Category Archives: Bonds

image

How Dangerous Is Common Retirement Advice?


  • Things are much different than they were 10 or 20 years ago but everyone seems to follow the same retirement investing advice.
  • As retirees are in need of more security they are now forced into more risk as bonds have become riskier than stocks while also giving a lower yield.
  • If you’re looking for security, cash may be your best bet.

Introduction

You’ve likely heard the advice that as you get closer to retirement you should move toward having a bigger chunk of your portfolio in bonds rather than stocks. Most retirement funds are structured in that way. Vanguard Target Retirement Funds allocate 90% of assets in equities and 10% in bonds if you are going to retire between 2058 and 2062, thus 45 years from now. For those with 20 years until retirement, the division is 80/20. The ratio is 75/25 for those with 15 years, 65/35 for those with 10, 60/40 for those with only 5 years, and 50/50 for those of retirement age. For those in retirement, the division is 64% in bonds and 36% in equities if you’re younger than age 73, and 70% in bonds and 30% in equities if you’re older than 73. You can see this represented in figure 1 below.

figure 1 vanguard asset allocation
Figure 1: Vanguard Target Retirement Fund asset allocation per age group. Source: Vanguard.

The example above follows the standard and traditional retirement advice issued by the majority of financial institutions and retirement specialists. In this article we are going to analyze if that advice still holds up in the current financial environment, what the risks related to it are, and finally, what can be done differently.

Don’t forget that it is a given in the financial world that if an advisor gives the wrong advice but the advice is the same as what the majority does, there will be no negative implications for the advisor’s career if and when things turn for the worse. On the other hand, if you point out risks but nothing happens, your financial career is in jeopardy. Think of the movie The Big Short and the guys shorting A rated credit institutions.

What Has Changed In The Last Two Decades? Bonds.

The common advice outlined above comes from an environment that was significantly different than the one we have today. The first major difference is that yields have gone down and bond prices have gone up in the last 20 years.

figure 2 bond yields
Figure 2: Thirty-year treasury yield. Source: FRED.

The current yield on 30-year treasuries is 2.24%, which is a record low. What is significant is that yields have been declining since 1981 and before that yields had only been increasing.

The declining yields trend pushed bond prices upwards. The net asset value of the iShares 20+ Year Treasury Bond ETF (TLT) has gone from $103 at the end of 2013 to the current price of $140. This means that if yields go back to the levels they were at the end of 2013, of around 4%, the value of 20+ bonds will decline by 29%. It would take more than 10 years for the increase in yields to cover for the decline in value. So, by being long bonds, you are risking a loss of 30% for a yield of 2.24%.

Yes, bond prices can go higher if the U.S. becomes like Japan or Europe where negative interest rates are the new normal, but with the FED contemplating interest rate increases and an employment rate of 4.9%, which is half of Europe’s rate, we could say that the chances are more in favor of higher yields.

The retirement strategy that was formed a long time ago didn’t have to account for global negative interest rates, treasuries yields below 2.5% and the fact that bond yields could jump up or decline 50% in a matter of a year.

figure 3 volatility
Figure 3: Thirty-year treasury yield volatility in the last 5 years. Source: FRED.

What Has Changed In The Last Two Decades? Stocks.

Stocks are in the same asset bubble as bonds. Low bond yields push investors to seek better yields elsewhere. The S&P 500 has a PE ratio of 25.23 which implies a yield from stocks of 3.96% which is, the same as with bonds, the highest level ever reached if we exclude the 2000 tech bubble and the depressed earnings in 2009.

figure 4 s&P 500 multipl
Figure 4: S&P 500 PE ratio. Source: Multpl.

The Shiller PE ratio, which takes into account 10-year earnings averages in order to eliminate cyclical influences, is even worse and at 27.08.

figure 5 shiller
Figure 5: Shiller PE ratio. Source: Multpl.

To put it simply, if bond yields go to 4% and we attach the historical stock premium of 2.29% for stocks, the expected yield from stocks would be 6.29%. With current earnings, it would imply a PE ratio of 15.97 and an S&P 500 value of 1,380, or a decline of 37% from current values. This means that for the current S&P 500 earnings yield of 3.96%, you are risking 37% of your stocks portfolio if the FED reaches its 2% inflation target.

Conclusion

Given the risk versus reward outlined above for both bonds and stocks, one clearly has to be prudent with their savings, especially for those close to retirement. Many retirees watched their retirement savings get cut in half during the last financial crisis and unfortunately it looks like many will go down the same road again because they follow the same old rules without questioning them.

