“Run on the Fund”: The Big Risk of Bond Mutual Funds. What to Look For and What to Do

“First-Mover Advantage” in a “Liquidity Mismatch”: How slow-poke investors in conservative-sounding mutual funds can get their faces ripped off.

When it comes to conservative-sounding open-end mutual funds, particularly those invested in bonds, loans, thinly traded stocks, real estate, and the like, “first-mover advantage” means: When there are signs of trouble, get out early. Because if you don’t, you can get your face ripped off.

“First Mover Advantage” is known, which is part of the problem.

Astute fund investors know about the first-mover advantage. So they keep an eye on the markets, and when they see stress in the asset class that the open-end mutual fund is invested in, they pay close attention. And when the first warning signs appear in the fund itself, they get out of the fund. “Open-end” mutual funds are those where investors can on a daily basis buy shares from, or sell shares to the fund sponsor to get into or out of the fund.

“The liquidity mismatch.”

But when investors sell shares back to the fund, the fund has to sell some of its assets to meet those redemptions. This is not a problem when these assets are very liquid, such as large-cap stocks. But when these assets are bonds, loans, or real estate, that cannot be easily sold within hours – it may take days or weeks for some of them – then there is a mismatch in liquidity between what the mutual fund offers to its investors (daily liquidity) and what the fund holds (largely illiquid assets that are difficult to sell quickly without a punitive discount).

This “liquidity mismatch” is also what makes banks risky, and why bank deposits are insured. But mutual funds are not insured.

“A run on the fund.”

When enough investors worry about the fund getting in trouble and are trying to use the first-mover advantage by yanking their money out before all heck breaks loose, the open-end mutual fund faces a “run on the fund” and is forced to sell large amounts of illiquid assets to meet redemptions. But the only way to sell them quickly is to sell them at ever lower prices, and the longer investors stay in the fund, the more they lose.

How this played out in reality.

Many open-end bond mutual funds collapsed and were shuttered, with slow-poke investors getting their faces ripped off. Here is a big example of just how bad this can get.

Before the Financial Crisis, Schwab marketed a family of bond mutual funds – Schwab YieldPlus Select (SWYSX) and Schwab Yield Plus (SWYPX) – as conservative alternatives to money market funds, with just a tad higher yield. In 2005, the yield was about 5.5%, when the 10-year Treasury yield was between 4% and 5%. At the time, the fund had about $14 billion in assets, which was a lot of money back then.

The top 10 holdings, which is what investors could see listed, was the usual mix of Treasury securities and investment-grade corporate bonds, and some highly rated corporate paper. Beneath the skin, 45% of the funds’ holdings were mortgage backed securities (MBS), including many backed by subprime mortgages. Most of them were highly rated as well.

But smart investors in Schwab’s conservative-sounding open-end bond mutual fund kept their eyes on the markets. And when the tide turned in the housing market, they started paying attention, and then they saw that people were defaulting on mortgages, as home prices were dropping.

This was the first warning sign. These astute investors sold their shares of the fund back to Schwab and got their money out, after having earned the juicy yields for years. They had the “first-mover advantage” because what came after them turned into a nightmare for slow-poke investors.

The fund had to sell assets to meet these redemptions. It sold its most liquid assets first because it could sell them without losing money: Treasury securities. That was the fund’s cushion, and the fund burned through it.

When the redemptions continued, assets in the fund began to drop rapidly. This was the second warning sign.

It confirmed to investors that the fund was forced to sell assets because first-mover investors were cashing out. Seeing this, more investors got nervous and yanked their money out. Now the fund had to sell less-liquid assets, such as its best corporate bonds. But under pressure to sell, Schwab’s fund and other funds in a similar position drove down the price of those bonds, and as prices dropped, the Net Asset Value (NAV) of the fund began to drop sharply.

This was the third warning sign. And more investors figured out that this fund was stressed, and that they had better get out now. They sold their shares back to Schwab, which now had to sell even less-liquid assets and there were fewer buyers for them, as the whole market was beginning to get stressed. By that time, Schwab was experiencing a full-blown “run on the fund.”

And then something weird happened: As the Treasuries and other high-quality bonds had been sold, the MBS holdings began dominating the list of the top 10 holdings.

By that time, the mortgage crisis was in the media. The fund’s NAV was dropping every day. Folks who still held shares of this fund and looked at the top 10 holdings and knew what they were looking at got scared and sold their shares back to Schwab, and Schwab was finally forced to sell these MBS when the bottom was falling out of MBS market.

