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Abby Joseph Cohen: Fixed Income Headed For Trouble
Huh, the write is like she has been reading MFO posts over the years.
I need to see her verified and audited investment portfolio from May, 2007 to date to discover whether she still knows what she is talking about; as to placing her personal investments into the proper sectors, based upon her thinking.
The jobs that command the highest wages are in STEM – science, technology, engineering and math professions. STEM workers are earning an average of $100,000 annually, twice as much as the national average of $45,000 to $50,000 a year, Cohen said.
If that is the case, why is there not more Americans getting college degrees in STEM and the positions are often filled with foreign workers?
@MFO: I guess Roy Weitz, FundAlarm. Com, won't mind me telling you, that he and Abby Joesph Cohen were classmates at Martin Van Buren High School in Queens, N.Y. Regards, Ted
Reminds me of "Trouble in River City" from a favorite musical. I think the warnings about trouble in fixed income have been running now for almost as long as The Music Man.
A kid born when these "warnings" first began must be about ready to enter college today. If the fixed income was invested in longer dated bonds or high yield bonds the parents probably did well in saving for college. Equities however likely out-performed fixed-income over the past 15 years (but turned many stomachs during the '07-'09 time-frame).
I like Abby Cohen a lot. A regular on Rukeyser's old show. But if you're not aware, Abby is a perma-bull. Can't ever recall her being negative on equities. FWIW
The only thing that remains to be seen is who is going to wait the longest before sounding the alarm on fixed income so they can say *they* famously made the call before fixed income actually starts underperforming in a meaningful. Basically, who is going to be alter-ego of Hussman for fixed income, who will get the timing just perfect.
Many people have claimed the end of the bull market for bonds over the past several years. In fact Muhlenkamp did in the 80s or 90s I think. Good I realized what a joke his economic theories were. Selling out of bonds when interest rates are dropping and calling it end of bull market. Now at least people are calling it correctly because of rise in interest rates impending. Only it is not yet quite happening. Maybe GS has heavily shorted fixed income and can bring about its collapse.
Regarding Abby being perma bull. Guys and Gals, I will always peddle what I am selling. Why will I do anything else? I will bash the other side and get you to come over to mine.
Lets look at the one comment she made on fixed income investments:
A Goldman analysis of 10-year government bonds around the world shows there’s not one bond where the firm thinks yields are as high as they should be, Cohen said. “This is problematic. We think that yields can and should go higher. They are already so low it’s not going to impact the economy per se, but we do worry about the portfolio impacts. When yields go up, prices go down.”
A 10-yr government bond is a 10 year contract that is an agreement to pay a coupon (interest...however high of low) for the duration of the contract (in this case 10 years). If you hold the bond to maturity in your portfolio you get your full investment back plus interest. Price only goes down relative to newly contracted bonds if you sell when terms are better (rates have risen). Price goes up if newly contracted bonds are written when there is downward pressure on rates (which has happened many times recently). Bond price can also be impacted by "flight to safety" when there is a shock in the equity market. these bond funds spike in price due to a lack of availability of these bond shares (everyone wants them...no one is selling).
What to do? She doesn't offer any strategies, but there a few.
In a rising rate environment ladder individual bonds (just as you would ladder CDs). Another strategy in a rising rate environment would be to shorten your duration. Also keep in mind that with rising rate often comes Inflation...remember TIPS...they may play a bigger role as rates rise and trigger higher inflation.
Aren't Bond manager's capable of navigating these changes?
I can understand that an un-managed Bond Index fund will have periods of adjustment (price loss), if investors are selling these investments into rising rates, but even these funds will evolve their holdings into the prevailing rates over longer time frames. Cash or a ST Bond fund may serve as an additional strategy for those who need income in 1-3 year time frames. Holding IT Bond funds for longer periods will help the IT bond fund adjust over 3-7 years to these higher rates. Investors have to think more about how to divide up the bond funds: ST, IT and LT. This would be similar to laddering cash in CDs.
