| For many investors, there are only two assets | | | | near record high levels (interest rates near record |
| worth considering most of the time - stocks or | | | | low levels). So what should you be doing - buying |
| bonds. "When the stock market falters, switch to | | | | or selling? I told you it was simple. |
| bonds for 'safety.' They might be dull and boring, | | | | The last time I recommended buying bonds was |
| compared to the roller-coaster ride shares can | | | | in 1989, when the yield on the Australian 10-year |
| give you, but you can't lose on US Government | | | | was 14%. It has since been below 5% and is still |
| Bonds, because apart from less volatility, you | | | | below 6%. |
| have the strongest guarantee in the world." So | | | | Today if you buy 30-year US bonds, you are |
| goes the argument. | | | | locking in less then 5% per annum for 30 years. |
| Is this true? Are Uncle Sam's Treasuries safe? | | | | In 1981 you could have locked in 15% per annum. |
| Well, if you don't mind lending your hard-earned | | | | And you could have sold them along the way for |
| savings to someone who already owes $9 trillion | | | | a huge capital profit. Yet today they are infinitely |
| and has no chance of ever paying it back, I guess | | | | more popular than they were in 1981, when |
| you could say they are safe. | | | | bonds were a dirty word. That's human nature. |
| Bonds are only safe because people (including | | | | "The 13 ¼ percent bond due in 2014 that |
| international investors, even central banks) think | | | | the government sold on May 15, 1984, returned |
| they are safe. When it comes time for Uncle Sam | | | | an annualized 24 percent. The S&P 500 |
| to repay his loans, he simply borrows some more | | | | returned 13 percent, including dividends, during the |
| (issues new bonds), often from the same people. | | | | same period." Courtesy Bloomberg |
| The lemmings love them. If that's not a gigantic | | | | Clearly the most important thing is not so much |
| Ponzi scheme, what is? If you or I tried it, we'd | | | | what you buy and sell but when you buy and sell. |
| be behind bars! But the scheme survives because | | | | The junk bond market is a disaster waiting to |
| people believe in it, as they do the fractional | | | | happen. With investors desperate to get a better |
| reserve banking system.. | | | | yield, they have been prepared to ignore risk, |
| Just like money in the bank, technically bonds are | | | | with the result that the spread between |
| a very unsafe investment. But whilst ever the | | | | government paper and junk is near a record low. |
| public maintains confidence in the confidence trick | | | | Investors are clamoring for junk yet it is clearly |
| that both represent, you should not lose too | | | | the worst possible time to be doing so. Along with |
| much. | | | | private equity and hedge funds, associated junk |
| But this brings up the main factor to consider | | | | bonds are going to be the greatest disaster since |
| when buying bonds. Creditworthiness is one thing. | | | | the dotcom crash (unless the housing crunch |
| But the market risk is of even greater concern. | | | | beats it to the punch). |
| And whatever I have to say about Treasuries | | | | But with countries like China and Japan owning |
| here is doubled, tripled, quadrupled and more when | | | | hundreds of billions of dollars worth of US |
| it comes to junk bonds (lower than investment | | | | Government paper, is there no risk that panic |
| grade). | | | | selling could break out at any time even in the |
| Investing is so easy. You only have to remember | | | | "quality" market, causing a collapse in bond prices |
| one rule: Buy when prices are low; Sell when | | | | and a corresponding escalation in long term |
| prices are high. It's that simple. Yet it is human | | | | interest rates around the world? A persistent |
| nature to do the opposite. When an asset has | | | | inverse yield curve has been warning of trouble |
| been on the bottom for years, nobody wants to | | | | ahead for many months. Does the fact that this |
| touch it. Once it has doubled in price, everybody | | | | has been ignored mean that the trouble will not |
| wants to buy it. Crazy, huh? But that's why a | | | | occur? |
| study of crowd behavior (socionomics and Elliott | | | | The expression "flight to safety," when used in |
| Wave patterns) is far more important than a | | | | reference to bonds, may really mean "out of the |
| study of economic fundamentals. | | | | frying pan into the fire. |
| So, where are bonds now? Like stocks, they are | | | | |