Warren Buffett says it is "quite clear stocks are cheaper than bonds" right now, but notes that relationship will change eventually when confidence in the economy is inevitably restored.
In an appearance earlier on Tuesday at the Fortune Most Powerful Women Conference in Washington, Buffett said he "can't imagine" choosing bonds over stocks at current prices, but concedes that's what many investors have been doing because of a "lack of confidence" in the economy's future. "They're making a mistake, the ones that are buying the bonds" at record low yields.
In the interview, he tells Fortune's Carol Loomis:
"It's quite clear that stocks are cheaper than bonds. I can't imagine anybody having bonds in their portfolio when they can own equities, a diversified group of equities. But people do because they, the lack of confidence. But that's what makes for the attractive prices. If they had their confidence back, they wouldn't be selling at these prices. And believe me, it will come back over time."
It's not a new opinion for Buffett. Back in early 2009, he was writing about an "extraordinary" U.S. Treasury bond "bubble."
Fortune's Street Sweep Blog points out that the 10-year Treasury yield has dropped to under 2.5 percent from 4 percent over the past six months. CRAZY!
Here are some more people who are saying the same thing: FDIC Chairwoman Sheila Blair also said there "a bit of a bond bubble now", longtime bond bull Goldman Sachs believes bonds have peaked and will be heading lower from here, and PIMCO's Steve Rodosky tells Dow Jones today that "the best day in Treasurys is probably behind us." He hasn't bought them since July.
I have been talking about the 'bond bubble' for some time now and I think the time to short it is NOW!!! Today, I just bought some shares of TBT, ProShares UltraShort Lehman 20+ Year Treasury ETF. I want to be in a fund that has the highest Duration available: TBT has an adjusted duration of 16.86 years, PST (UltraShort 7-10 Year) has an adjusted duration of 7.63. To summarize, bonds with the highest or longest durations are more sensitive to changes in interest rates. Personally, I think the market is in for a rally and I'm looking to long equities, and short bonds. Good luck.
You can add Oaktree's Howard Marks to the ever growing list of people saying stocks are cheap relative to bonds.
http://www.oaktreecapital.com/memo.aspx
Agree 110%. You'd think more people would realize this... It's extremely apparent. It just goes to show the terribly low confidence in the economy.
I used to laugh at my mother's investing conservatism as she balanced her portfolio basically 90-10 bonds over stock. Today, she is laughing all the way to the bank as she's had nice, steady, safe returns for 30+ years, a pension, a ton of savings, great net worth and years of good sleep. Stocks might be cheap, but whether or not one buys bonds or stocks should depend on their level of risk adverseness, position in life, etc. Blanket statements about disbelief that there are bond buyers over stock buyers in today's environment or saying bond buyers are making a mistake is kind of dumb.
I think bonds are still smart if that are top rated, diversified and held to maturity. The problem I think Buffet is bringing up is how people are flocking to bonds when rates are at all time lows. When the rates increase the price on these bond funds is going to plummet and a lot of people who own these funds are just ridding the fad.
Buffett's off his meds. He says the TARP CEO's and their families should be driven into poverty, but that didn't stop him from becoming the single largest corporate welfare recipient. I used to have a lot of respect for the guy, now he's right up there with Alan Greenspan as far as I'm concerned.
+1 Edmundo. He has become so hypocritical over the last few years and it drives me nuts. My respect for the Oracle is waning.
Regards
Nope. I gotta disagree. The Oracle of Omaha sold out a long time ago and I don't believe that he is worth listening to without taking a significant few grains of salt on the matter. He lost alot of credibility by opening up a derivatives book despite believing that they were weapons of mass financial destruction. I think he's also too ingrained in the system to be objective, as he's taking the same view as Paulson. The smartest money in the room is sitting out this battle in my opinion.
I also don't believe that the market is undervalued versus bonds. I believe it's overvalued by a few trillion due to the influx of monetized dollar denominated bonds. I also don't think that the relative value of the markets when compared to each will have any effect on someone's decision on where to invest. When you are competing against robots and the Fed in a rigged casino, it really doesn't matter how much value one security or market has relative to another since the house always wins unless your one of the few who is told by the Casino when and where to cheat.
You have to take a contrarian stance at this point: Sheila Blair?!? I think it will happen eventually, but not before a whole bunch of people get burned waiting for the trend to reverse.
I take Buffet’s comments with a pound of salt but he’s not alone on this one. Yields will eventually increase (I have no clue when, however). I’d be scared to have a long duration bond portfolio right now. This ultrashort bond index is something to consider.
If you buy and hold, then you've got nothing to worry about in terms of duration/convexity. So again, it depends on where you are in your life.
Its funny how much Buffett gets away with. Not one single private individual or business entity in the entire country had more benefit from the bailout. He's at a point where he is more of an institution than an individual. Blindly following his lead is a fool's errand for those of us without a few billion to burn. The bottom line is that in today's environment no track record from boom times is a guarantee of future success. Nobody's word is law.
Hmm, which has done better this year, bonds or stocks? And he said treasuries were in a bubble last year: check out CME long/short positions... doesn't exactly scream bubble to me.
exactly. Also if yields rise before the maturity of your bonds, couldn't you reinvest the coupons at the higher yield and thus realize a higher YTM when you get paid back par?
Spreads/Rates will tighten with QE 2 and then widen. I remember when Bill Gross crowed about the Bond Bubble and then loaded up on TSYs two weeks later.
If you're really gung-ho about this then place bets on things with long duration.
no fear soon tlt will be close to zero!
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