I do get the inverse relationship between bond prices and prevailing interest rates. This relationship should apply to every bond "category" as well. If long term interest rates are rising, long term bonds will fall. If short term interest rates are falling short term bonds will rise. So bonds of different durations may not move in the same direction, and it is not just about what is "best". If both short and long term bonds are falling in the face of both short and long term interest rates rising, saying short term bonds are better investment because they are falling less to me is a little ridiculous, because CASH is actually the best performer.
So my problem is this. Maturity, and more specifically how does it matter if I'm purchasing a 30-year bond, but it was issued 29 years back. What is difference between buying this bond which has 1 year left to mature vs buying a brand new 1-year bond? If the market is going to adjust the price of the 30-year bond for me discounted to the present, and if the 30 year bond yielded (say) 4%, vs the 1-year bond which yields (say) 1%, could I still not buy the 30 year long term bond and come out ahead? Only in this case I might be doing that through a Long-Term bond fund, but I'm told I'm not supposed to not do that right now because interest rates can only go up from here.
That's why I can never bring myself to invest in bond funds and rely on balanced funds for my bond exposure. Even bond index funds have to turn over their portfolios. So really effective maturity and effective duration of the portfolio I think should matter and hence M* provides that information (some times). However, I've always had trouble co-relating that information with actual performance of the fund. Because those two numbers can keep changing even for index funds.
For the stock index fund which is market weighted I can visualize in my head when it goes up and when it goes down. For bond funds I can't.
Finally, revisiting the inverse relationship between price and interest rate. If we issue $100M worth of bonds of given duration in the market yielding (say) 4%, and very soon later (just to diminish effect to outstanding maturity) issue just $1M worth of bonds of same duration but yielding 10%, because of lack of availability of quantity of higher yielding bond, I don't see how prices of the $100M bonds can fall meaningfully. Supply and demand should work for bonds just like it is for stocks. So simply saying the inverse relationship exists is IMO not good enough. There needs to be substantial availability of higher yielding bonds of same maturity out there to meaningfully depress the prices of the lower yielding bonds.
I often mention I use ANALysis for my investing. THIS is the reason. If I use Analysis, then I buy MCI WorldCom instead of Verizon in the late 90s. If I used ANALysis I would have bought Verizon.
Lets look at the one comment she made on fixed income investments:
A Goldman analysis of 10-year government bonds around the world shows ...
... that AJC knows very little about the breadth and depth of the fixed income market, if the only reference (and apparently the only category she thinks exists, if she's equating it to the entire FI market) is to intermediate-long sovereign debt.
Thanks, Bee, for reading & reporting. It might have been interesting reading, but I'm completely done with wasting time on these equity uber alles types pontificating on an asset class they're utterly ignorant about.
Supply and demand should work for bonds just like it is for stocks. So simply saying the inverse relationship exists is IMO not good enough. There needs to be substantial availability of higher yielding bonds of same maturity out there to meaningfully depress the prices of the lower yielding bonds.
Great point!
Some additional 'gurgitation.
An Individual 30-yr bonds doesn't act any differently in year 29 than they did in year 1. You still get your coupon...and, you eventually get your principal back (in year 30). A bond fund is a mix of 30-yr bonds which were bought at different times with a variety of yields and are blended together to provide a coupon at a relative share price. Its the movement of this bond fund share price comparison that is made with other blended bond fund that has some concerned. If rates drop, yesterdays 30-yr bond fund is more valuable in price (if you were to sell). If rates rise, yesterdays 30-yr bond fund is less valuable (again, if you sell).
If you don't sell and just live off the dividends (yesterday it was 4%...tomorrow it may move to 5%), irregardless to the bond fund's share price you have less concern about the direction of interest rates. I believe the typical fix income investor is spending down shares of their bond fund as well as spending the coupon. This may be what AJC is concerned about. If you never sell your bond shares the individual securities will eventually mature out of the 4% yields and it will be replaced with new, potentially higher yielding contracts. Selling shares is what 'fixes the price" and obviously you don't have control over other investor's selling. This could be at a loss compared to what the shares were first bought at.
