Wednesday, May 6, 2015

Bonds for Safety, Stocks for Risk... Is that your final answer?

Day in and day out we hear the same old shit regurgitated across our faces. We hear it so much until we believe that it is true without even asking ourselves why. Why?

I once heard a famous investor say that the best sort of bet to take is when you know something will absolutely have to happen, the only question is when will it happen.

And when it happens, you best be ready to jump on that train and ride it!

I like IceCap AM, I think that their global market outlooks are pretty good reads every now and then to remind me about poignant issues I might be missing.

Their point about governments defaulting their debt? I think it's brilliant.

Take Italy for example (slide 12). Not once have they ever ran a budget surplus before. Why would anyone ever buy their bonds? Now, if you want to talk about "greater fool" investing, here's a perfect candidate for you.

It's not if they will default, it is when will they default.

I don't see how many countries could ever pay back their debt owing, like the USA or Japan.

I think that their point of target date funds is extremely spot on. Why would anybody at this point of market history have large exposures to bonds? Just how much lower do you want interest rates to go?

Despite the recent plunge in bonds, like IceCap AM, I do think that bonds might have another ace up their sleeve, especially once things start falling apart for the stock market. Once people realize that they need more liquidity and all they've left is tons of bonds to sell, boom, open the floodgates.

But really though, I don't see the need to take such a gamble for that one last surge. Penny wise, pound foolish.

Seriously, if you're holding on to bonds, at what level of (negative) interest rates are you planning to sell at?

These are unconventional times. I cannot bring myself to even recommend to anyone the cookie-cutter 60/40 stock-bond portfolio. Everything is insanely priced. Long insanity and short common sense.

This is madness.

My only exposure to bonds are short-term bonds. Their short duration and the returns already produced is enough to give me a margin of safety that I can leave even just as things start to get messy. I also have emerging market bonds, but my exposure is low. Essentially, I'm still playing the same game of chicken with all the other bond holders out there, but I'm playing Easy mode with noobs in the lower league.

So are bonds safe long-term investments? Not to me. It feels so 1940.

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