The Chase For Yield Is On!

That was my thought as I read this article from the WSJ about debt recently issued in Mongolia. You can read the article to learn about Mongolia’s recent past but as part of the offering there was a ten year tranche which was priced to yield 5.125% and there was demand for the paper. Nominally speaking 5% for ten years seems pretty good these days but as one manager is quoted that doesn’t adequately compensate the risk for lending money to Mongolia for ten years. The long term prospects for Mongolia are great because of the vast resources in the ground there but the government has done a couple of things that could impede the progress between here and “great.” I think of it as being theirs to lose and they could lose. The apparent success of the offering is easy to understand which is that yield is harder to come by from the usual slices of the fixed income market and so more investors (both institutional and individual) are going to places that ten years ago would have never occurred to them. At some point enhancing yield turns into chasing yield and yield chasers often get hurt. A complacency develops about the risk taken by owning certain things and the complacency gets rewarded because nothing bad happens for a while. This is along the lines of a Minsky Moment which is one of the behaviors that was widely discussed after the financial crisis was widely known to have started. Some investors mentally minimize the risk they are taking with their yield chasing but there are other investors that...

The Chase For Yield Is On!

That was my thought as I read this article from the WSJ about debt recently issued in Mongolia. You can read the article to learn about Mongolia’s recent past but as part of the offering there was a ten year tranche which was priced to yield 5.125% and there was demand for the paper. Nominally speaking 5% for ten years seems pretty good these days but as one manager is quoted that doesn’t adequately compensate the risk for lending money to Mongolia for ten years. The long term prospects for Mongolia are great because of the vast resources in the ground there but the government has done a couple of things that could impede the progress between here and “great.” I think of it as being theirs to lose and they could lose. The apparent success of the offering is easy to understand which is that yield is harder to come by from the usual slices of the fixed income market and so more investors (both institutional and individual) are going to places that ten years ago would have never occurred to them. At some point enhancing yield turns into chasing yield and yield chasers often get hurt. A complacency develops about the risk taken by owning certain things and the complacency gets rewarded because nothing bad happens for a while. This is along the lines of a Minsky Moment which is one of the behaviors that was widely discussed after the financial crisis was widely known to have started. Some investors mentally minimize the risk they are taking with their yield chasing but there are other investors that...

Tax the Rich!

A couple of months ago my wife and I took a trip to Boston and New York and while there we had lunch with an old friend of mine whom I’ve known since fourth grade. My friend believes that taxes will and should go up on the wealthy. It seems pretty obvious that he is correct that they will go up but there is more of a conversation to be had about whether they should go up. Several years ago as the scope of the US’ fiscal problems I made the obvious and un-unique observation that to actually fix things it would require sacrifice on the part of everyone, that it would hurt and I didn’t the the political will existed to do what needs to be done. Maybe some progress is happening on the political will front but that remains to be seen. Karl Denninger posted the above chart recently that captures the scope of the problem. In their never ending coverage of the fiscal cliff CNBC has offered up that increasing taxes on the wealthy will solve the problem for about a week or two. That is not a reason by itself to not raise taxes but it would do very little. In all likelihood a real fix will have to involve a lot of little things that by themselves are too small to matter. Per the above table there are only three big things to cut into that could by themselves make a difference. Are entitlements and defense really on the table? Any program that endures cuts will adversely affect some constituency which is of course the...

Tax the Rich!

A couple of months ago my wife and I took a trip to Boston and New York and while there we had lunch with an old friend of mine whom I’ve known since fourth grade. My friend believes that taxes will and should go up on the wealthy. It seems pretty obvious that he is correct that they will go up but there is more of a conversation to be had about whether they should go up. Several years ago as the scope of the US’ fiscal problems I made the obvious and un-unique observation that to actually fix things it would require sacrifice on the part of everyone, that it would hurt and I didn’t the the political will existed to do what needs to be done. Maybe some progress is happening on the political will front but that remains to be seen. Karl Denninger posted the above chart recently that captures the scope of the problem. In their never ending coverage of the fiscal cliff CNBC has offered up that increasing taxes on the wealthy will solve the problem for about a week or two. That is not a reason by itself to not raise taxes but it would do very little. In all likelihood a real fix will have to involve a lot of little things that by themselves are too small to matter. Per the above table there are only three big things to cut into that could by themselves make a difference. Are entitlements and defense really on the table? Any program that endures cuts will adversely affect some constituency which is of course the...

Don’t Swim Up Stream

A reader at Barry Ritholtz’ blog asked Barry the following question; I believe you have written the above statement before on your blog, though I don’t have any links to prove that, and while I too believe forecasting is fatal, my feeling is that you must use some forecasting when choosing stocks/funds/ETFs for your clients. The context was the extent to which Barry refers to the Folly of Forecasting. I think Barry and I draw similar conclusions about the role of forecasting in the management process and what really should be forecasted. I think a big part of my influence here comes from John Hussman. From the idea of taking little bits of process from various places to create your own process Hussman tries to assess probabilities of outcomes that are broader than whether to buy Qualcom (QCOM) before the earnings or having a year end target for some broad index. The role of “forecasting” is more along the lines of trying to swim with the current than against it. For example when the market starts to discount a recession/bear market, the industrial sector tends to get hit very hard which is something I have mentioned many times before. Rising interest rates are bad for certain sectors. Bull market phases tend to last four-five years. There are quite a few others that I have mentioned over the years. In my opinion understanding these sorts of rules of thumb can make the task of navigating a cycle a little easier. After a five year bull run it probably makes sense to not give the market the benefit of the doubt when it...