This is the price of admission to get at the bond coupon in a bond fund. Price appreciation and coupon yield are what we have enjoyed for the last thirty years with bond funds. A Bond fund share price can rise and fall significantly even when interest rate move just a small amount.
I wonder if it might be easier to think of a bond fund like an annuity. If you invest in an immediate annuity you give up principal for a stream of income. Think of a 30 year bond fund or any other bond fund the same way. If you discipline yourself to only collect the coupon from the bond fund you have "an annuity" that will always have a cash value. The 'cash value" (share price) changes as a result of its comparative value to other bond funds (and their underlying coupon).
Also, if you reinvest your dividends you are nudging your cost basis lower (buying additional shares at lower share price) if that share price did indeed dropped.
@bee I see what you are saying but like I said, I can tell when/why stock going up and so my fund holding that stock going up. I can "see" the stocks it owns. I don't "see" the bond holdings in my funds to recognize how they they are moving. I can't chart them because I don't have a ticker. So I feel quite blind.
Basically, I want my bond management active, and I don't invest in bond index funds. Hopefully my manager knows what he is doing. And by the way, i take it back when I said I don't own any bond only funds. I do own JUCDX, but that's my only true bond fund.
The thing is I don't get the "diversification" through bonds and so I have never targeted a bond allocation for my portfolio. We keep debating whether stock market is a casino. In its present form I do believe it is. By the same notion, the bond market is also a casino. I therefore do not see the probability of me winning in one casino vs the next. I cannot figure out the odds of my winning in blackjack vs roulette either.
Analysis did not work for me regardless of bull/bear market or rising/falling interest rates. ANALysis on the other hand works every time. Hence my excessive skepticism about manager skill and celebrity worship. "Smart" Investor has to be the successful investor, which in my mind is anyone who makes money. There is no smart investor if he is producing negative returns. I mentioned in another thread I purchased PLMDX few months back. I don't know diddly about how it invests. I heard Robert Arnott on Consuelo Mack then used my ANALysis and it told me to buy. If not I wouldn't have.
When I say ANALysis it is charting, tea leaves, alignment of the planets, ...everything. Last 10 year someone can tell you he read tea leaves and that told him to be in the stock market. I'm exaggerating, but I hope you see my point. He can write a research paper to "prove" his ANALysis. Until it stops working. So When you Buy, not What you Buy. That's it. If you manage to catch the turn, then good. If you think you did, but are proven wrong you take your lumps immediately. This has served me well. I will leave the Analysis to someone else.
If that is the case, why is there not more Americans getting college degrees in STEM and the positions are often filled with foreign workers?
I've got degrees in engineering and computer science, and the classes were pretty difficult. I graduated a long time ago, but we had almost a 70% drop out rate from the program.
I think with the relatively recent emphasis on STEM education in the primary and secondary systems, that the number of capable students wanting to try those degrees will increase.
@billr Great point! I have read numerous articles claiming their are plenty of available jobs, but not enough "qualified" applicants with the correct skill sets!
I have a question. ... So my problem is this. Maturity, and more specifically how does it matter if I'm purchasing a 30-year bond, but it was issued 29 years back. What is difference between buying this bond which has 1 year left to mature vs buying a brand new 1-year bond? ...
There isn't any difference. They are both 1-year bonds in today's market. The loss or gain on the old 30-year bond doesn't have anything to do with the next 12 months. The previous owner made or lost money, but its current value is determined by the current 1 yr rate.
