Buffett hints at bond bubble

[super_awesome_username]

My two novice cents:

Buffett says stocks should give higher returns than bonds at current prices.
Lots of investing theory says you should hold an appropriate mix of cash, bonds, and stocks.

Both of these sentences can be correct - it depends on your timeframe. I would submit that Buffett is really saying *over the long run* stocks should return more than bonds at these prices. But that could take 10+ years to play out. If you're looking to maximize returns with money you don't need for the next 10 years, and have a stomach of steel, great, go 100% stocks if you like. But if you're looking to moderate the amount of risk you're taking at any given time, and could foresee having a potential need for at least some of the money you're investing in the next 5-10 years, then I think a mix of stocks *and* bonds/cash makes sense.

I'm currently about 67/26/7 stocks/bonds/cash, FWIW. That mix didn't maximize my returns over the last few years, but the bonds and cash sure helped me feel ok holding the stocks in 2008 and 2009.

Disclaimer: I have no qualifications whatsoever even to be managing my own money, much less giving anyone else investment advice.

 

[HFWR]

*[Yeah, yeah, I know... takes one to know one, OK?]

Don't be too hard on yourself. TH/CFB has been off the air for two years, and you're still 3000 posts behind...

Imagine if JG was still around. Okay, that's too ugly to ponder...

The problem with Gross is that it seems that he may say one thing, while his partner Mohamed El-Erian is doing the opposite. I am curious what people think Gross is saying about bonds now. I really don't know.

One of the talking heads on CNBC was making a pretty good case that we are seeing a sharp uptick in commodities which will soon translate to inflation at the retail level.

On the other hand Schwab just dropped the interest they were paying on their interest checking from .5% to .25% and the savings from .75 to .55%. The new Google price index is showing deflation in the US. I am hard pressed to imagine how the foreclosure mess will lead to anything other than lower housing prices in the intermediate term.

I've expected interest rates to rise for a few years now. Still expecting it...

 

[jacob]

Short story: I'm moving from stocks to bonds+natural resource companies. (I'm currently 90/10 or so).

Long story: Unless companies can successfully push the inflation onto their customers (kinda hard with everyone ""struggling") I don't see a big future for stocks. Shiller's graphs makes the case for me. If we do get a run-up, it's not going to last for long. We might feel supremely rich for a couple of years, but then it's heading for the dumps again. My expectations for stocks over the next decade are for poor returns. The yield on the industrials is once again getting reaching parity with short term corporate debt when it clearly should be higher due to the higher risk of cutting dividends. There's also a bigger risk for inflation + the world is hitting several resource limitations, most notably energy, but also food, and some some industrial metals.

 

[Nords]

... + the world is hitting several resource limitations, most notably energy, but also food, and some some industrial metals.

Every time I read those "peak resources" warnings, as the supply dwindles the price seems to rise to a level where suddenly a technically-feasible but economically unattractive alternative becomes profitable. And at those prices there's plenty to go around. Then everyone leaps on the idea, industry companies start cutting each other's throats, and suddenly the price is back down to its long-term average.

The trick is not to abandon the resource's industry but rather to figure out who's coming up with the next good idea.

 

[jacob]

Every time I read those "peak resources" warnings, as the supply dwindles the price seems to rise to a level where suddenly a technically-feasible but economically unattractive alternative becomes profitable. And at those prices there's plenty to go around.

I don't think it's technical innovations as much as it's people getting priced out of the market at higher nominal prices. This lowers demand; prices drop.
It's an overshot cycle much like the credit cycle. For example, when oil prices got very high, personal transportation (which is a large part of oil consumption) took a hit as people substituted their huge trucks and SUVs for more efficient cars or simply drove less.

The problem is that money is not a natural resource. It has no inherent value whatsoever. It only determines the distribution of wealth. It isn't wealthy in itself. Gold is similar. Hence money and gold can achieve amazingly high value. Oils and metals, not so much; at least not as long as the money system is still "alive".

Hence, there's a limit to "technical ingenuity". If nothing else this is clear from the fact that it's energetically senseless to pump up oil if the potential energy on needs to overcome is higher than the chemical energy in refined oil. (Yes, nuclear power could be used to pump it up, but at that point, oil would no longer be an energy source.). AFAIR the ratio of energy returned to energy invested is 4 to 1 today. Back in the golden age, it was 100--200 to 1.

Just saying ...

 

[kumquat]

There are some financial professionals who believe that the 10-year will get down to yielding 1.6% before finally hitting the lowest rate. If so, bonds will continue to appreciate for a while.

Audrey

All bubbles are inflating when they burst.

Trying to predict if and when something like that will happen is for DMT's.