As mark-to-market fails, slow-pokes eat the losses of First Movers.

Bank-issued MBS in a stressed market were difficult to price on a daily basis because for some of the issues there were no trades in days or weeks. These holdings may not have been marked to market properly – and when the fund was forced to sell them at whatever it could get for them, namely cents on the dollar after Lehman had collapsed, there was a huge plunge from book value to the sold price.

But the first movers were paid based on the possibly pristine value at which these MBS were carried on the books of the fund at the time. The slow pokes were paid on the price the fund actually received from selling them. In other words, the first movers should have taken some of the loss of those MBS, but didn’t, and what should have been their losses ended up falling on the slow-pokes.

The fund size plunges.

From its $14 billion in assets in 2005, the fund dropped to $13 billion in May 2007, to $6.5 billion in January 2008, to $2.5 billion in March 2008, to $500 million in July 2008, to about $210 million in October 2009, by which time the fund had been shuttered.

Net Asset Value plunges, and there is no recovery.

First movers got all their money out. Investors that hung in there long enough lost between 40% and 50% of their principal that they had invested in this conservative sounding bond mutual fund.

Unlike the prices of stocks or bonds that investors hold outright, bond mutual funds that experience a run cannot recover because the fund is forced to sell the assets, and they’re gone, and when prices of those assets recover, someone else owns them and takes the gain. A run on the fund is a one-way event that is permanent loss to fund holders.

Lawyers get rich.

Over the following years, lawyers got rich in the ensuing waves of litigation. Schwab ended up settling countless individual investor lawsuits and class action lawsuits mostly for cents on the dollar. Actual payouts to aggrieved investors, after the lawyers got their cut, were minuscule.

Hedge funds et al. get rich.

Hedge funds and others that bought those distressed MBS for cents on the dollar from the Schwab fund when it was forced to sell them made a killing by selling them at face value to the Fed.

Other open-end mutual funds that did not experience a run on the fund survived the period more or less intact.

The risk is never priced into open-end bond or loan mutual funds.

The risk that an open-end fund with illiquid assets can collapse when it experiences a run is never priced in. This risk is a one-way catastrophic loss. But investors are not paid for taking this risk. Most fund investors shoulder this risk, thinking it doesn’t exist.

All major central banks have been warning about the risks posed by this type of liquidity mismatch, including the Fed, due to implications for financial stability. A run on the fund — if it is a broader occurrence as it was during the Financial Crisis, where funds were forced to sell large amounts of illiquid assets — can destroy prices of those bonds and loans. This explodes yields to where companies can no longer afford to borrow and as a result will have to default on their existing loans and bonds and then cannot meet payroll…

What smart investors do.

There are reasons to own open-end bond funds or loan funds. But smart investors that hold these funds don’t relax. They know they’re not being compensated for the risk of a run on the fund. They keep an eye on the market, and when the market for the assets in the fund gets shaky, they start paying close attention to the fund, and when they see the first feeble warning signs that a run on the fund might be happening, they grab the first-mover advantage while they still can and get the hell out.

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  60 comments for ““Run on the Fund”: The Big Risk of Bond Mutual Funds. What to Look For and What to Do

  1. Old-school
    Oct 28, 2019 at 10:52 pm

    I have generally reduced the complexity of my investments over time. Robert Shiller introduced me to a two class model in some of his writings. Basically a risk-on class such as SP500 index and risk-off class such as short term treasury fund. (SP500 expense 0.05% and bond fund 0.1%.) Both funds are going to be very liquid.

    You can blend the two to get any risk level you want. You can estimate the duration of the stock index by dividing by the dividend yield which would give you around 50 years at current level. If your time horizon is 25 years you wouldn’t go too far wrong by blending the two to 50% risk on and 50% risk off to roughly give you a duration match of around 25 years.

    Of course I don’t always practice what I preach. Right now I don’t want to loose money and am nearly all risk off.

    • Oct 28, 2019 at 11:24 pm

      Old-school,

      The irony is that people who invested int the Schwab funds thought they were investing in a risk-off instrument – and lost half of their principal, unless they got out early.