@billr. Okay so a long-term bond fund buying this long-term bond 29 year after it was issued is still investing in long-term bonds but can actually court less interest rate risk? I
@billr. Okay so a long-term bond fund buying this long-term bond 29 year after it was issued is still investing in long-term bonds but can actually court less interest rate risk? I
I somehow don't think that's correct. With a year left to maturity, the fund would be investing in a short-intermediate term bond. (Long Ago and Far Away it constituted a long-term bond.)
@hank I didn't say that. I was trying to interpret earlier comment. Regardless now you know my problem with bonds. There seem to be more shenanigans going on in the bond market. Mortgage Backed Securities were after all bonds, right? Stock manipulation I get, bond manipulation I don't.
I don't think there's any legal definition of long, short or intermediate term bond. So, there isn't any "correct" answer to the question you raised earlier. Manager spells out his/her definition of what constitutes each category for purpose of defining the fund's investment practices. And, of course, there's common practice, on which something like Investopedia would probably offer up a definition.
Problems with bonds? Tell me about it. Rates s*** on investment grade stuff. So investors have for years been fleeing into riskier assets like equities and high yield. A bit like jumping from the teapot onto the fire. Your point about slicing, dicing and than re-stacking the bond deck isn't missed either (Which nicely obscures the underlying risk for most of mere mortals.) I see that in spades in some hybrid income funds.
FWIW (totally unrelated) Commentators on Bloomberg are now speculating that the daily multi-billion dollar flow into large cap index funds is what''s keeping equity markets afloat. Just a thought.
We don't need bloomberg to tell us that right? Index investing is momentum investing. By definition you are buying more of the stocks that are going up and even in down market you are buying more of the stocks that are going down less. Value Indexing is also buying more of stocks going up which should make them less valuable.
Basically what we are saying is that Active managers suck at momentum investing. Let the market tell you which stocks to buy on any given day through the index, which will automatically switch you into the higher momentum stocks at the top. As long as you keep on cost averaging in, you don't have to sell the stocks lacking momentum, you simply buy more of stocks gaining momentum. In theory, this will continue till the end of time.
If we had a $300 Billion Active fund, it would influence the markets the same way an index fund does as long as people kept sending money to it. Until they stop. There is no genius to Bloomberg statement. What they are saying has always been the case. Coming out of bad bear market, people are seeing the long term numbers of their funds now. A "perfect storm" 10 year performance number tells you, your active fund manager sucks, and you switch to index fund. That's bound to cause a surge. Not sure it can sustain all by itself.
Re: "There is no genius to Bloomberg statement. What they are saying has always been the case." Those of us who lived through the S&P 500 Index euphoria of the later 90s would tend to agree.
What may be different, however, is the magnitude: "Vanguard saw inflows of $1.8 billion on the active side and was the top fund family on the passive side, with inflows of $36.2 billion."
I've seen where over $1 Bil daily is flowing to Vanguard - most going into passive funds. And about 20 times greater (at Vanguard) than in 2000. The specific quotation/source eludes me.
@hank Yeah. So in the 90s active managers did well too. In fact some did really well throwing darts. What's different this time is the 10 year numbers after last bear market are not flattering to active managers. IMO, that's caused the "surge". However, I think it will reverse in the next bear market. Let's see.
The short, medium, long designations are applied to the remaining term on the bond. So if it was a 30 year bond and is now in year 28, there are two years to go. It will have the same interest rate (to within some tiny margin of error) as a new two year bond would have and will be considered a short term bond. The past doesn't matter; the price you pay today is the present value of the future revenue stream.
I kinda DON'T like AJC BECAUSE she is an equity perma-bull. I mean, personally, I am sure she is a lovely person, and very articulate. But what is the value of a broken clock in helping you ascertain the time of day? What is the value of investment advice if the person is always 'cautiously optimistic'?
As for the risk in bonds. Sure, bonds are expensive. They are in part expensive by intent (i.e. monetary policy). But I would posit the CBs of the world are intent to prevent a nasty, sudden increase in rates, if they can. But what if they can't, you ask? Well, bondholders will suffer. But in any hypothetical disorderly bond swoon, I would be shocked if equityholders didn't suffer more than bondholders. After all, bonds both compete with equities for investors' dollars and interest rates (bonds) represent a cost of capital for corporations. Raise the cost of debt capital and residual returns of companies (i.e. earnings) go down.
