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Old 08-12-2011, 04:11 PM   #21
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Looks like they are indirectly control the long rates too. Poor short term yields are forcing investors out on the longer end of the curve and driving yields down. Fed's Easy Policy Confines Treasurys Rally To Long End - WSJ.com

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They either continue buying short-term debt and earn next-to-nothing, or they take the risk of locking themselves into a prolonged period of holding U.S. paper to earn a bit more. Investors are still cautious as they transition into the latter.
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Old 08-13-2011, 11:48 AM   #22
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I just looked at I-bonds. they are paying an excellent rate at this time. However, for new bonds the fixed rate is 0%, that's right ZERO PERCENT! One only gets the inflation rate.
Zero Percent real is actually a smashing good deal right now. In the TIPS market real yields are negative out to ten year maturities. The real yield on nominal bonds is also expected to be negative.

The huge problem with I-Bonds is the investment limit. If that cap were lifted, I-Bond 0% real yields would be 'back-the-truck-up' attractive compared to the rest of the fixed income market.
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Old 08-13-2011, 01:10 PM   #23
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Those lousy real yields are telling us it pays to take some risks now.

SP500 PE=14.1 trailing and PE=11.9 estimated. Throw in a 2.2% dividend yield which is very close to the 10 year Treasury, and stocks look very good right now.
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Old 08-13-2011, 08:33 PM   #24
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Relax. We are on the way to deflation. Depression follows.

The Fed is out of ammunition, no matter what Bernanke says. What can they do after interest rates are zero? Banks are not lending. Businesses are not investing. People are not buying. This is not good, people.

IMHO the past few Chairmen of the Fed should be considered criminals.
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Old 08-14-2011, 09:09 AM   #25
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Article from the WSJ from last April. Low interest rates force many retirees to take on more risk than they're comfortable with. Doesn't look this this will change anytime soon.

Fed's Low Interest Rates Crack Retirees' Nest Eggs - WSJ.com


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John Lehman, a 70-year-old former hardware entrepreneur who lives on the other side of the golf course from Mr. Cohen, has less sympathy for what he calls "those idiots in Washington, D.C." He says he's keeping about 80% of his considerable investments in stocks, despite the shock he suffered during the financial crisis. He hopes his returns in equities will allow him to live without dipping into his capital.

"That's why most of us are in the stock market, because there's no place else to go," he says, noting that he would happily move into safer CDs if he could get a better rate. "I hope my assets don't run out before I die."

Mr. Lehman's taste for stocks goes against the traditional advice of financial planners, who urge older Americans to keep a majority of their assets in relatively safe, fixed-income investments. But more retirees are getting into riskier positions as they try to avoid running out of money, says Neil Kasanofksy, a financial adviser in Port Charlotte who has a largely elderly clientele.
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Old 08-14-2011, 09:24 AM   #26
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Relax. We are on the way to deflation. Depression follows.

The Fed is out of ammunition, no matter what Bernanke says. What can they do after interest rates are zero?
The Fed is out of political will, but has plenty of ammunition if there is a will to use it. With the God-Like powers to create unlimited money out of thin air, the Fed has deep enough pockets to buy every asset on earth. It can manufacture inflation if it wants to. It won't because such actions have risks, not least of which is to the Fed's independence.

Alternatively, if the Fed were to commit to a credible long-run inflation target of 3% to 4%, that would have the effect of reducing real rates below zero. It's announcement that rates will stay at zero to the middle of 2013 is a half step in that direction. This could be more effective policy than QE3.
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Old 08-14-2011, 09:36 AM   #27
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Those lousy real yields are telling us it pays to take some risks now.

SP500 PE=14.1 trailing and PE=11.9 estimated. Throw in a 2.2% dividend yield which is very close to the 10 year Treasury, and stocks look very good right now.
I'm not quite as optimistic about stocks as you are. I'm not comfortable being forced out of one overvalued asset into another one. Chasing yield almost always ends badly. True, PE ratios look attractive, but long-run measures like PE-10 still say we're in overvalued territory. I'm slightly uncomfortable with buying in at record profit margins and I believe that all the liquidity flowing through the financial system has the effect of boosting asset prices and making fundamentals appear better than they really are.

Having said that, stocks are a somewhat better buy today than they were a couple of weeks ago and bonds are a far, far worse buy. Here's an interesting chart that partly gets to your point: S&P 500 Yields are now above 10-Yr Bond Yields.

Something to note here, though. Unlike in 2008, when last these yields crossed, nearly the entire move today is because bond prices have rallied so strongly. Stocks aren't nearly as cheap as they were in 2008 when yields reached 4% (they're half that now and in the neighborhood of where they were prior to the last crash).

I'm not generally of the view that stocks are attractive simply because bonds suck so bad. It's entirely possible they both suck.
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Old 08-14-2011, 10:03 AM   #28
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I'm not quite as optimistic about stocks as you are. I'm not comfortable being forced out of one overvalued asset into another one. Chasing yield almost always ends badly. True, PE ratios look attractive, but long-run measures like PE-10 still say we're in overvalued territory. I'm slightly uncomfortable with buying in at record profit margins and I believe that all the liquidity flowing through the financial system has the effect of boosting asset prices and making fundamentals appear better than they really are. ....
I'm never comfortable with the stock market so that makes two of us.

