELF. AT THE END OF THE 15 DAY PERIOD, WE WILL MAKE A DECISION AS TO WHICH WAY WE WANT TO GO!

This sounds to me like he's preparing to prioritise saving the economy and the stock market at the expense of the population. Can he do that? What would be the effects? It would almost certainly be a very different approach to the rest of the Western world, and Asia, so how would the world look if Trump adopted a "Take it on the chin" approach?
I don't know the answer, but I can't see this reducing the uncertainty for businesses and world trading.
Interested to hear how other people think this might work out.

He could well get rid of over 10 million unproductive members of society and get the USA up and running again before the rest of the world!

He might just do it...


John

[simoan]

As I said earlier, I agree that there's something in your point, but I also think it's difficult to get to the heart of this whilst thinking purely in statistical terms.

If we boil it down to a single life, would that help further the discussion in more general terms?

What if we discuss an elderly gentleman with an underlying condition that might have meant he would be unlikely to reach the 'average' life duration, but he might well live for another five years given his current condition and the medication he's taking for it.

If he got this virus, let's assume that it would be highly likely that he'd die within a week...

I've not read the book you're describing, but can you please explain why Hans would say it's not worth us being concerned about the risk to this single elderly gentleman, or why we shouldn't give any real importance to the issue if he were to die from it today?

I'm genuinely interested why a virus that is both very contagious and also that clearly shortens life expectancy in an important section of global society should not be important in terms of trying to tackle it...

Cheers,

Itsallaguess

Honestly, you should just read the book. Hans Rosling was one of the few people that saw a high probability of a global pandemic coming and how unprepared the world was. He was right. I don't think anybody is playing down the horrendous nature of this virus and it's effects on society. Certainly not me. The only point I was trying to make was that you need to be careful when quoting statistics.

At the end of the day, why worry about one old man? Did you know that in 2016 4.2 million babies died worldwide?

All the best, Si

[gryffron]

He could well get rid of over 10 million unproductive members of society and get the USA up and running again before the rest of the world!
He might just do it...

It might ultimately prove to have been the best strategy. But Trump is unlikely to remain PotUS long enough to bask in the glory. He is a president who has fed on economic/stock market success. With the stock market tanking, unemployment rocketing, and voters' elderly relatives dropping like flies, it's very hard to see any strategy which lets him win in November. Unless the democrats can stuff it up again. Sanders?

Gryff