So while AJC believes bonds are riskier than investors think, --and maybe she is right as I cannot psychoanalyze the collective investor mind --- bonds are still much less risky than equities.
I like Abby Cohen a lot. A regular on Rukeyser's old show. But if you're not aware, Abby is a perma-bull. Can't ever recall her being negative on equities. FWIW
Comments
I need to see her verified and audited investment portfolio from May, 2007 to date to discover whether she still knows what she is talking about; as to placing her personal investments into the proper sectors, based upon her thinking.
Regards,
Ted
A kid born when these "warnings" first began must be about ready to enter college today. If the fixed income was invested in longer dated bonds or high yield bonds the parents probably did well in saving for college. Equities however likely out-performed fixed-income over the past 15 years (but turned many stomachs during the '07-'09 time-frame).
I like Abby Cohen a lot. A regular on Rukeyser's old show. But if you're not aware, Abby is a perma-bull. Can't ever recall her being negative on equities. FWIW
Many people have claimed the end of the bull market for bonds over the past several years. In fact Muhlenkamp did in the 80s or 90s I think. Good I realized what a joke his economic theories were. Selling out of bonds when interest rates are dropping and calling it end of bull market. Now at least people are calling it correctly because of rise in interest rates impending. Only it is not yet quite happening. Maybe GS has heavily shorted fixed income and can bring about its collapse.
Regarding Abby being perma bull. Guys and Gals, I will always peddle what I am selling. Why will I do anything else? I will bash the other side and get you to come over to mine.
What to do? She doesn't offer any strategies, but there a few.
In a rising rate environment ladder individual bonds (just as you would ladder CDs). Another strategy in a rising rate environment would be to shorten your duration. Also keep in mind that with rising rate often comes Inflation...remember TIPS...they may play a bigger role as rates rise and trigger higher inflation.
Aren't Bond manager's capable of navigating these changes?
I can understand that an un-managed Bond Index fund will have periods of adjustment (price loss), if investors are selling these investments into rising rates, but even these funds will evolve their holdings into the prevailing rates over longer time frames. Cash or a ST Bond fund may serve as an additional strategy for those who need income in 1-3 year time frames. Holding IT Bond funds for longer periods will help the IT bond fund adjust over 3-7 years to these higher rates. Investors have to think more about how to divide up the bond funds: ST, IT and LT. This would be similar to laddering cash in CDs.
Couple of Articles:
Evaluate the risk of owning bond mutual funds versus individual bonds in a rising interest rate environment:
money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2014/07/31/the-perils-of-bond-funds-in-a-rising-interest-rate-environment
Best Bond Funds For Rising Interest Rates:
https://thebalance.com/best-bond-funds-for-rising-interest-rates-2466827
I do get the inverse relationship between bond prices and prevailing interest rates. This relationship should apply to every bond "category" as well. If long term interest rates are rising, long term bonds will fall. If short term interest rates are falling short term bonds will rise. So bonds of different durations may not move in the same direction, and it is not just about what is "best". If both short and long term bonds are falling in the face of both short and long term interest rates rising, saying short term bonds are better investment because they are falling less to me is a little ridiculous, because CASH is actually the best performer.
So my problem is this. Maturity, and more specifically how does it matter if I'm purchasing a 30-year bond, but it was issued 29 years back. What is difference between buying this bond which has 1 year left to mature vs buying a brand new 1-year bond? If the market is going to adjust the price of the 30-year bond for me discounted to the present, and if the 30 year bond yielded (say) 4%, vs the 1-year bond which yields (say) 1%, could I still not buy the 30 year long term bond and come out ahead? Only in this case I might be doing that through a Long-Term bond fund, but I'm told I'm not supposed to not do that right now because interest rates can only go up from here.
