False Sense of Securities: Treasurys Are a Bad Bet

WALL STREET JOURNAL ^ | 3/12/3 | JONATHAN CLEMENTS

[presidio9]

It's March 2000 all over again. But this time, the frenzied buyers aren't focusing on stocks.

Spooked by the prospect of war and anxious for any semblance of safety, bond investors have bid up the price of 10-year Treasury notes, so that they yield just 3.57%.

[presidio9]

Here is that article you requested. I'm not sure if the link will work, as it is a subscriber site. This article was faxed around Wall Street quite a bit this week, as it does a good job of explaining duration's role as a in determining the effect on the price of a bond an interest rate move causes.

[presidio9]

ping

[AdamSelene235]

But this is nuts. The Standard & Poor's 500-stock index is off 48% from its record high. Isn't it a little late to be worrying about downside risk?

Nope.

There are no safe investments. Safety isn't a money-market fund with a 0.8% yield, where you are guaranteed to lose money after inflation and taxes. Safety isn't Treasury bonds, where you could get bludgeoned by rising interest rates. Safety isn't stocks, which could indeed be in for a long dry spell comparable to the grueling 1966-82 period. Instead, safety comes from owning all these investments. That way, you should do just fine in the years ahead, no matter what the market serves up.

Wrong again.

[razorback-bert]

Inflation could easily wipe out that 2.61% gain.

But I though we were in deflation.

[AdamSelene235]

But I though we were in deflation.

Sure we are.

[WaveThatFlag]

But I though we were in deflation.

No, Bert, we are still in an inflationary economy. Around 2.2%. But even if we there were deflation right, now, the author is referring to the future value of 10 year notes. A lot can happen on those 10 years.

[WaveThatFlag]

Wrong again.

I agree that "you should do just fine" is an overstatement. But the author is making a statement for a properly diversified portfolio, which is technically correct. The reason any stock (say, Fanniemae, for example) is priced where it is is because half the investment money thinks it is going up. Half think it is going down. When that perception changes, money flows in or out. Unless you diversify your portfolio (and that includes asset allocation as well as securities diversification) you are really just gambling anyway. In this market, everyone should also be looking at alternative investments with no correlation to either stocks or bonds.

[KantianBurke]

SO WHAT THE HECK SHOULD WE DO WITH OUR MONEY IF STOCKS AND BONDS AREN'T SAFE??

[Andiceman]

Ammo?

[razorback-bert]

I been touting younger women, older whiskey and faster horses for years.

[Mr. Jeeves]

Wrong again.

The paper-pushers' pathological fear of uttering the word "gold" really is amusing, isn't it?

[presidio9]

Contrary to what the article says, there are safe money market instruments that beat inflation. But as of today's closing bell, stocks are now positive for the year. I'm not saying get into the stock market right now, but people need to understand that the last few painful years have been the hangover from the worst market bubble in history. Long term returns from properly diversified equity portfolios should be positive.

[Siegfried]

The author left out one class of assets -- physical -- that ought to be part of a well-balanced portfolio.

I recommend gold be included to ensure against low interest rates along with a stagnating economy. But the truth is, any physical asset, even houses if bought cheaply, would serve the same purpose. Gold is just the most compact and fungible physical asset I can think of.

The public library in our small town is not well funded, and as a consequence, there are a lot of old books on its shelves that haven't been replaced in many years. It's a real eye-opener to browse the financial shelves and see all the books written during the stagflation period of the late-1970's. Some of the writers of these books recommend some seemingly outlandish schemes to defeat inflation, like stocking barrels of heating oil in your backyard (the author includes directions for adding stabilizing agents to the barrels), and building a covered platform and buying steel products like girders and sheet steel for long-term storage.

These seem like ridiculous ideas now, but the important point is that they seemed reasonable at the time. In the late 1970's there was inflation as far as the eye could see. Of course, by the time these books were written and published and finally stocked on library shelves it was way too late to take advantage of any of these ideas, but the writers were writing their "wish I hadda done it" stories in light of their current situation.

This writer is suggesting diversification among monetary instruments; money market funds, stocks, and bonds. But he left out the "real" money of final analysis; gold.

Now it's not likely the world will completely devolve into anarchy, but just the same, the value of gold will likely stay relatively constant, while the value of money market funds, bonds, and stocks will always depend on the value of the underlying currency. Who can say how many dollars it will take to buy an ounce of gold down the road a ways?

[Wyatt's Torch]

We were from 1997 through late 2002. Now, that pressure has lifted. Many supply-siders called this around Aug/Sept of last year.

[TomB]

Why the HELL would you ping yourself?