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Markel’s Tom Gayner With Strong Warning on Bond Bubble

August 13, 2010

I’ve written several times about the high profile investors publicly suggesting that the very highest quality American companies are bargains at current prices. Here are a few of them:

Jeremy Grantham


Bill Miller


James Grant


There is another rumble coming from the crowd of respected investors, and that is that the returns currently offered by bonds are not acceptable for the risk assumed. Jim Grant mentioned it and after reading the quarterly conference call comments by well respected value investor Tom Gayner it seems he is of the same line of thinking.

Here are his comments:

“If you are tuned into the financial markets these days, it seems like deflation is the headline story of our time. As is almost always the case, the genesis for the headlines is true, true especially if you’re looking in the rearview mirror of recent hard data, as opposed to the unclear, unknowable and imprecise future.

All across the globe, we face persistent unemployment issues, the ongoing deleveraging of the economy, increased savings rates and new labor pools from the developing world, which are creating more in the way of global supply than demand.

All of these factors create pressure on prices and worries about deflation. These facts and worries can be seen clearly in the low levels of inflation expectations and interest rates. I don’t hear bondholders talking about things like the fact that Disney just raised the admission price and the tuition and medical bills among others continue to rise.

A one-year treasury now offers a yield to investors of approximately 0.3%. You can get almost 10 times that if you commit money for 10 years, since the 10-year yield is almost 3%. Neither one of those rates is acceptable to us.

The popular idea of investing in bonds today strikes me as about the same as the chance of Dow 36000 a decade ago. The arguments were well-reasoned and seemed plausible at the time. A bull market can make you believe some incredible things. Today the multi-decade bull market has been in bonds, not equities and I think that similar incredible ideas are out and about in the financial markets. I don’t think that committing our capital for returns of roughly 3% is a good idea that will stand the test of time.

In 1904, the New York City subway system opened with a fare of $0.05. The fare stayed the same 44 years until 1948. Over the next 62 years, prices increased regularly and now stand at $2.15. Investing in long-term fixed income instruments at today’s interest rates makes sense if you think the coming decades will see the subway fare remain at $2.15 or thereabouts.

Personally, I’ll take the over bet and invest your capital reflecting this view. We’re not interested in locking up our capital for such low nominal returns. We maintain the fixed income holdings we must to match and protect our policy holders. Beyond that, we keep cash and fixed income in order to have the option of investing differently as market conditions change and different opportunities present themselves.”

The logic is hard to argue with. Of course as always, the timing of the change in sentiment is impossible to predict.

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Rating: 4.0/5 (23 votes)


Cm1750 - 7 years ago    Report SPAM
Totally agree.

Expectations can change dramatically in a matter of months.

Investors have flip flopped on their view of the Euro this year and the big fear was inflation just a few months ago when buying the TBT (2x t-bond inverse) was all the rage.

If you buy a 10+ year t-bond at under 2.67%, you are betting that inflation will be very low for the next 10 years. Given economists can't predict rates one year out, betting on 10-year projections is insane given the huge losses possible if rates do jump materially. There is also the risk of the U.S. eventually losing it's AAA rating.

As WEB says - I like to shoot fish in a barrel. But I like to do it after the water has run out. I hardly think t-bonds qualify.

I would feel better buying WMT at a forward earnings yield (E/P) of 8% and a 2.4% dividend yield where you also get (hopefully) better tax treatment with cap gains and dividends.

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