Low yields force investors to hold a greater percentage of their savings in assets that produce some form of yield in order to reach a satisfying retirement income, but if you look at risk as a function of price and not volatility you see that those assets become more and more risky as their prices go up and yield goes down. As we described in our article about Carl Icahn, smart investors continue to warn us about the long-term negative effects of low interest rates as they threaten to bankrupt pension funds and retirement incomes. Those low interest rates force people to save more as they will need more money to retire safely.

The main point of this article is to make investors think and to show them the risks they are running by just following the old investment dogmas in a different world. If you are close to retirement, assess your future needs, assess the risks you are currently exposed to and create a portfolio that you can sleep well with no matter what happens.

An asset that is pretty safe but that no financial advisor will ever recommend because you do not get any commission on it, is cash. Something to think about in this new world.

There is one additional strategy, which happens to be one of our favorites, where the bulk of your retirement savings sits safely in cash, yet still allows you to earn high double digit yields on your capital. Click here to learn more.

 

image

Negative Yielding Debt: A Party for Investors or Pure Stupidity?


  • Almost 30% of global sovereign debt comes with a negative yield.
  • The situation is much worse in Japan and Europe than it is in the U.S.
  • Investors should enjoy the asset inflation party while it lasts but also be prepared for the worst.

Introduction

Negative yielding debt seemed impossible and illogical for a long time, but it suddenly became a reality a few years ago and now we are seeing it slowly become the new normal.

This isn’t just strange, it’s dangerous as risk averse investors—like pension funds and insurance companies—are forced to invest in assets that have traditionally been considered safe but that have now become risky, and their returns minimal. Those low returns will result in lower pensions and lower savings which will create new troubles in the future.

This article will analyze how we arrived negative interest rates, what the current situation is globally, and what the long term implications will be for your portfolio.

History and the Current Situation

Negative interest rates started with a few European central banks cutting their interest rates below zero in 2014 (Switzerland and Sweden), followed by Japan in 2016. The EU is not far behind with its 0% interest rate. Apart from central banks’ negative interest rates, high demand for bonds also pushes the yields below zero. With the European Central Bank buying 169 billion of bonds per month with its asset purchase program, it also distorts the markets, and pushes bond prices up, creating negative yields.

It is now estimated that 30% of global sovereign debt has a negative yield.

figure 1 negative yielding debt
Figure 1: Global debt by yield. Source: Wall Street Journal.

Per country, the worst situation is in Switzerland where the complete yield curve is negative, even for bonds maturing in 2049. Germany and Japan have negative yields on debt maturing in 10 years with yields of -0.17% and -0.28% respectively, while The Netherlands and France are not far away with yields at 0.02% and 0.12% respectively. The situation is much worse for debts with shorter maturities.

figure 2 euro yield curve
Figure 2: Euro yield curve. Source: Financial Times.

For perspective, it is wise to compare this to how the U.S. nominal yield curve looks as it is much healthier. If economic news from the U.S. continues to be similar to the latest job news, we could expect an interest rate rise in one of the next FED meetings, which should normalize the U.S. yield curve even more.

figure 3 us curve
Figure 3: U.S. yield curve. Source: U.S. Department of the Treasury.

With longer term yield being above inflation, the U.S. debt market looks much healthier and more rational than the EU or Japanese markets.

Economic Reasons and Implications

Many of the World’s most renowned investors have warned that this negative interest rate experiment in Europe and Japan will backfire. Pimco’s Bill Gross stated that a new supernova is being created and BlackRock’s Larry Fink has warned that it will have huge repercussions on the ability investors have to save and plan for the future.

The main goal central banks had in mind by lowering interest rates was to stabilize the economy and increase employment. However, given the length of time yields have been at zero, or even negative, without the accompanying benefits to the economy, one could conclude that the experiment has not worked. In fact, the World Bank has now trimmed global economic growth prospects from 2.9% to 2.4%.

One of the reasons why it may not have worked, is because the whole world is pushing for liquidity by lowering yields, and the positive effect low yields should have on an economy has been diluted and the only thing that has been inflated are asset prices, which isn’t bad if you are fully invested.

Since central banks were unable to create a healthy inflation rate of 2% with what they deemed the appropriate amount of liquidity, they then flooded the global economy with too much liquidity. And instead of having the desired effect of raising prices, it has actually increased competition with more goods and services being offered, which has lowered prices.