In my view people are looking at PE10 and not realizing there is an underlying problem with it. If you look at the standard deviation of those 10 year earnings (the E10 in the denominator) they are up much higher then historical values. It is not completely up to date, but you'll get the idea. Here is a chart, check out that yellow line:

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Old 08-14-2011, 10:06 AM   #29
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I've always been confused by people who think high interest rates (especially on CDs) are a good deal. They don't see all the other bad economic factors that accompany high rates.

In 2004 I sat next to a man at a Schwab "investment dinner". In late 1974 he'd put over 75% of his net worth into 30-year Treasuries... at 9%. He was in despair trying to figure out how to replicate that 9% yield with the latest asset classes. The Schwab advisers were drooling into their napkins.
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Old 08-14-2011, 11:26 AM   #30
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I think a healthy fear of the stock market is good. Along with a healthy fear of inflation. And a healthy fear of extreme interest rates.
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Old 08-14-2011, 11:48 AM   #31
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Originally Posted by Gone4Good View Post
The Fed is out of political will, but has plenty of ammunition if there is a will to use it. With the God-Like powers to create unlimited money out of thin air, the Fed has deep enough pockets to buy every asset on earth. It can manufacture inflation if it wants to. It won't because such actions have risks, not least of which is to the Fed's independence.

Alternatively, if the Fed were to commit to a credible long-run inflation target of 3% to 4%, that would have the effect of reducing real rates below zero. It's announcement that rates will stay at zero to the middle of 2013 is a half step in that direction. This could be more effective policy than QE3.
How does this work? The Fed can't buy anything, as far as I know. They set rates.
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Old 08-14-2011, 12:20 PM   #32
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Article from the WSJ from last April.
I'm with Mr. Lehman.
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Mr. Lehman's taste for stocks goes against the traditional advice of financial planners, who urge older Americans to keep a majority of their assets in relatively safe, fixed-income investments.
I just don't believe that traditional advice, these days when interest rates are low. I hold only stocks -- no bonds.
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Old 08-14-2011, 12:29 PM   #33
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I'm with Mr. Lehman.

I just don't believe that traditional advice, these days when interest rates are low. I hold only stocks -- no bonds.
If I had a pension like you do, I might share your belief.
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Old 08-14-2011, 12:36 PM   #34
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If I had a pension like you do, I might share your belief.
Excellent point FD! As I've mentioned numerous times on this board over the years, poster's comments regarding investment strategies should always be taken in light of their other financial resources. AA's for folks with large pensions/SS should/could be very different than folks living exclusively off of investment income.

Another AA determining factor is the ability of the retiree to be flexible in spending, a young single person vs a middle age parent with kids for example.

Context is important.
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Old 08-14-2011, 12:55 PM   #35
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AA's for folks with large pensions/SS should/could be very different than folks living exclusively off of investment income.
So those living exclusively off of investment income should be more willing to buy bonds? But isn't this thread about how that's not working out too well?
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Old 08-14-2011, 01:04 PM   #36
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All my views expressed here are from the standpoint of a standard stock/bond allocation with some SS thrown in. The only long term bonds I own are Ibonds purchased in 2000. Should have held those longer dated TIPS.

I do think it's possible to achieve reasonable real rates even in a rising interest rate environment. That is, over any reasonable long period like over 10 years (see rate history from 1950 - 1980). Short term it could be painful at times. That's where the balance of stocks comes into play.
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Old 08-14-2011, 01:09 PM   #37
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I'm with Mr. Lehman.

I just don't believe that traditional advice, these days when interest rates are low. I hold only stocks -- no bonds.
Here's the thing I worry about. You impress me as someone who understands how to manage risk. With rates so low, I fear many people, particularly the elderly who've always invested in CDs, are tempted to take on risk they don't understand or be preyed on by those promising high returns.
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Old 08-14-2011, 01:15 PM   #38
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So those living exclusively off of investment income should be more willing to buy bonds? But isn't this thread about how that's not working out too well?
So folks whose financial needs are met by large, secure pensions should invest the same as folks with no pension? IMHO, income sources outside the FIRE porfolio do have a bearing on the portfolio's AA strategy. But we all decide on our own AA's, so you do it your way, Ill do it mine.
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Old 08-14-2011, 02:28 PM   #39
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How does this work? The Fed can't buy anything, as far as I know. They set rates.
Q: How do they set interest rates?

A: Through "Open Market Operations" (a.k.a buying and selling bonds on the open market).

Beyond that, here is a very short summary of what Bernanke previously said the Fed has the authority to do.

This is an excerpt from his actual speech . . .

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A second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral. For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.


The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.

. . .


Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. . . . the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.
That last paragraph may seem a bit cryptic, but he's basically saying that in conjunction with the help of Treasury, the Fed can essentially finance the acquisition of any asset. He can buy the whole world.
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Old 08-14-2011, 02:32 PM   #40
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In my view people are looking at PE10 and not realizing there is an underlying problem with it. If you look at the standard deviation of those 10 year earnings (the E10 in the denominator) they are up much higher then historical values. It is not completely up to date, but you'll get the idea. Here is a chart, check out that yellow line:
So what you're saying is that annual earnings have become far more volatile, which stands to reason considering we've had the 2000 and 2008 debacles within the last 10-yr window. That probably makes PE-10 somewhat less reliable, but I'd also argue that it makes normal PE completely unreliable.

I'd continue with the thought that if earnings are now far more volitile than was true in the past, equities are far more risky than was true in the past. Therefore higher risk premiums (lower PE's, however measured) seem appropriate. No?
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