      • Old-school
        Oct 29, 2019 at 2:21 am

        Yep. There is a saying that more money has been lost reaching for yield than anything else. I recently looked up returns for t-bills, stocks, bonds, gold, inflation for last hundred years. For a 20 year run sometimes gold does better, sometimes stocks, sometimes bonds, but if you want to be sure you are going to have about the same amount of buying power in a year or two t-bills is the ticket. Well that is unless you live in a place where real estate is going up many times faster than inflation.

        • nhz
          Oct 29, 2019 at 5:12 am

          The problem with historic returns is that the recent (10-30 year) runup has been anything but historic, in my country especially for real estate where the stellar returns totally contradict the previous 400 year history. Does this mean RE is a good investment now? Many small investors seem to think so …

          For t-bills in EU you are sure to loose money if you hold them to maturity (sometimes even without taking inflation into account) and the only way to win is to sell to a greater fool – which exists in the form of the ECB, but you never know if they keep buying everything. Many EU stock markets are still below their tops from 2000, with current low dividend yields (way below inflation) that means most stock investors lost money over the last 20 years. Common sense no longer works :(

          My time horizon is less than 20 years so I like gold, but given the 5-6x gain over the last 15 years even that looks risky if you purchase now, in the sense that it could easily go down 50% if the tidal way of credit recedes.

        • Old-school
          Oct 29, 2019 at 9:00 am

          Dear NHZ,
          I am responding from above. You are obviously a well informed intelligent investor. I don’t know what I would do if I were in your country. I have heard the saying that owning gold is like shorting central bankers.

          Terminology may be different in each country. Here t-bills are under 1 year but can be very short duration. Good luck. Try to be very logical in your thinking as crazy times like run away real estate prices can temp us to do illogical things.

      • Pl’n’l
        Oct 30, 2019 at 12:48 pm

        Not to mention the possibility of the Fund Management “Co-mingling “ low risk funds with higher risk in an effort to save the Group, in a financial rout.

    • Troy Ounce
      Oct 29, 2019 at 12:02 am

      People are playing roulette with other passengers in an airplane that went out of fuel.
      Nobody has any idea on what is coming as descent is gradual. Everybody is smiling and winning.
      The pilot does not care, he sees the mountain in front of him. But he has a parachute. He jumps… while hearing the laughter from the back.

      Why do intelligent people do this?

      • nick kelly
        Oct 29, 2019 at 12:46 am

        Because the Fed will save everyone. lol

        • Danno
          Oct 29, 2019 at 7:42 am

          Sadly, I agree…what is the alternative if they don’t keep printing more money, etc? Mass Chaos?

        • robt
          Oct 29, 2019 at 11:23 am

          After you’re down 90%.

        • Cassiday
          Oct 29, 2019 at 1:10 pm

          The Fed does not save everyone. They save the rich bankers that in turn own the various Fed Rsrv banks. Of course, the battle cry the Fed issues while pumping money out to the bankers is the fear of ‘mass chaos’ that might ensue should the Fed not be bailing out the bankers.

          If you think the Fed saves everyone, talk to someone who lost their home in the last We-Dare-Not-Call-it-a-Great-Depression. The bankers got bailed out because the own the Fed. Everyone else had to pay for it one way or another.

        • jrmcdowell
          Oct 29, 2019 at 4:06 pm

          Good comments, Cassiday, but the wealthiest (not just bankers) were greatly enriched by Fed monetary policy while millions lost their homes or sold their modest financial holdings at an inopportune time.

          Somehow, the Fed’s printing press got pointed toward Wall Street instead of the little guys and mom and pops on Main Street. Not advocating that anyone should be receiving printed fiat money but the Fed (with all its conflicts of interest) should not have this power.

      • Unamused
        Oct 29, 2019 at 8:20 am

        Why do intelligent people do this?

        Because reason is the servant of desire, not its master. Intelligence is good for coming up with excellent rationalisations for doing the wrong thing. To do the right thing one must also be honest, because mere intelligence is not enough.

      • Kent
        Oct 29, 2019 at 10:00 am

        Intelligent people don’t. But most people aren’t all that intelligent.

        • RD Blakeslee
          Oct 29, 2019 at 11:34 am

          Along with intelligence, two other characteristics are important, IMO: ignorance and greed. Intelligent people can be ill-informed (ignorant) and greed causes all kinds of risky and/or unethical behavior.

  2. BobT
    Oct 29, 2019 at 12:37 am

    Given the horrors taking place in the repo market anything with counter party risk is a potential major problem in my view. Given the right catalyst the financial markets could be turned upside down in 24 hours meaning only the pros and very nimble footed have a chance to take the excellent advice from Wolf.

