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Strategies & Market Trends : John Pitera's Market Laboratory
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To: The Ox who wrote (18323)7/11/2016 6:18:39 PM
From: John Pitera7 Recommendations

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Hi Ox, my view of the future is a bit more nuanced than you may be perceiving it. In a future environment where interest rates rise substantially..... as they did in the 1970's bond prices will decline in price and the price multiple on equity and indeed all investment will contract.

The hurdle rate at which a new plant or business is viable goes higher. However, with bond prices falling, there are vast opportunity to make money shorting bonds, bond products, interest rate derivatives including the multitude of ETF's that now exist.

Merril Lynch and several other major firms have calculated that 60 % of the SPX gains since 1980 were due to Price earning multiple expansion due competing rates of return on fixed income declined in a massive fashion.
20% was organic growth of the businesses and 20% came from buy backs, a move away from traditional GAAP accounting and other aspects of financial engineering.

Institutional Investors in Japan this year have seen there 30 year JGBbonds appreciate 40 to 50% in 5 months as prices have zoomed higher even as rates are negative. That and the vast appreciation of the currency has made institutional investors fantastic returns this year, in an environment in which many wall street FA's think that everything has been horrible in Japan.

The money that has been made in fixed income with the continuous long term capital appreciation along with interest payments earned has not been widely enough appreciated by most of the financial media.

The abiliy to make money in bonds and the array of fixed income products by selling them short when rates ultimately reverse will provide vast returns for the minority of smart money of the mind set and able to position themselves for such an environment.

In the 1970's investors in inflation recipient asset classes produced tremendous returns.......One of the most interesting things that we learn from the market Wizards Interviews in Jack Schwager's books is that 1981 was a year in which the many of the smartest Hedge fund and Global Macro managers lost big money was due to them not picking up on the sea change from rising interest rates to falling interest rates, After Paul Volcker stopped the runaway inflation mindset by putting the Fed Funds rate up to 19% at he start of 1979....... dropping FF rates all the way down to 9% in the June- July time frame of the year... and then moving Fed Fund rate dramatically higher back to 19.25% by the end of the same calendar year.

over the past 20 years the S&P 30 year bond return has been 319% and it has outperformed the SPX total return of S&P 500 index by 85%...... the total return has been 219%

I had more written on this but lost it in a made up load.... hope to have more on my thoughts soon.

JP

btw..... totally agree with your statement below.

With today's rates so very low, a 200% to 400% move higher in long bond yields over the next decade should not be underestimated, IMO.
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