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Powell didn't put it that way in his press conference, but that's the inference. Equity markets are looking at it a completely different way than the bond market. We saw the long end of the bond market sell off a bit after the rate cut.
If we were going to get a very hard economic landing, theoretically you'd see a demand for duration. But that demand for duration would come out of selling equities. So you have a bid for equities and for the front end of the curve, but in the bond market you have what's called a "bearish steeping". And that's not a bullish underlying story.
A lot of things are just not lining up for him. Is the bond market right about the outcome, or is the stock market right? When the Fed did its summary of economic projections for unemployment, inflation, dot plots, etc., the front end of the market (short-term interest rates) is pricing in a much more aggressive path of rate cuts. This tells him that the bond market's looking for a harder landing than the stock market. Both can't be right. Right now, the stock market continues to win that debate.
All kinds of reasons why the path of Fed rate cuts might be slower. But the market's pricing in way more than the Fed's telling us it's going to do. The market is a better discounting mechanism than any one individual. But at the same time, the stock market's at all-time highs. That tells you we have a stronger economy. In a stronger economy, the bond market's not going to be good. That's why we've seen pressure on the long end, yields rising and bonds selling off.
If the bond market was saying OK, hard landing, that would imply the Fed's going to cut more. There's a lot that doesn't add up, and when that happens, you want dry powder to take advantage of opportunities in any market surprises. A bit of cash right now is not a bad thing.
That's what he's seeing. All the new ETFs coming out are leveraged plays on NVDA, leveraged bitcoin, leveraged this and that. Lots of speculation in the marketplace right now, which doesn't happen at a market bottom; it happens much closer to a euphoric stage of investor enthusiasm.
An ETF that holds treasury bond exposure, with call options embedded to get upside in equities. Called a "treasury growth strategy". Combination of making money from equities plus protection from fixed income.
Instead, look at some of the Innovator ETFs or the BMO Buffer ETFs. Strategies that put protection in your equity portfolios.
From a trade perspective, a bit overbought. He's a trader at heart, and buys into dips. If you're a bull, by all means keep holding. But he took some $$ off the table.
Likes both gold and silver here. Gold and silver equities and exposure to them are very undervalued relative to long-term trends; analysts tell him it's likely going to stay that way for a while. The market just doesn't believe that gold and silver prices are going to remain elevated.
Utilities, pipelines, and telcos (including BCE). A utility play, with a covered call strategy. Really nice way to get a lot of income in your portfolio without a lot of volatility. But very interest-rate sensitive. Lots of ups and downs over the last 5 years, mainly based on what the bond market's done.
ZWP is the equivalent of high-dividend players, but exposed to Europe. Some of the best dividend yields come out of foreign companies. Great way for Canadian investors to get income and dividend exposure in Europe. Likes it very much.
Likes both, and owns both in his ZZZD. The mix changes from time to time as he sees more value in one or the other. Most recently, he trimmed ZWU and bought some ZWEN (direct exposure to covered call energy sector).
ZWU has utilities, pipelines, and telcos (including BCE). A utility play, with a covered call strategy. Really nice way to get a lot of income in your portfolio without a lot of volatility. But very interest-rate sensitive. Lots of ups and downs over the last 5 years, mainly based on what the bond market's done.
ZWP is the equivalent of high-dividend players, but exposed to Europe. Some of the best dividend yields come out of foreign companies. Great way for Canadian investors to get income and dividend exposure in Europe. Likes it very much.
Likes both, and owns both in his ZZZD. The mix changes from time to time as he sees more value in one or the other. Most recently, he trimmed ZWU and bought some ZWEN (direct exposure to covered call energy sector).
You get the dividend from the underlying securities, that's for sure. If underlying companies cut dividends, then the dividend will be down.
But the enhancement from the options strategy comes from the price of volatility. There's nothing more volatile than the price of volatility. Extra income generated is variable. Right now, it's pretty attractive. But he'd be lying if he said that there's a strategy where you can get 10-11% forever and ever without change.
