I wonder how you're feeling.
There's ringing in my ears.
And no one to relate to, 'cept the sea.
Who can I believe in,
I'm kneeling on the floor.
There has to be a force; who do I phone.
The stars are out and shining, but all I really want to know.
Oh won't you... show me the way.
I want you ...show me the way.
There's ringing in my ears.
And no one to relate to, 'cept the sea.
Who can I believe in,
I'm kneeling on the floor.
There has to be a force; who do I phone.
The stars are out and shining, but all I really want to know.
Oh won't you... show me the way.
I want you ...show me the way.
"Show Me The Way" by Peter Frampton
Who can I believe in? As investors we often fall for the siren song of the Wall Street Expert, but experts are only humans with educated opinions, just opinions...not truth. You see the truth is that no one can show us the way. I've often said that the most dangerous thing about investing is having a strong opinion, and it continues to amaze me that so many investors put so much credence in some "experts" opinion. Saturday's Wall Street Journal ( Treasury-Yield Forecasts Differ Sharply - WSJ.com ) had a great article on the various interest rate forecasts of Wall Street's "top" prognosticators (not sure how they define "top"). The article went on to show that Morgan Stanley's strategist, Jim Caron, expects the yield on the 10-year Treasury bond (currently 3.93%) to rise to 5.50% by year-end. Meanwhile Goldman Sachs's strategist, Jan Hatzius, believes yields will fall to 3.25%. The article makes for very good reading but the real take away from this gapping 2.25% spread in forecasts is that no one can forecast the future. If you were to believe Morgan Stanley then you wouldn't own any bonds, especially longer maturities. If you were to believe Goldman Sachs you would load up on long-term treasuries. The funny thing is that both of these men could be wrong and rates could end up unchanged...no one knows.
We all search for someone to believe in, someone to show us the way, but we humans simply have no ability to forecast the future. Long-ago I gave up listening to so called experts forecasts, and have instead determined that listening to the market is by far more valuable. You see, the market is the collective intelligence of all of its participants, and although it can't tell us what is going to happen in the future, it does a pretty good job letting us know what is happening today. Mr. Market can show us the way, to being in harmony with the markets.
When it comes to interest rates, what is Mr. Market telling us today?
One of our technical indicators (MACD, moving average convergence divergence) has moved to a negative reading on the Vanguard Total Bond Market ETF (BND), this is causing us to go from a bullish allocation in US bonds to a neutral allocation. We have been at neutral for International Treasury Bonds (IGOV) for some time now, but our moving average indicators have swung negative, thereby putting us at a bearish allocation in International Treasury Bonds. Overall our fixed income weight is Neutral. And, in regard to interest rates, Mr. Market is currently confirming Morgan Stanley's forecast.
On the Bullish side, the continued rally in international equities has moved us from Neutral to Bullish on MSCI EAFE Index ETF (EFA). And we have also moved from Neutral to Bullish in International REIT's (IFGL).
Overall, Mr. Market is Bearish on interest rates, and Bullish on equities.
This bearish view of interest rates and bullish view of equities coincides with a new term, Biflation. Biflation is a relatively new idea initially proposed by Dr. F. Osborne Brown in 2003. It states that in a biflationary environment, inflation and deflation occur simultaneously. Inflation occurs because a massive amount of money is chasing goods, such as oil, grains, gold, and earnings based assets like stocks. In other words, an inflationary bubble is forming in certain assets. Meanwhile, deflation occurs for debt based assets, such as cars and houses, since credit dries up and debt loads are being worked off.
I like this theory because it coincides with what Mr. Market is telling us today. Bullish on equities, REITs, gold, and commodities; and neutral to bearish on fixed income. Makes sense. That's not an opinion, just an observation.
Be careful out there,
Chris Wiles
This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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