We might now start to see some inflation in the U.S. as the unemployment rate is getting close to the natural unemployment rate but Europe is still far from it with unemployment at 10.1%. Until consumers increase spending and create inflation this negative interest environment will persist and we cannot know when it will change, what we can is prepare for when it will change and analyze the current risks.

Implications for Investors

The most painful consequence of negative yields is that savers are penalized and that investors desperate for any kind of yield pay a high risk premium for low yields. A global snap back in interest rates, or a fall in credit quality, would put the financial world under extreme pressure as investments that are usually considered the safest could lose a substantial amount of value depending on how high interest rates rise, since bond prices move inversely to yields. Goldman Sachs estimates that an unexpected 1% increase in U.S. treasury yields would trigger $1 trillion of losses. If you are highly invested in bonds please be aware of the risks you are running if interest rates rise and ask yourself if the low yield is worth the risk.

Inflation would put pressure on interest rates and companies which cannot transfer increased financing costs onto customers would have huge difficulties in refinancing their debt. The current S&P 500 debt pile is the largest in history and companies are taking advantage of the low interest rates in order to borrow as much as they can.

figure 4 net debt
Figure 4: Net debt issuance/reduction. Source: FACTSET.

Investors should take advantage of the situation as most of the corporate debt is used for repurchases that further inflate asset prices but be careful for the moment when the party stops. At some point, the party has to come to an end someday because corporations are not using the fresh capital to invest but instead are only using it mostly for repurchases and dividends, thus not thinking that much about the future.

Conclusion 

As there is no historical precedent to the current situation, all that one can do is make an educated guess as to when it will end. We all know that this situation is artificial and we also know that it has not been that beneficial to the global economy in the last few years.

As the more mature investors reading this will know, the economy works in cycles and we will see this asset inflation end but we cannot know when. When it does turn, it will certainly be an ugly scenario as investors will sell inflated assets in panic, corporations will find it difficult to refinance debt and central banks will not have maneuvering options with interest rates already negative.

But, as central banks continue to hope that more of the same—which is clearly not working—will eventually work, and which according to Albert Einstein is the exact definition of stupidity, let us enjoy the party while it lasts, hope that it will last for a long time, and always stay prepared for an eventual change.

 

image

BREXIT Aftermath: Where to Look for Returns & What to Avoid Now


  • The U.S. and Europe are overvalued, especially seeing the current political situation and economic fragility.
  • What’s about to hit Europe and the U.S. already hit emerging markets in 2015. There are opportunities in emerging markets now, but where?
  • Bonds seem the riskiest asset of all with no yield and huge potential downside.

Introduction

After last week’s BREXIT vote the markets have been in a free fall with a slight recovery yesterday. But savvy investors have been expecting this and it has been a recurring theme at Investiv Daily that stocks are overvalued. In such an overvalued environment it is normal that inflated asset prices take a beating at any sign of future uncertainty.

As one’s misfortune is another’s fortune, this article is going to elaborate on what to look for and what to avoid in order to limit risks and maximize returns.

The U.S. Stock Market

The U.S. stock market is fully valued and therefore the decline should not have come as a surprise. The S&P 500 has been moving sideways for the last year and a half and many are expecting a recession. In such an environment the risks are high and the potential returns very low.

figure 1 pe earnings
Figure 1: S&P 500 PE ratio and earnings. Source: Multpl.

With a PE ratio of 24 and declining earnings, the only way for investors to realize capital gains by investing in the S&P 500 would be through the formation of an asset bubble. With the current political turmoil, slower U.S. productivity, lower employment participation and strong dollar, this seems like a very unlikely scenario.

On the other hand, those factors might start a recession that could easily lower the S&P 500 to the average historical PE ratio of 15 which would cause a 1,300 point, or 35% drop. Therefore, the conclusion is that the S&P 500 carries a lot of risks with limited upside.

Emerging Markets

Emerging markets were the thing to avoid in 2015, but they still possess long term factors that should make them the long term investment winners, especially if bought at these depressed prices. Let us focus on Brazil as an example.

Brazil was hit by various corruption scandals and by the deepest recession in the last two decades. But, Brazil is still a young country rich in natural resources and on the road to becoming part of the developed world, minor setbacks are normal and should be used as an investment opportunity.

figure 2 brazil GDP
Figure 2: Brazil’s GDP in billions of US dollars. Source: Trading Economics.