    • Old-school
      Oct 29, 2019 at 2:32 am

      You always have to remember when investing that you most likely will be hit with a pearl harbor, 9 -11, severe natural calamity from time to time. Always have to be able to weather a 50% stock market hit. Got to be able to meet your needs without borrowing because banks take away the umbrella when it starts raining.

      • nhz
        Oct 29, 2019 at 9:55 am

        even if you can take a 50% hit without worrying, the question is how long to break even. In Europe after the 2000 top that took 15-20 years, and in many countries and especially in specific sectors like dot.com and telecom stuff stocks never recovered their losses.

        People like John Hussman have been writing about the almost certainty that if you invest now in stocks you are not going to make any money over the next 10 years and have risk of 60-70% drawdown along the way. Maybe that’s still worth it if you consider stocks safer than money in the bank (could be true, difficult to say because that is up to politics) but it looks like a really bad option to me. Of course people who invested in the nineties, in 2001-2002 or 2008-2010 are in an entirely different position (but from what I read most small investors were selling then instead of buying).

    • Doc Holliday
      Oct 29, 2019 at 1:14 pm

      A wise investor will also remember that the ‘pros’ pay big money to have their computers connected directly to the markets. They will always get at least a ten to fifteen minute advantage over even an intelligent outside investor even when that outsider is paying very close attention. Thus, they are guaranteed to be the very first movers.

      A proper training school for dealing with these markets would be experience betting in a rigged casino.

      • 91B20 1stCav
        Oct 29, 2019 at 2:30 pm

        That’s some accurate shootin’ there, Doc…

        A better day to all.

      • Old-school
        Oct 29, 2019 at 4:16 pm

        I struggle with this sometimes.

        If you are focused on asset value then it’s important to be hooked up to get a millisecond advantage.

        If you believe that an investment is the sum of future cash flows then what happens in the next six months is a rounding error.

  3. CEF Newb
    Oct 29, 2019 at 12:54 am

    Is what you say true for closed-end funds as well, or does their being publicly traded price the risk in (and/or provide a clearer bellwether to the health of the fund)?

    • Oct 29, 2019 at 10:10 am

      CEF Newb,

      It only applies to open-end funds. In a closed-end fund, investors who want to get out have to sell the shares to other investors (if it is publicly traded) rather then selling them back to the sponsor. And the company that manages the closed-end fund doesn’t have to unload bonds when investors get cold feet. So a “run on the fund” is not really possible with a closed-end fund. Instead, as you pointed out correctly, a closed-end fund’s price would reflect selling pressure by investors.

  4. Alex
    Oct 29, 2019 at 1:06 am

    In general terms who are the guys who bought MBS at pennies on the dollar and collected face-value bailout money? Is there a way to get a piece of that action?

    • jrmcdowell
      Oct 29, 2019 at 9:31 am

      “Is there a way to get a piece of that action?”

      Yeah, somehow I don’t think the prospectus for those types of deals are going to be sent to mom-and-pop investors.

      • Doc Holliday
        Oct 29, 2019 at 1:16 pm

        “Is there a way to get a piece of that action?”

        Be a billionaire banker, or maybe to be one of those Fed ‘primary dealers’ who are currently holding their buckets under the free flowing money spigot. Basically, already be rich, so you can get richer.

        • NBay
          Oct 29, 2019 at 3:50 pm

          When Buffet said, “the first billion is the hardest” he was NOT joking. After that, many many many new “opportunities” will open up to one like magic.

  5. RON
    Oct 29, 2019 at 1:22 am

    Sounds a little like the Auction Rate Securities. I was sold these by WF and was told they were liquid and safe. When they collapsed WF gave me my money back over time. Buyer beware!

  6. Old-school
    Oct 29, 2019 at 3:22 am

    Every once in a while I do the work to try to figure what Berkshire B shares are worth. There are several methods the easiest is to just multiply book times 1.3 realizing in a recession it will probably get marketed down 1.0 book and book will be somewhat less maybe 10% – 20%. Anyway 1.3 book gives you just over $200 per share.

