Schadenfreude anyone?

On October 20th, in our blog post entitled, “Cognitive Dissonance in the Bond Market”, we asserted that investors were ignoring the growing risks in fixed income, and more or less robotically adding money to bond funds. We also Tweeted on the subject and added the hashtag #mondaymorningquarterback to stress the point about investing through the rear view mirror. To which we received a “thoughtful” reply from a fellow Tweeter:

“$TLT is +15% this year. Cry me a river, you know. Just horrible return.”

We’ll withhold names, as engaging in Twitter wars is far too time consuming (we’ll leave that particular pastime for our President elect).

Anyway, there are some gifts that just appear out of thin air. Clearly we were too subtle in our messaging, but the benefit was a response that far exceeded what we could have possibly hoped for; in a brief Tweet, our point was perfectly made that investors are over reliant on past returns when positioning for the future.

Even if the bond market hadn’t subsequently been thrown into chaos that would have been a good outcome, but, as luck would have it, an unexpected election result was handed down, and voilà, concerns over deflation quickly shifted to inflation.

TLT, the iShares 20+ Year Treasury Bond ETF, is down about 9% from the time of our blog post through the close yesterday (we are writing this on November 15). Further, according to Bloomberg, the bond market has seen over $1 trillion of wealth wiped out in just a few short days.

Now, we’ll be the first to admit that short-term performance never proves anything, even, we’ll begrudgingly admit, when it’s our performance and its good. However, this shift in the landscape would seem to be more than just a momentary blip. And in the last few days, a number of big names in the hedge fund world – Druckenmiller, Dalio, Ackman – have been lining up to talk about, and take advantage of, a new pro-growth environment. At the same time they (and many others at this point) are warning of what the environmental shift could mean for bond investors. And with that, the standard risk mitigation tool that investors have used, and profited greatly from for approximately 35 years, is looking more than a bit defenseless.

We’ve been under the aegis of the sturdy, dependable bond market for so long, that leaving its cover can seem more than a bit uncomfortable. But with the annual arrival of flu season, as we head to the doctor to be inoculated against the ever-changing virus, we can’t help but draw a parallel with investing: risk continually mutates and adapts, and so must our defenses.