Post by newtecher on Oct 22, 2022 13:31:11 GMT
Hi everyone,
I am new to this forum but was active on M* forums about 10 years ago. It is great to see so many posters have moved here and the same respectful interactions that made the old M* forums so special.
I am an absolute value investor in the spirit of oildog (for those who remember that M* poster). Accordingly, I have been in mostly cash or high-yield CDs in the last 5 years since I did not see value anywhere (except occasional forays into some CEFs and energy mutual funds). In hindsight, I could have done much better by staying in US stocks, but missing out on large valuation expansions (from already high values) is par for the course for absolute value investors.
I am now starting to deploy large amounts of money as I start to see decent values in some asset classes.
1) TIPS are very attractively valued right now. Real yields are now around 2% all the way out to 20-30 year maturities. I am employing about half of all assets into TIPS ETFs (split between short and long-term).
That said, I am uncertain about how inflation will play out as there are too many moving parts. Ukraine may get much worse, with massive energy disruptions, and investment results similar to 1970s. China-Taiwan is another wildcard. TIPs (especially long-term) should do very well in these terrible scenarios. I can see real yields increasing further, maybe to 2.5% in the short term due to frenetic Fed tightening, but I do not see them going higher than 2.5%. Inflation+2% is likely better than GDP growth in realistic scenarios and comparable to stock returns over many long-term periods. There are some fringe risks like US debt default or severe political dysfunction, but that would affect all US assets, and can only be hedged by exposure outside the US. Some people are concerned that the government will change the way inflation is calculated (e.g., make it more similar to PCE deflator) and thereby degrade TIPs returns. It is possible, but most likely would be gradual and challenged in courts. In addition, TIPs are only about 10% of all treasuries, so messing with inflation rates is probably not worth the trouble for the government.
It is also entirely possible that the Ukraine war eases or China has a full-blown financial crisis, the Fed goes way too far, and we end up with deflation as the main threat again (like in 2008-2020). In that sense, some long-term treasuries are probably worth buying as a hedge. Really long treasuries are now approaching 4.5% and are attractive for the first time since many years ago. I just bought some long-term treasuries to complement the large TIPS holdings and will continue to cost average into them.
2) Emerging markets. Many portfolios are now at <10 earnings and at less than the book value. Of course, the geopolitical risks remain. Russian stocks have turned into pumpkins for foreign holders and if Xi chooses to invade Taiwan Chinese stocks may do the same, not to mention the knock-on effects on all other economies. That said, there are many EM stock funds with limited Chinese/Taiwan exposure and trading at the same very low valuations.
I do not see much value in US or developed market stocks right now except maybe in energy. However, stock valuations may improve a lot going forward. Historically speaking, high inflation is not kind to stock valuations. High real rates (see TIPS yields) can put a lot of pressure on stocks. Valuations will also drop in case of recession and deflation. I would happy to switch from TIPs to US stocks if that happens.
Would be happy to see comments/criticisms, especially from old M* posters. The world is unpredictable, but I finally see some values.
I am new to this forum but was active on M* forums about 10 years ago. It is great to see so many posters have moved here and the same respectful interactions that made the old M* forums so special.
I am an absolute value investor in the spirit of oildog (for those who remember that M* poster). Accordingly, I have been in mostly cash or high-yield CDs in the last 5 years since I did not see value anywhere (except occasional forays into some CEFs and energy mutual funds). In hindsight, I could have done much better by staying in US stocks, but missing out on large valuation expansions (from already high values) is par for the course for absolute value investors.
I am now starting to deploy large amounts of money as I start to see decent values in some asset classes.
1) TIPS are very attractively valued right now. Real yields are now around 2% all the way out to 20-30 year maturities. I am employing about half of all assets into TIPS ETFs (split between short and long-term).
That said, I am uncertain about how inflation will play out as there are too many moving parts. Ukraine may get much worse, with massive energy disruptions, and investment results similar to 1970s. China-Taiwan is another wildcard. TIPs (especially long-term) should do very well in these terrible scenarios. I can see real yields increasing further, maybe to 2.5% in the short term due to frenetic Fed tightening, but I do not see them going higher than 2.5%. Inflation+2% is likely better than GDP growth in realistic scenarios and comparable to stock returns over many long-term periods. There are some fringe risks like US debt default or severe political dysfunction, but that would affect all US assets, and can only be hedged by exposure outside the US. Some people are concerned that the government will change the way inflation is calculated (e.g., make it more similar to PCE deflator) and thereby degrade TIPs returns. It is possible, but most likely would be gradual and challenged in courts. In addition, TIPs are only about 10% of all treasuries, so messing with inflation rates is probably not worth the trouble for the government.
It is also entirely possible that the Ukraine war eases or China has a full-blown financial crisis, the Fed goes way too far, and we end up with deflation as the main threat again (like in 2008-2020). In that sense, some long-term treasuries are probably worth buying as a hedge. Really long treasuries are now approaching 4.5% and are attractive for the first time since many years ago. I just bought some long-term treasuries to complement the large TIPS holdings and will continue to cost average into them.
2) Emerging markets. Many portfolios are now at <10 earnings and at less than the book value. Of course, the geopolitical risks remain. Russian stocks have turned into pumpkins for foreign holders and if Xi chooses to invade Taiwan Chinese stocks may do the same, not to mention the knock-on effects on all other economies. That said, there are many EM stock funds with limited Chinese/Taiwan exposure and trading at the same very low valuations.
I do not see much value in US or developed market stocks right now except maybe in energy. However, stock valuations may improve a lot going forward. Historically speaking, high inflation is not kind to stock valuations. High real rates (see TIPS yields) can put a lot of pressure on stocks. Valuations will also drop in case of recession and deflation. I would happy to switch from TIPs to US stocks if that happens.
Would be happy to see comments/criticisms, especially from old M* posters. The world is unpredictable, but I finally see some values.