    Better method is to figure out what Buffet calls look through earnings and I found where someone had already done the work and I guess it looks total earnings is $31 billion, then divide by number of shares, convert to B shares and I think earnings to use was roughly $12.60 X PE of say 15 and you get about $190. Anyway that’s probably going to be where I start buying if it gets that low. Right now $210. It’s so large now you probably have to get it at a good price to hope to get 10% annual return over a business cycle. There are rolling 10 year returns on internet. If you had bought at in peak year your 10 year return would have been 4%, the last two years 10 year returns have been 10%. That’s pretty good considering he has been sitting on a pile of cash. Anyway hope I saved someone some time.

    • gorbachev
      Oct 29, 2019 at 3:19 pm

      That”s the kind of math I can get behind

  7. nhz
    Oct 29, 2019 at 5:26 am

    I noticed a strong increase in TV advertising in Netherlands for funds that invest in rental property in Germany lately, apparently mostly rental homes plus some commercial/office space, and suggesting easy 7-10% yearly returns. This is interesting as until recently Germany was the only EU country without a housing bubble (there are some local RE hotspots though like Frankfurt (ECB) and cities like Stuttgart (car manufacturing).

    If these funds are advertising on TV it means they are expecting to draw in many small investors (it helps that rates on savings accounts are zero and the threat of negative rates is hovering over the market, or already real for those with significant savings). Will be interesting to see what happens with these funds when the RE market finally comes to its senses. I also read about RE investment funds from the US and Scandinavia that invest in rental properties (in the “free sector”, not social housing) in Netherlands, primarily because they can easily jack up the rents every year thanks to evil government policy. But I think this is more hedgefund or large investor money.

    In my area many vacation homes have been build (you are not allowed to live there, officially) and sold mostly to foreign investors. The regional government cheered that the average price of a vacation home has now increased to 700.000 euro, that’s double the average home price which is already very high compared to income. Many recent vacation properties even cost 1.2- 1.5 million and sit empty all year, or they are used maybe 2 weeks in summer and that’s it. What’s the value, tax heaven, black money laundering, hiding from ECB confiscation??

    The small coastal villages are swamped by big German SUV’s that seem to come their mainly to shop for more investment property ;( This cannot end well, although at some time in the far future I guess homes might become very cheap over here thanks to a flood of abandoned RE.

    • MC01
      Oct 29, 2019 at 5:57 am

      You are looking at one of the suckers who looked into German real estate. Real life yields were around 4.5% on good yielding properties ( such as healthcare oriented CRE) during Q2 2019, and you still had to pay taxes and fees. Yields right now are likely lower as prices have increased even further, and new construction is flooding the market as we speak.
      Mind this direct ownership (through a German based company you own 100% of), not a fund.

      Germany is going through the first widespread real estate bubble of her recent history. Some cities and their metropolitan areas, such as Berlin, Frankfurt, Hamburg and Munich, are completely nuts. Funny thing is that super-rich Augusburg is just as expensive as ever, no real change there.

      • nhz
        Oct 29, 2019 at 10:05 am

        Agree, I don’t believe those 7-10% returns for a moment and I’m surprised that after so many years of regulations companies still get away with advertising such claims to the general public … Maybe the small prints is something like what they do over here with investment in vacation properties: they “guarantee” 10-12% yearly returns, but when you want out they deduct the depreciation of the property over the same time which often means you have low or negative returns, because the initial valuations are irrealistic.

        In my country I’m told the net return for rental RE is around 2% nowadays, if you are lucky and have good management. Negative returns are certainly possible and when investment RE finally gets taxed here in 1-3 years even 2% net return might be wishfull thinking (property owners: Nah, we will simply increase the rent to compensate for the extra taxes). Germany is probably not as bad as Netherlands nowadays, but not great either for those who want to invest in RE.

        In NL most RE “investors” just like many homeowners are really speculators with one simple strategy: sell to a greater fool for much higher price in a few years, and because of that most investment properties stay empty (no need to bother with renters and wear and tear from normal use). They could not care less about the real life yields, just like most stock investors nowadays could not care less about dividends.

        • RD Blakeslee
          Oct 29, 2019 at 11:43 am

          I suppose it’s pointless to repeat my mantra (going to do it, anyway) ?

          Some of us own debt-free and occupy our real estate “investment” as our home and use the kaboodle productively.

        • MC01
          Oct 29, 2019 at 1:47 pm

          I suspect for the first year or two those funds may actually pay a 7-8% coupon for those who bought at face value: it’s a typical trick used by French fund managers to lure people in and may prove irresistible in a negative yield environment. But what next? The fine print would probably tell us more and I suspect that fat coupon comes chiefly from other sources of income, such as old fashioned stock market speculation or flipping properties while the market is hot.

