Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web.
Finance and economic academics are difficult for most investors to put in context. On one hand, they have a lot of fancy letters after their name and a ton of knowledge of market history. On the other hand, they tend to be poor investors – even John Maynard Keynes almost bankrupted himself by trading.
That preamble was to introduce Harvard's Paul Schmelzing, who is warning about a bond market massacre,
"Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded," wrote Schmelzing in an article posted on Bank Underground, which is a blog run by Bank of England staff. "History suggests this reversal will be driven by inflation fundamentals, and leave investors worse off than the 1994 'bond massacre.' "
Mr. Schmelzing's conclusions are supported with a graphic showing that the 1981-to-the-present bond rally is among the longest and largest in over 700 years (and that's not a typo).
"Harvard Academic Sees Debt Rout Worse Than 1994 'Bond Massacre'" – Bloomberg
"Venetians, Volcker and Value-at-Risk: 8 centuries of bond market reversals" – Bank Underground
"@SBarlow_ROB 'bond massacre' ahead?" – (chart) Twitter
A bond rout, if it happens, will not be something equity investors will be able to ignore. A report from Goldman Sachs highlights the sectors that will benefit most, and be hit hardest, if interest rates climb.
Winning sectors include finance, technology, and materials. Losers would be telecom, utilities, real estate and consumer staples.
"@SBarlow_ROB GS: sectors most helped/hurt by rising real rates' – (chart) Twitter
"@ReutersJamie Goldman raises 10-yr U.S. yield forecast to 3.0% by the end of the year from 2.75%." – Twitter
**
I admit bias where Credit Suisse's Michael Mauboussin is involved because I think he's one of the best finance writers alive. For one, he was the author of what I believe is the best short paper ever published for investors of all experience levels.
Mr. Mauboussin recently published an extended study of active versus passive investing and the results were predictably thought provoking,
"The investors leaving active managers are likely less informed than those who remain. This is equivalent to the weak players leaving the poker table. Since the winners need losers, this can make the market even more efficient, and hence less attractive, for those who remain. Active management provides price discovery and liquidity, valuable social goods. However, the fees are higher for active managers than passive ones, identifying skill ahead of time is not easy, and there is a cost to assessing skill. … Research shows that fundamental money managers who take a long view and are truly active can deliver excess returns… There is growing evidence that passive investing may lead to less efficient prices and an increase in market fragility associated with lower liquidity … . So IF EVERYBODY INVESTS ACTIVELY, YOU WANT TO BE PASSIVE. IF EVERYONE INVESTS PASSIVELY, YOU WANT TO BE ACTIVE."
Thankfully, the entire report is publicly available.
"Looking for Easy Games How Passive Investing Shapes Active Management" – Credit Suisse
**
Tweet of the Day: "@UpshotNYT Scan those "best stocks to buy in 2017" lists for fun. In 2016, they didn't do as well as a plain jane index fund. nyti.ms/2hRQ5JI " – Twitter
Diversion: "The most critically acclaimed TV shows of 2016 weren't on HBO" – Quartz
Scott Barlow