SPY (S&P500) versus TLT (20 Year US Gov't Treasuries)
So it seems that stocks are often the better choice over the long haul because of a number of reasons
1. Inflation hurts bonds, but helps stocks. Why? Inflation of company goods and services prices can flow through to the bottom line and raise dividends whereas coupons are stable and are reduced over time by inflation.
2. Leverage in the underlying company/companies.
3. Accounting principles that allow leverage and depreciation to encourage long term investment.
I'm sure there are many more reasons, but I wanted to get to discussing the chart.
1. There are long waves of stocks outperforming bonds and then equal, and often dramatic reductions in the returns of stocks versus bonds.
2. There is nothing "predictable" per say in the patterns that I can see right off the bat, but I do see that I copied the rally from 2003 to 2007 and then connected it to the high in 2013 and the rest lines up pretty consistently. I also decided to copy the decline from 2007 until 2009 and connect it to the high in 2013 and it shows we are on the verge of a large and fast breakdown in stocks versus bonds.
3. The beautiful part of this type of trade is that we don't necessarily have to have a breakdown in stocks to get to copy the ratio decline. We could see a massive rally in TLT instead? How big a rally? About 30% or so. If US rates fell from 3% on the long end down to 2%, that would accomplish this ratio movement, roughly, to the downside.
4. Given that QE~~~~~ (Quantitative Easing 'infinitely') hasn't created the desired results and Central Banks don't want to bankrupt their own countries by raising rates, we have a simple race to the bottom of the barrel here. If stocks take a tumble too, then all the better for this ratio to drop back down to where it was in 2009.
Whatever happens - at least see that bonds and stocks cycle back in forth in dramatic fashion and capturing this is what a "balanced" fund manager is trying to do at all times. When stocks go down, buy a little and trim some bonds. When stocks go back up, trim a little and get back into bonds. Keep repeating - the more often the better.
A couple of more points:
1. Lower highs lately in the ratio (shown by the purple arrow)
2. SPY/TLT dropped below a "mode" on the frequent price chart (light blue graph on the right). 1.68 stop, 1.64 last. Target.... 1.2-1.0-0.8....
Cheers,
Tim 11:41PM EST 12/11/2014
So it seems that stocks are often the better choice over the long haul because of a number of reasons
1. Inflation hurts bonds, but helps stocks. Why? Inflation of company goods and services prices can flow through to the bottom line and raise dividends whereas coupons are stable and are reduced over time by inflation.
2. Leverage in the underlying company/companies.
3. Accounting principles that allow leverage and depreciation to encourage long term investment.
I'm sure there are many more reasons, but I wanted to get to discussing the chart.
1. There are long waves of stocks outperforming bonds and then equal, and often dramatic reductions in the returns of stocks versus bonds.
2. There is nothing "predictable" per say in the patterns that I can see right off the bat, but I do see that I copied the rally from 2003 to 2007 and then connected it to the high in 2013 and the rest lines up pretty consistently. I also decided to copy the decline from 2007 until 2009 and connect it to the high in 2013 and it shows we are on the verge of a large and fast breakdown in stocks versus bonds.
3. The beautiful part of this type of trade is that we don't necessarily have to have a breakdown in stocks to get to copy the ratio decline. We could see a massive rally in TLT instead? How big a rally? About 30% or so. If US rates fell from 3% on the long end down to 2%, that would accomplish this ratio movement, roughly, to the downside.
4. Given that QE~~~~~ (Quantitative Easing 'infinitely') hasn't created the desired results and Central Banks don't want to bankrupt their own countries by raising rates, we have a simple race to the bottom of the barrel here. If stocks take a tumble too, then all the better for this ratio to drop back down to where it was in 2009.
Whatever happens - at least see that bonds and stocks cycle back in forth in dramatic fashion and capturing this is what a "balanced" fund manager is trying to do at all times. When stocks go down, buy a little and trim some bonds. When stocks go back up, trim a little and get back into bonds. Keep repeating - the more often the better.
A couple of more points:
1. Lower highs lately in the ratio (shown by the purple arrow)
2. SPY/TLT dropped below a "mode" on the frequent price chart (light blue graph on the right). 1.68 stop, 1.64 last. Target.... 1.2-1.0-0.8....
Cheers,
Tim 11:41PM EST 12/11/2014
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