          Anyway the big problem these funds face is the same as the airline sector: massive oversupply.
          Europe is being buried in “vacation properties”: our Nick here has often written about the impact they are having in Barcelona and the Costa Brava and everywhere you look people are diving into the AirBnB business. Supply is going through the roof and it’s starting to put downward pressure on rents, for now chiefly in places with a big headstart such as Malaga and Faro, but it’s coming to a property near to you.
          It’s amazing where these things are popping up and given the prices involved I strongly suspect a whole lot of people (including fund managers) will eat a whole lot of losses. And this is assuming the bagholders don’t finally manage to find a way to get their long overdue revenge on AirBnB and its siblings.

      • Old-school
        Oct 29, 2019 at 8:20 pm

        Has there ever been a government including their agent a central bank that can be trusted with a ‘printing press’?

        It’s like having junk food in the house, you know better but when you are hungry it’s just too easy to chow down.

        Central bankers are already giving the wink and nod to politicians that itis ok to come up with some hair brained utopia spending for stimulous.

        To commemorate the broken window fallacy we should pay people to replace all the windows in the world with new efficient windows even if they are already efficient.

  8. otishertz
    Oct 29, 2019 at 5:49 am

    Do these types of funds use the repo for their short term liquidity needs?

  9. Iamafan
    Oct 29, 2019 at 8:36 am

    So these so-called High Yield Funds of today are in CLOs and Junk or near-junk. The values are iffy, but worse, they are not liquid and thinly traded (in the over the counter at best). The rush to exit, when it comes, can be like a scared theater exit. The next exciting frontier.

    • Oct 29, 2019 at 10:23 am

      Iamafan,

      If these funds are open-end mutual funds, they can turn toxic.

      If they’re closed-end funds (often publicly traded), they don’t have this liquidity mismatch since investors have to sell to other investors to get out, and the fund itself doesn’t have to sell its assets. So this type of fund doesn’t face the risk of a run on the fund. Instead, its share price takes a hit when credit markets get in trouble.

  10. Iamafan
    Oct 29, 2019 at 8:48 am

    ** OFF TOPIC **
    Today’s 14-day term Treasury repo had a stop out rate of 1.63%.
    This is almost a tip that the Fed will reduce the target Fed Funds interest rate tomorrow by another 25 points,

    • Oct 29, 2019 at 10:53 am

      SOFR is in the low 80’s, they are okay here, but if they drop they are pushing the high end once more. Everything is telegraphing pause; the economy is strong, trade talk phase one is nearly done, stock market just made a new high. So your justification for a rate drop would be?

      • p coyle
        Oct 30, 2019 at 12:57 am

        while not a justification, more like an excuse: “because the market has already priced it in?”

  11. unit472
    Oct 29, 2019 at 9:14 am

    I once owned some of Bill Gtoss’s Total Return Fund. That was when he was still the ‘Bond King’ so even taking my minimum annual distribution it kept growing. Then he shaved his mustache and Bill Gundlach became the new ‘Bond King’. Now even Gundlach struggles under Feds finanical repression regime.

  12. Norma Lacy
    Oct 29, 2019 at 9:25 am

    Also OFF TOPIC to Iamafan and other smart people. Re the Fed. I notice that in the last few days, especially monday and today, TLT has drifted down while utilities are also down. Example DUK down from >97.5 to +/-
    93.50 which is a lot in two days. So… I would have expected that if the Fed was going to drop rates on wednesday, TLT would be level to up and DUK ditto. So call me an idiot, but give me a hint. Thanks.

    • fred flintstone
      Oct 29, 2019 at 10:55 am

      Norma….the fed is trying to reduce short term rates and increase long term rates. So they can claim a healthy yield curve exists.
      TLT invests in long term securities.

      • DawnsEarlyLight
        Oct 29, 2019 at 11:48 am

        Isn’t what the FED is buying also what the Treasury is selling?

  13. Wes
    Oct 29, 2019 at 9:25 am

    Good history and business lesson Mr. Richter. There’s an old saying that history repeats itself, not always exactly but it does rhyme. Same old game just new players.