That's why I can never bring myself to invest in bond funds and rely on balanced funds for my bond exposure. Even bond index funds have to turn over their portfolios. So really effective maturity and effective duration of the portfolio I think should matter and hence M* provides that information (some times). However, I've always had trouble co-relating that information with actual performance of the fund. Because those two numbers can keep changing even for index funds.
For the stock index fund which is market weighted I can visualize in my head when it goes up and when it goes down. For bond funds I can't.
Finally, revisiting the inverse relationship between price and interest rate. If we issue $100M worth of bonds of given duration in the market yielding (say) 4%, and very soon later (just to diminish effect to outstanding maturity) issue just $1M worth of bonds of same duration but yielding 10%, because of lack of availability of quantity of higher yielding bond, I don't see how prices of the $100M bonds can fall meaningfully. Supply and demand should work for bonds just like it is for stocks. So simply saying the inverse relationship exists is IMO not good enough. There needs to be substantial availability of higher yielding bonds of same maturity out there to meaningfully depress the prices of the lower yielding bonds.
I often mention I use ANALysis for my investing. THIS is the reason. If I use Analysis, then I buy MCI WorldCom instead of Verizon in the late 90s. If I used ANALysis I would have bought Verizon.
Thanks for reading (if you did).
Some additional 'gurgitation.
An Individual 30-yr bonds doesn't act any differently in year 29 than they did in year 1. You still get your coupon...and, you eventually get your principal back (in year 30). A bond fund is a mix of 30-yr bonds which were bought at different times with a variety of yields and are blended together to provide a coupon at a relative share price. Its the movement of this bond fund share price comparison that is made with other blended bond fund that has some concerned. If rates drop, yesterdays 30-yr bond fund is more valuable in price (if you were to sell). If rates rise, yesterdays 30-yr bond fund is less valuable (again, if you sell).
If you don't sell and just live off the dividends (yesterday it was 4%...tomorrow it may move to 5%), irregardless to the bond fund's share price you have less concern about the direction of interest rates. I believe the typical fix income investor is spending down shares of their bond fund as well as spending the coupon. This may be what AJC is concerned about. If you never sell your bond shares the individual securities will eventually mature out of the 4% yields and it will be replaced with new, potentially higher yielding contracts. Selling shares is what 'fixes the price" and obviously you don't have control over other investor's selling. This could be at a loss compared to what the shares were first bought at.
This is the price of admission to get at the bond coupon in a bond fund. Price appreciation and coupon yield are what we have enjoyed for the last thirty years with bond funds. A Bond fund share price can rise and fall significantly even when interest rate move just a small amount.
I wonder if it might be easier to think of a bond fund like an annuity. If you invest in an immediate annuity you give up principal for a stream of income. Think of a 30 year bond fund or any other bond fund the same way. If you discipline yourself to only collect the coupon from the bond fund you have "an annuity" that will always have a cash value. The 'cash value" (share price) changes as a result of its comparative value to other bond funds (and their underlying coupon).
Also, if you reinvest your dividends you are nudging your cost basis lower (buying additional shares at lower share price) if that share price did indeed dropped.
Basically, I want my bond management active, and I don't invest in bond index funds. Hopefully my manager knows what he is doing. And by the way, i take it back when I said I don't own any bond only funds. I do own JUCDX, but that's my only true bond fund.
The thing is I don't get the "diversification" through bonds and so I have never targeted a bond allocation for my portfolio. We keep debating whether stock market is a casino. In its present form I do believe it is. By the same notion, the bond market is also a casino. I therefore do not see the probability of me winning in one casino vs the next. I cannot figure out the odds of my winning in blackjack vs roulette either.