Right now, probably sustainable. Not a strategy to just buy, without understanding the mechanism of it, and forget about it. Nothing wrong with it, but the income generated is variable, with the biggest swing factor being the price of volatility. If volatility goes down, the fund can't get as much for the call options.
He uses the BMO versions of these because of the funds he runs for BMO.
Different types of return of capital. The difference tax-wise is that when a strategy is giving you a certain yield, that they're not earning, they're giving you back your own money. That's the one that's dilutive to your net asset price. That's not what happens in this ETF.
If the underlying ETF is generating dividends and incremental income on a covered call overlay, and paying those out, it's not an erosion of your income.
Sometimes, there has to be a tiny bit of ROC when very recent investors to a fund are owed their dividend, but their investment hasn't yet had enough time to generate what they're owed. So there might be a small ROC in the interests of fairness to all unitholders of the fund.
When you buy any bond fund or ETF, you have persistent rate risk. Very different from buying a bond that matures. If you want to take advantage of falling yields, you have to own long-term bonds that don't mature for a long, long time. So if interest rates fall, you get the advantage of that.
For a bet on falling interest rates, long bonds are the way to do it. ZFL contains long-term federal government bonds in Canada. In the US, use TLT. Best bang for your buck, but highly volatile and highly risky. Long bonds right now are facing a tremendous wall of supply, and he's not sure they're going to fall that much in price. He's quite cautious on long bonds right now.
Another way is to use a target-dated ETF, where the ETF owns a bunch of bonds in the same maturity bucket. Would have more price sensitivity.
BMO has a series a bond ETFs that break things down by short-, medium-, and long-term bonds. BMO has the best universe of bond ETFs that are broken down into different categories. Look at those.
When you buy any bond fund or ETF, you have persistent rate risk. Very different from buying a bond that matures. If you want to take advantage of falling yields, you have to own long-term bonds that don't mature for a long, long time. So if interest rates fall, you get the advantage of that.
For a bet on falling interest rates, long bonds are the way to do it. ZFL contains long-term federal government bonds in Canada. In the US, use TLT. Best bang for your buck, but highly volatile and highly risky. Long bonds right now are facing a tremendous wall of supply, and he's not sure they're going to fall that much in price. He's quite cautious on long bonds right now.
When you buy any bond fund or ETF, you have persistent rate risk. Very different from buying a bond that matures. If you want to take advantage of falling yields, you have to own long-term bonds that don't mature for a long, long time. So if interest rates fall, you get the advantage of that.
For a bet on falling interest rates, long bonds are the way to do it. ZFL contains long-term federal government bonds in Canada. In the US, use TLT. Best bang for your buck, but highly volatile and highly risky. Long bonds right now are facing a tremendous wall of supply, and he's not sure they're going to fall that much in price. He's quite cautious on long bonds right now.
Lesson for Boomers
Going forward for as long as you want to look into the future, the bond market is not going to protect investors the way it has for the last 40 years. Investors need to really rethink portfolio construction in retirement years. In financial planning school, they tell students that the older you get, the more safety and bonds you should have in your portfolio. When interest rates got very low a number of years ago, that didn't give the protection needed.
In a bond fund, you earn yield to maturity plus the interest rate risk. If interest rates are falling, you get the current yield plus the change in rates. But if rates go up, you get the current yield MINUS the change in rates. With inflation being stickier, bonds will be challenged. Higher inflation is a problem for bonds.
Looking at a chart, in 2018 the yield to maturity was 3.25%. Today, it's 3.70%. Long-term average inflation is about 2%, + or -, for decades. We didn't have to worry about it, and now we do. If inflation's back down to 2%, he's not sure it's going to stay there.
You need a higher return than a bond is going to give you today to keep up with inflation and grow your savings. Alternative ETFs such as ZWU, VCNS, ZWB, ZWC, and PJAN are what's needed to protect your portfolio, rather than conventional bonds. These are what you need to generate the income you'll need for retirement, to get a real return on your investment, more than just protection of principal.