Brazil’s GDP grew from $1,107 billion to $2,346 billion in ten years which still represents a yearly average growth of 7.7%. As the market has already factored in the chance of a Brazil bankruptcy, the risks and rewards of investing there are opposite from what they are in the U.S., as there is no risk of a U.S. bankruptcy.

Brazil’s current CAPE (Cyclically adjusted 10 year average price earnings ratio) is currently 3 times undervalued at 8.2, while the S&P 500 has a CAPE ratio of 24.6. The undervaluation is probably the reason why Brazilian stocks have behaved very well in the last few days. The Brazilian stock index is still in positive territory for the month and year to date. On top of the relative stability, U.S. investors could also gain from currency benefits as the oversold real is slowly returning to its real exchange value toward the dollar.

figure 3 usd brl
Figure 3: USD vs BRL in the last year. Source: XE.

To conclude, Brazil represents a young, resource rich country where it seems that all that could go wrong did go wrong last year. More positive news than negative news should now be expected. On top of that, it is one of the most undervalued markets in the world.

Europe

The situation in Europe is similar if not worse than the one in the U.S. To put it simply, the markets are in an asset bubble as the European Central Bank has been issuing huge amounts of liquidity with the hope of faster economic growth and some inflation. It succeeded for a while but the BREXIT issue will for sure have a negative impact on current economic growth when coupled with the overvalued markets, the risks outweigh the rewards.

The average PE ratio in Italy is 31.5, Netherlands 28.5, United Kingdom 35.4 and Germany 19. There is also the euro issue where any political turmoil could weaken the euro and lower investment returns for U.S. investors.

Europe should be avoided until asset prices reflect the real state of the economy and the political situation, thus far below current prices, at least 50%.

Gold and Bonds

It is uncommon to put gold and bonds in the same basket but as they both have practically no yield with negative interest rates on the most secure government bonds, it seems the right choice.

Gold is currently at its year high as investors look for safety. The problem with gold is that it has no yield and most investors come too late to the party as gold primarily appreciates at maximum turmoil as it has done in the past few days.

figure 4 gold prices
Figure 4: Gold prices in the last year. Source: Bloomberg.

If political turmoil persists and inflation arrives due to the high liquidity, gold might be the winner, but any signs of stabilization would negatively affect gold. It can be concluded that gold represents a good hedge and could be a part of a well-diversified portfolio. Investors that seek a riskier investment than gold itself could go for gold mining stocks that offer a dividend yield and potential growth, though gold mining stocks also come with much more volatility.

As for government bonds, the risks seem to outweigh the rewards. Yes, it is possible to make capital gains if interest rates further decline, but this defies logic as there is no point in holding negative yielding bonds. On the other hand, if yields increase bonds could fall tremendously as a 100% increase in bond yields should consequently lower bond prices by 50%. Therefore, the current situation with bonds isn’t what’s typically assumed about bonds—low risk with high rewards—as right now they are high risk with low rewards.

Conclusion

At this point, after a 7-year bull market and high liquidity provided by central banks, investors should be wary of being overweight in the same things that were good 7 years ago. Many analysts have forgotten how to analyze risk as we have not seen a bear market since 2009, but this is exactly the time when one should look at risks before rewards. High asset prices and low yields mean that investors do not see much risk and are willing to pay hefty prices, but this is exactly the kind of situation that can bring lots of investment pains.

Any signs of recession, the continuation of the decline in corporate earnings, and a shift from the current investor’s perception that central banks are still able to save the markets with additional intervention, could easily send the stock market down by 30%. Assess your risks, estimate the rewards, and position your portfolio accordingly.

image

How to Prepare Your Portfolio For The Next Recession or Stock Market Crash


  • The risks of a slowdown are higher than the upside.
  • Fundamental trends are negative in advanced economies while emerging markets show higher growth rates and are cheaper.
  • It is important to create a diversified portfolio with uncorrelated assets.

Introduction

In an environment where it seems maximum potential for the U.S. economy has been reached, the St. Louis FED chief, James Bullard, has said in his most recent report that he favors only one interest rate increase through 2018, which would at best keep things stable. His view is further supported by the fact that the unemployment rate is sitting at below 5%, and the Personal Consumption Expenditures PCE inflation—measured by the Dallas FED—is at 1.84%, both of which signal that the economy has reached its maximum potential.