Analysis did not work for me regardless of bull/bear market or rising/falling interest rates. ANALysis on the other hand works every time. Hence my excessive skepticism about manager skill and celebrity worship. "Smart" Investor has to be the successful investor, which in my mind is anyone who makes money. There is no smart investor if he is producing negative returns. I mentioned in another thread I purchased PLMDX few months back. I don't know diddly about how it invests. I heard Robert Arnott on Consuelo Mack then used my ANALysis and it told me to buy. If not I wouldn't have.
When I say ANALysis it is charting, tea leaves, alignment of the planets, ...everything. Last 10 year someone can tell you he read tea leaves and that told him to be in the stock market. I'm exaggerating, but I hope you see my point. He can write a research paper to "prove" his ANALysis. Until it stops working. So When you Buy, not What you Buy. That's it. If you manage to catch the turn, then good. If you think you did, but are proven wrong you take your lumps immediately. This has served me well. I will leave the Analysis to someone else.
I think with the relatively recent emphasis on STEM education in the primary and secondary systems, that the number of capable students wanting to try those degrees will increase.
Great point! I have read numerous articles claiming their are plenty of available jobs, but not enough "qualified" applicants with the correct skill sets!
I don't think there's any legal definition of long, short or intermediate term bond. So, there isn't any "correct" answer to the question you raised earlier. Manager spells out his/her definition of what constitutes each category for purpose of defining the fund's investment practices. And, of course, there's common practice, on which something like Investopedia would probably offer up a definition.
Problems with bonds? Tell me about it. Rates s*** on investment grade stuff. So investors have for years been fleeing into riskier assets like equities and high yield. A bit like jumping from the teapot onto the fire. Your point about slicing, dicing and than re-stacking the bond deck isn't missed either (Which nicely obscures the underlying risk for most of mere mortals.) I see that in spades in some hybrid income funds.
FWIW (totally unrelated) Commentators on Bloomberg are now speculating that the daily multi-billion dollar flow into large cap index funds is what''s keeping equity markets afloat. Just a thought.
Basically what we are saying is that Active managers suck at momentum investing. Let the market tell you which stocks to buy on any given day through the index, which will automatically switch you into the higher momentum stocks at the top. As long as you keep on cost averaging in, you don't have to sell the stocks lacking momentum, you simply buy more of stocks gaining momentum. In theory, this will continue till the end of time.
If we had a $300 Billion Active fund, it would influence the markets the same way an index fund does as long as people kept sending money to it. Until they stop. There is no genius to Bloomberg statement. What they are saying has always been the case. Coming out of bad bear market, people are seeing the long term numbers of their funds now. A "perfect storm" 10 year performance number tells you, your active fund manager sucks, and you switch to index fund. That's bound to cause a surge. Not sure it can sustain all by itself.
Those of us who lived through the S&P 500 Index euphoria of the later 90s would tend to agree.
What may be different, however, is the magnitude: "Vanguard saw inflows of $1.8 billion on the active side and was the top fund family on the passive side, with inflows of $36.2 billion."
I've seen where over $1 Bil daily is flowing to Vanguard - most going into passive funds.
And about 20 times greater (at Vanguard) than in 2000. The specific quotation/source eludes me.
https://www.thestreet.com/story/14093218/1/morningstar-reports-us-mutual-fund-and-etf-asset-flows-for-march-2017.html
As for the risk in bonds. Sure, bonds are expensive. They are in part expensive by intent (i.e. monetary policy). But I would posit the CBs of the world are intent to prevent a nasty, sudden increase in rates, if they can. But what if they can't, you ask? Well, bondholders will suffer. But in any hypothetical disorderly bond swoon, I would be shocked if equityholders didn't suffer more than bondholders. After all, bonds both compete with equities for investors' dollars and interest rates (bonds) represent a cost of capital for corporations. Raise the cost of debt capital and residual returns of companies (i.e. earnings) go down.
So while AJC believes bonds are riskier than investors think, --and maybe she is right as I cannot psychoanalyze the collective investor mind --- bonds are still much less risky than equities.