Over the last four years, cumulative mutual fund flows have shown that investors favour bonds over equities in general. This pattern is quite worrying because bonds have been in a bull market for almost 30 years now, since 1981. Foreign equities including emerging markets are also receiving strong flows, despite an amazingly powerful rally since 2001. On the other hand, the most ignored asset class seems to be the US equity market. Once again this pattern is quite worrying, because S&P 500 has been out of favour and in a secular bear market for over 11 years.
These opinions are obviously my own and are by no means to be used to time todays market over the next few months, but as the old saying goes: "Investors never chase bears". It is my opinion that bonds are nearing the end of their secular bull trend and in the next few years stock could be at bargain prices. But investors seem to be doing a completely opposite strategy.
Thanks for the chart. I have a good friend who was a technical analyst at Merrill under Bob Farrell for 27 years. His under-grad degree is in psychology from Yale University. For years he has said, "Human nature hasn't changed in the last 10,000 years and it's not going to change in the next 5 or 10 years." To which I always added, "People will still react the same way given similar circumstances." Most of the money will always come in towards the end of a bull move. I believe that occurred in stocks after 1996. It's occuring now in bonds. I began in the industry in March of 1981. You couldn't give stocks away. Everybody had lost a fortune on bonds. The only thing they were interested in were gold, silver, oil and a few of the accompanying stocks. I believe we are at the other end of the long pendulum. Best of luck in your advisory work. Alan
ReplyDeleteBob Farrell is a legend, that is for sure. Therefore, it makes it very difficult to disagree with everything you have said. My view stands between two main points:
ReplyDelete1.) Secular bull market in commodities is now almost 12 years old, and while we might have several years to go, where the biggest gains occur, this is now a momentum trade, as commodities have returned 13% annualised return over the last 10 years. This figure presents the best secular bull market return for commodities in the last 200 years. While commodities could now have a blow off top, as I remain a bull, I also would not get married to a fairy tale story, because we are closer to the end, than the beginning. Stock markets have been completely beaten down over the last 10 years, as annualised returns over the same time frame are now in negatives. Therefore, while stocks might not be at the bottom just yet, they are what I would call a good value investment over the long run, especially if they have another bear market - unlike the momentum in commodities.
2.) Secular bull market in bonds is now almost 30 years old, and I have a feeling that we are just about finished with lower interest rates. Away from technical analysis and human behaviour, which we already discussed, I believe that Asia is changing its growth model, which is about to become very inflationary. You see, if you study history you will find that it was in 1979 that China opened its doors to the foreign investment and the world enter a new phase of economic growth due to the ability to access very very cheap labour. This was followed by inflation turning into a disinflation and therefore falling interest rates, since 1981. This has lasted for over 30 years, but when I see the new 5 year plans by the Chinese, it is quite obvious, that they are interested in changing the growth model from export biased to consumer biased. The catalyst for this was the Foxconn crisis in 2009. There recent comments by the Chinese officials has been quite clear: grow the wages at rapid speed over the next five years. And India, Bangladesh, Indonesia and Vietnam, follow what Chinese wages do, so it is not like one can change the manufacturing base towards those countries either. Therefore, the era of low labour costs which has lasted since 1979 for over 30 years, mixed this together with rising commodity prices is signalling that low interest rates on long bonds around the world, in my opinion, are coming to an end after a 30 year.