1 figure trimmed inflation
Figure 1: Trimmed mean PCE inflation. Source: FRED.

The scary part of the report is where Mr. Bullard describes how forecasts are made based on the current situation, which will most definitely change. What is difficult to predict is the direction of the change therefore, forecasts are bound to be incorrect and under the influence of various risks like a return to the normal Phillips curve influence where low unemployment triggers inflation, or a recession even if no current data indicates the possibility of one. Thus only an extremely positive scenario would trigger interest rate increases if fundamentals like inflation or productivity stay stable.

2 figure fed stlouis
Figure 2: St. Louis FED’s U.S. macroeconomic outlook. Source: St. Louis FED.

The conclusion is that practically anything can happen, and the FED has absolutely no idea as to where the economy will be in a year or two. Even FED Chairwoman Yellen admits that the 2013 expected interest rates of 4% for 2016 were too high and that an aging society and a slump in productivity growth will keep the subdued economic indicators persistent.

In such an uncertain environment, an investor should look at the best ways to protect his downside and maximize his upside.

Investment Ideas

Let us start with bonds where interest rates have been declining since the start of this century.

Bonds

3 figure bonds
Figure 3: 10-year government bonds yields. Source: Wall Street Journal.

As bond prices are inverse to bond yields, any increase in yields would precipitate bond prices, thus bonds are currently low yield and high risk. Usually considered safe havens in recession times, bonds currently do not provide such protection as it is better to keep cash than bonds with negative interest rates. There is the option of further bond price increases, but that is a highly unlikely scenario as bond yields are at historical lows.

The Stock Market

The S&P 500 is still holding well, but does not manage to break the previous highs despite having come close several times.

4 figure s&P 500
Figure 4: S&P 500 in the last 12 months. Source: Bloomberg.

The S&P 500 dividend yield is 2.12% which might look tempting when compared to the extremely low bond yields, but it is meagre when compared to the historical mean of 4.39%. A return to the mean would result in a drop of 50% or more of the S&P 500 index. The conclusion here is the same as with bonds: High risk, low returns.

But there is an option with stocks that should limit the downside. Dividend stocks that will not see their cash flows affected by a slowing down in the economy are always assets toward which investors run when trouble comes. Examples can be found in telecommunication, consumer staples and healthcare.

Emerging Markets

If the reason for economic stagnation in the developed world is an aging society, slow productivity growth and emerging markets competition, a contrarian thesis would be to invest into emerging markets.

Emerging markets have a relatively young population and are currently shunned by investors as too risky amidst a commodity price slump. But no matter the current issues, the World Bank expects emerging markets and developing economies to grow at rates north of 4% in the long term, while advanced economies are expected to grow below 2%.

Currently, advanced economies are preferred by investors as they regard them as secure, but long term structural trends are strong in place even if we do not choose to see them. What China has done in the last 15 years could be the same as India is about to do. Brazil will probably also return to growth someday.

The following figure will show that the current developed world impression of asset security is mostly funded by debt which is unsustainable in the long term.

figure 5 investment position
Figure 5: U.S. net international investment position. Source: Bureau of Economic Analysis.

On top of that, emerging markets are much cheaper than developed ones according to the Cyclically Adjusted Price Earnings (CAPE) ratio which takes into account earnings from the past 10 years.

figure 6 global cape
Figure 6: Global CAPE map. Source: Star Capital.

For long term investors, the less risky option might be to dig for good investments in emerging markets with positive demographics and a strong growth outlook. Currently those investments are out of favor, but this is exactly the environment where investments give the best returns.

Gold

Gold is a doomsday investment, it protects you against inflation and is the metal that surges in difficult times. Typically as the economy does well, stocks grow and gold declines because gold has no yield. The opposite happens in turmoil.

7 figure guardian precious metals
Figure 7: Gold and stocks cycle. Source: Guardian Precious Metals.

You can invest in gold by buying it physically, through ETFs or by buying gold miner stocks.

Conclusion

As always, good diversification should provide sufficient downside protection but a portfolio has to be diversified with uncorrelated assets.

If you have Ford in your portfolio and then you add some Caterpillar, that is not real diversification. Gold, emerging markets, cash, and quality stocks should enable a portfolio to weather economic hardships.

Don’t forget that after every recession comes a recovery, so be ready to increase your exposure to stocks when assets are cheap, even if everyone will be thinking that there is no tomorrow.

image

If Stocks Are Risky, What About Bonds?