  14. Oct 29, 2019 at 11:20 am

    These nimble investors should be punished, or in lieu of that restricted by placing redemption limits on illiquid funds. Passive investors are god’s people, they never sell, not even when the global financial system collapses. Some call passive investing ‘evil’ but we should place blame where it really belongs, speculators, who are debased in the same manner as market “short sellers”. Fund holders who held and took huge losses are due compensation, probably from those who caused the stampede in redemptions. The mass hallucination, like the mass media, takes on an aura of respectability and moral high ground, and even an auspice of reality. The real problem is disbelief, which disrupts functioning in the financial autocracy; a system centrally controlled and absolute, and immune to any denigration of faith in the value of assets, by outside forces, or analysis, if you care to analogize this to politics.

    • robt
      Oct 29, 2019 at 11:47 am

      Anybody who buys a stock hoping for it to go up instead of receiving dividend income is a speculator. Is this bad?
      If some ‘nimble’ investor sells a fund early because they believe it is wise to do so (or even just because they need the cash, or wish to redeploy) should they compensate others who lost because they are too stubborn or too uninformed to sell?
      Should anyone who sells a stock at a profit compensate someone who takes a loss?
      All this is about as silly as some calls during the last financial crisis that perhaps the government should be setting stock prices, to avoid losses. Yes, it was proposed!
      Anyway, redemption limits on funds are self-regulatory: when the funds can’t sustain redemptions they moderate or suspend them. No need to regulate redemptions of illiquid funds; it’s self-evident and redundant.

      • nhz
        Oct 29, 2019 at 1:36 pm

        The Netherlands has a free government-sponsored insurance (“NHG”) against loss when you have to sell your home, for homes with a mortgage value of up to around 300K euro, which is now yearly adjusted to track the average home price. And because no one can loose when selling, this insurance makes the mortgage often even cheaper than without the insurance and it is great for jacking up home prices. Zero risk and free money for home debtors, gotta love the government!

        I guess the Dutch government is already pitching the idea to the ECB to extend this to stocks and bonds (only for qualified companies like multinationals, obviously – not for the small players). If you can only win and never loose, any stock can go to infinity… Of course, until the epic Ponzi collapses, but leave it to the Dutch to keep this going for many more years than anyone can imagine.

        • Oct 29, 2019 at 3:17 pm

          Yeah I think that if you are going to build a stock market as perpetual motion machine, (which always goes up) you are going to have to regulate the investors.

        • Old-school
          Oct 29, 2019 at 4:28 pm

          This gets very frustrating in the USA too. For example, government always has idea that spending money is good to the extent they offer you a carrot to do something you would not normally do. Here is $7500 to buy a Tesla. Well for average American they probably shouldn’t be spending more than $7500 for a car much less $60,000 – $90,000. I have a friend that got a $5,000 tax credit for buying a $50,000 home ten years ago. The debt keeps piling up and we become slaves to consumption.

      • 91B20 1stCav (AUS)
        Oct 29, 2019 at 3:00 pm

        robt-i think you and Doc Holliday combined present the best argument for staying out of the casino altogether. (In the film ‘Lost in America’, Albert Brooks sleeps while wife Holly Hunter loses everything they still own at Vegas World. The scene where Brooks’ attempts to negotiate with casino owner Bob Stupek for return of their belongings is classic, and an unfortunate analogy, in my opinion, of our tool of overleveraging finance/economics having become more important than our basic mission of human survival).

        Again, a better day to all.

        • Happy1
          Oct 29, 2019 at 10:41 pm

          I disagree. The stock market is a weighing machine in the long run and patient investors who don’t sell when things are low do well under almost any 30 year circumstance. You are purchasing ownership in a business in the stock market, in a casino you are playing a game of chance, and you aren’t earning a dividend. The stock market can be a casino in the short term but that’s a fools game that no one should be playing. None of this is to say that there will be outsized returns in the market near term, there can’t be because the market is overvalued along with almost everything else. But it’s not a casino for someone with a 30 year time frame and to state that it is is disingenuous.

