Below is my “go to” inflation chart. The Ned Davis Research Inflation Timing Model consists of 22 indicators that primarily measure the various rates of change of such indicators as commodity prices, consumer prices, producer prices, and industrial production. The model totals all the indicator readings and provides a score ranging from +22 (strong inflationary pressures) to -22 (strong disinflationary pressures). High inflationary pressures are signaled when the model rises to +6 or above. Low inflationary pressures are indicated when the model falls to zero or less.
Source: Ned Davis Research
Bonds, bond funds and bond ETFs lose money when rates rise. I posted this next chart just a few days before Treasury yields hit a 35-year yield low of 1.37%. What it shows is how much money is lost when rates rise.
If your starting point was a yield of 1.40% (top half of chart), as it was on 7/11/2016, and rates rose to 2.40% (which they did) your loss would be -8.84% if you were invested in 10-year Treasury Notes and -19.07% (bottom section of chart) if yields on the 30-year Treasury Bond rose to 3.25% (which it nearly did). Further, note the risk of loss if the 10-year rises to 5.40%. Note the -53.90% loss on the 30-year if yields rise to 6.25%.
A number of pundits are calling for a 5% yield in the 10-year within a few short years. I’m not in that camp but really… I don’t know. I’m more in the “one more big recession” camp that will properly reset equity valuations and if so then rates should gap lower.
What I do believe is most important, is that investors should see this chart and size up the potential risk-reward for themselves. With rates just coming off 5,000-year lows, my best advice is to think about your bond exposure as if your retirement wealth is dependent on it… and it is.
2.45% Treasury yields suck (as a good friend reminds me is a technical term) and rising inflation will eat into the net real yield and further cause interest rates to spike higher. Treasury yields were north of 5% in 2007.
Be tactical with your bond exposure. Don’t look at the last 35 years, as many people do, and project it forward. The great bond bull market yield low is likely in. Think differently about how you position that 40% of the traditional 60% equity / 40% bond portfolio.
Last week, the investment staff of CalPERS — the $300 billion California pension fund — 
Early each month, we look at market valuations to see where we are. It’s also important to consider what valuations may indicate with respect to probable (7- and 10-year) forward returns. We believe risk is most when we feel it least and the risk is least when we feel it most. Today, we feel it least.
Ray Dalio established Bridgewater Associates in 1975. With $150 billion under management, Bridgewater is the largest hedge fund in the world. The firm has approximately 350 institutional clients, including public and corporate pension funds, university endowments, charitable foundations, supranational agencies, sovereign wealth funds and central banks.
Almost every effective strategy I know can be written on the back of a napkin. The processes may appear to be simple, but implementation can to be complex and challenging.
Regular readers know that I favor the median price/earnings (P/E) ratio to assess broad market valuation. Median P/E tends to remove common one-off accounting gimmicks. However, by almost any valuation methodology, the market is overvalued and probable forward returns will be lower.
Naturally, because there’s a presidential election this year, every news cycle is very noisy. It’s critical, however, that we maintain our focus on monitoring and assessing important financial news and managing potential risk. Such is the case regarding the financial condition of Deutsche Bank (DB). DB is one of the largest financial institutions on the planet. And, right now, it may be one of today’s great systemic risks. Think Bear Stearns, Lehman Brothers…