  • Yields should be the main factor when choosing whether to invest in bonds or stocks.
  • As yields cannot go much lower, bonds become risky too.
  • Historically any significant increase in bond yields brings to negative returns.

Introduction

It is almost common knowledge that in the long term stocks outperform bonds as bonds are less risky and therefore have lower yields. But if we look at the question from the title of this article from a long term perspective where stocks always outperform, then there is no risk in investing in stocks as eventually you will be rewarded with higher returns. And this is exactly the current market’s perception on the stocks vs. bonds issue.

figure 1 bonds earnings dividends
Figure 1: Dividend yields, bond yields and S&P 500 earnings yield since 1927. Source: Federal Reserve, Multpl, NYU.

Historically the corporate earnings yield was the highest, except for the high inflation period in the 1980s and the dotcom bubble in the late 1990s, early 2000s. We could say that things are finally returning to normal as corporate earnings are higher than bond yields and therefore the logic that stocks will outperform bonds in the long run is correct at the moment.

Stocks did not outperform bonds in times when the earnings yield was lower than the bond yield. 2011 was the first time that bonds outperformed stocks over a 30-year period which is logical as in 1981 bond yields were higher than stock yields. The same has happened since the beginning of this century.

2 figure stock vs bods 21 century
Figure 2: Stocks vs bonds since 2000. Source: Wall Street Journal.

As bond yields were almost double corporate earnings in 2000, bonds smoothly outperformed stocks. We can easily conclude that yields are the main factor in the return puzzle and that investors can expect their returns to be perfectly correlated to the underlying earnings when investing in stocks or to the yields when investing in bonds.

Risks

Bonds are considered much less risky than stocks and if we look at the above figure that is clear as bonds did not experience the swings stocks did. But do not get fooled by bonds and their stable growth as most of the above returns were influenced by declining interest rates. As interest rates decline bond returns increase. The opposite happens if interest rates increase.

3 figure bond yields and returns
Figure 3: Bond returns versus changes in yields from 1927. Source: NYU and author’s calculation.

The almost perfect correlation in the above figure shows that no investment should be made based on general assumptions like the ones that bonds are less risky and that stocks always outperform in the long term. The first thing to look at is the yield of the potential investment, be it stocks or bonds, and then the risk.

The current S&P 500 earnings yield is 4.16% and the 10-year treasury bond yield is 1.62%. By looking at the risk side of the puzzle, it is clear that we are in an asset bubble, as both yields on bonds and stocks are historically low (figure 1). Bond yields have never been below 2% and stock yields are far below the historical mean of 7.42%. The main risk for both assets lies in interest rate increases. As there is no historical precedent to the current low yields and monetary policies, we can only assume an eventual return to normalcy.

As figure 3 shows, any increase in bond yields of 25% from the current yield results in negative returns from 5% to 15% for bonds. At current levels a yield increase of 25% would bring bond yields from 1.61% to just 2.01% and have a negative effect on bond returns. We can only imagine what a 100% bond yield increase would do to bond returns as we have no similar data in the last 90 years to analyze such a situation. A 100% increase in bond yields would bring the current yield to only 3.2% which is still historically very low.

The same can be expected for stock returns because with bond yields going higher, expected stock yields will also be higher and therefore stocks would have to go down.

Conclusion

No one knows what will happen in the future and all that we can make are assumptions based on analysis of historical data. Those assumptions tell us that the risks to an investor by being invested in stocks or bonds are high as both asset classes are in a bubble. If interest rates increase, and eventually they will as that is the goal of every central bank, are you willing to risk 20% of your investment for a yearly 1.6% yield from bonds or 40% for a 4% yield from stocks.

The usual investment tradeoff between bonds and stocks of being overweight the undervalued one and change accordingly might be a good solution. On the other hand, the recent negative yield on the German 10-year note shows how crazy the market can get so that nothing should be excluded but we should properly assess risks.

What Are The Options? 

One option that is usually blasphemy for investors but has to be considered is cash. As most asset classes are overvalued, cash might be a good option to weather the turmoil and give liquidity to buy stocks or bonds at lower prices.

Another option is to find stocks that will outperform the market and perform well in an environment with higher interest rates and inflation. Commodities that are uncorrelated to the economy can be a good protection, as well as utilities with low debt.

All of the above is easy to write about but very difficult to correctly time, but the purpose of this article was not to give exact forecasts and advice, but rather a mere overview of what can happen.