    • 91B20 1stCav (AUS)
      Oct 30, 2019 at 2:15 pm

      Happy-you are assuming most have a 30-year window of thought (and the funds to stay in the casino that long). The problem for me is the great decline in ANY kind of long-term thinking/planning for the prosperity of our nation, be it government OR business. In my lifetime I’ve seen the growing trend of the to market acquire, loot and then discard too many formerly viable companies on the altar of always-increasing next-quarter share value/asset stripping, leaving the workers to twist in the wind, and public income disparity to grow. Wolf’s excellent reporting calls out this situation in its many variations all-too-frequently. Big killings in the market have always been publicized or passed by word of mouth, and as such, have multiplied the numbers of those who are born every minute. (You, obviously, do not fall into this category). As the market at this point appears to lack Smith’s ‘well-regulated’ component (can that ever be achieved?), one should walk into it hopefully knowing they shouldn’t be betting more than they can afford to lose, against a house and other players who can and do have the power to rig the game. I’m glad long-term strategy has worked for you in spite of that, but I need much more convincing that the ‘weighing machine’ doesn’t have someone’s thumb firmly on the scales.

      A better day to you and to us all.

  15. Jack Manning
    Oct 29, 2019 at 11:34 am

    This is why I never bought bond mutual funds, bond etf’s because they have the power to change investments at anytime.

    I started with laddering, staggering short to mid to longer term GIC’s here in Canada and individual government bonds. Locked in some super interest rates compared to today, long term 4.7% to 5.0% yield to maturities.

    This is way I know if I should sell or hold them and don’t have to worry about other pooled money impacting my investments value.

  16. sunny129
    Oct 29, 2019 at 1:47 pm

    I converted my IRA portfolios from predominantly MFunds to ETFs ( div paying) in various sectors/industries/regions/countries within the last 5-8 years. The reasons obviously discussed above.

    Most of the MFunds have to STAY invested by their laws in their prospectuses! Check their performance in 2008!

  17. Norma Lacy
    Oct 29, 2019 at 3:56 pm

    Yes indeed to Fred F. Thanks. Just a child in the woods here. Well their plan seems to be working, hey? In that I cannot follow the Fed maze, I hold equal amounts of TLT and 3-6 month CDs and TBs. I got rid of all mutual funds long ago. Too scary for me.

    Did you happen to read the Wall Street on Parade article of 28 oct? “…How JPMorgan Lit the Fuse”

  18. SylVestor
    Oct 29, 2019 at 8:11 pm

    Ok, hypothetically speaking, in response to the DOOM&GLOOM, and no hope in the BOND world :(

    If you say buy EMB ( emerging market bonds, denominated in USD ), you have no currency risk, and get north of +5%, DALIO has billions in this fund,

    This is where the ELITE Internationally, who make the rules, who tell the FED what to do, park their money.

    If you study the history, they lost maybe 20% a few weeks in 2007, and quickly recovered, so you got an easy 20 year history to see how things played out,

    It’s not a risk-free world, but pretty damn close if your a billionaire.

    We have what we have today for a lot of reasons, but mainly ‘kick the can’ going all the way back to the great-depression, bretton-woods didn’t fix, and nixon didn’t fix, and saudi petro-dollar didn’t fix,

    The USA defaulted on its debt 3 times since 1776, and it will again, when who knows. But which debt is the clue, smart people study the history, and learn who lost, and who profited, not collapse is ever the same, so you can’t play the same game twice,

    So now we have the mother-of-all debt bubble economic insanity, and the FED is the only one with the ammunition to continue the party.

    When in Rome, do as the Romans do.

    ***

    Strategically its VERY important to understand the above, buying bonds INTL, yet based in home-currency, where the currency can be printed to infinity, gives all the advantages, and none of the pain of zero-return at home, but the comfy knowledge that home will print to infinity.
    Remember like Carlin said, “It’s a club, and your not in it”, but believe this, if you study the club owners, and do what they do, … well how could you go wrong?

    At this POINT USD aka USA-INC Corporate Criminal, Inc. Is just the little boy at the dike holding his finger, its been nearly 100 years of this, something is bound to break, and we all know it, if nothing else the rise of China, and their detest of playing the Western con-game. But the single fact that Club-Owners, are working 24/7 to appease the Chinese priority #1, gives me comfort, again do as the Romans Do.

  19. Larry Sabtiago
    Oct 30, 2019 at 6:38 pm

    China will be the horse they bet on that will not pan out as great as they expect. I give them maximum 20 years and it will run out of juice.

    China is a bigger version of Japan in the 1980’s until see what happened there. This whole social credit system will never make another U.S.A. as we can see how Hong Kong is a big thorn in the Chinese Communist government. Yes, people forget that China is still a Communist government that uses trade to grow and survive. If there is limited to no freedom, free enterprise is it will not work under constant government command economy.

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