The Real Reason Boomers Buy Bonds

Tyler Durden's picture

Day after day we are inundated with the apparent 'idiocy' of investors putting their hard earned money into Treasury bonds when they only earn 2% yields. Hour after hour, we hear why investors should buy stocks, 'get paid to wait', and bonds are in a bubble. So why is it that day after day, an entire generation appears to have found a new mantra of investing, preferring less risk to more, satisfied with less return as opposed to more. The simple answer comes down to two words - often misunderstood - risk and drawdown. While most consider the former to be some quantifiable measure of uncertainty (more is better because think of the upside potential); it is the latter that ends careers, crushes retirement hopes, and scars pysches for life - and is often ignored. As we discussed here previously - must read, comparing (risky uncertain cashflow stream) equity dividend yields to (risk-free certain cashflow stream) Treasuries is like comparing apples to unicorns, but more importantly as Boomers retire en masse, this chart explains why there is a third leg to the investment decision - risk, reward, and regret; and equity drawdowns are the real 'risk'.


Drawdown risk has kept equity investors at bay; bonds have appeal as a safety play - despite low yields as return OF capital still trumps return ON capital - even though bonds have provided both in recent years.

and some important lessons from Oaktree Capital's Howard Marks:

Question: Why do behaviour patterns and mistakes recur despite the plethora of information available now? Are we doomed to repeat our mistakes?


Howard Marks: It's extremely important to know history, but the trouble is that the big events in financial history occur only once every few generations. The latest global financial crisis began in 2008 and the one before that in 1929. That’s a gap of 79 years. So, while memory has the potential to restrain action and induce prudence by reminding us of tough periods, over time as memory fades the lessons fade as well.


In the investment environment, memory and the resultant prudence regularly do battle with greed, and greed tends to win out. Prudence is particularly dismissed when risky investments have paid off for a span of years. John Kenneth Galbraith wrote that the outstanding characteristics of financial markets are shortness of memory and ignorance of history. In hot times, the few who do remember the past are dismissed as relics of the old, lacking the ability to imagine the new. But it invariably turns out that there's nothing new in terms of investor behaviour. Mark Twain said that “history does not repeat itself but it does rhyme,” and what rhyme are the important themes.


The bottom line is that even though knowing financial history is important, requiring people to study it won’t make a big difference, because they'll ignore its lessons. There's a very strong tendency for people to believe in things which, if true, would make them rich. Demosthenes said, "For that a man wishes, he generally believes to be true" Just like in the movies, where they show a person in a dilemma to have an angel on one side and a devil on the other, in the case of investing, investors have prudence and memory on one shoulder and greed on the other. Most of the time greed wins. As long as human nature is part of the investment environment, which it always will be, we’ll experience bubbles and crashes.


Question: Is it volatility that’s made people scared of equity markets, particularly since 2000?


Howard Marks: Volatility goes in both directions but it’s declines that people dislike, not volatility. The equity markets of the last 50 years tell a long and meaningful story. Owning stocks wasn’t very popular back in the 1950s, until the brokerage houses popularised equity investing. People started buying equities and they went up, encouraging more people to buy them. This is the usual selffeeding spiral. So equities rose in nearly a straight line from 1960 to 1972. After this they had a bad decade, but then they did even better from 1982 to 1999. Overall, for 30 out of those 40 years, equities rose breathtakingly and people fell more and more in love with them. By the end of 1999 everyone had more equities than ever before and maybe too much of them. So, equity performance, equity prices, investor attitudes towards equities and equity allocations within portfolios all reached their acme in 2000, after which equity prices collapsed under their own weight. In 2000-02 we had the first three-year decline in equities since the Great Crash, and people started to fall out of love with them. This made them sell, driving prices down further and prompting even more selling. The same spiral, but now in reverse. And as investors fell out of love with equities, they fell in love with bonds.

The mantra in the last four decades of the 20th century was “growth” and the mantra in the last 12 years has been “safety and income.” And so, from 2000 to very recently, equity allocations have been going down, equity prices have been unchanged overall, equity returns have been close to zero, and we’ve seen people chase safety and income through bonds instead. But people often forget to look at the price they’re paying for the concept they’re buying into. In 2000, people pursued growth but forgot to ask themselves ‘at what price?’ And in recent years they've been pursuing safety and income while ignoring the same question. Today the price being paid for the safety and income of bonds is among the highest in history.

Chart: Goldman Sachs

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LawsofPhysics's picture

What a load of horseshit. Look, it is real simple folks. There are far too many paper fucking promises with too few real assets. The boomers have seen two major market crashes and are now buying real assets and playing a game of attrition. Fuck you Bernanke.

McMolotov's picture

There's never been a better time to buy (worthless paper shit)!

CH1's picture

They've spent too many decades following the 'wisdom' of their collective generation and can't pull out of the spiral.

Their errors defend themselves: To change course means having to admit they were wrong, and most of them never learned how to do that.

Harlequin001's picture

Boomers aren't buying bonds.

The Fed is.

riphowardkatz's picture

boomers are buying real assets, ha ha ha. not even close to the truth. talk to ten boomers about gold or oil or real estate and 9.9 of them will tell you, thanks but no thanks.most of them are scared out of their gord. real assets mean nothing to them, they think a bond is a real asset.

Unless the boomer you are talking to lives in or has recently moved  from India or Vietnam or Thailand or China. 

scottch's picture

Not this boomer or half the boomers who work for me.  Its all about RE right now.  Don't miss out!  Tenants, trash, and toilets, baby.  And 11% cap rates!!

Atomizer's picture

Agreed. RE has become a second income while putting your feet on the desk and doing nothing

ATM's picture

Until the governments of the states and localities decide that their only hope is to raise RE taxes.

and then they will raise them again and again and ultimately decide that they must take those properties in their jurisictions for the greater good.

Sorry but I am going to keep a good share of my net worth in assets that are portable.

Harlequin001's picture

No body has to do any work.

All you have to do to get rich is buy a house and invest in the stock market.

That will end well won't it...

Atomizer's picture


My assets are portable, they're called tenants. High end RE homes still drive a prime rental market under yearly contracts. Atomizer is by no means a slum lord. :)

Seer's picture

"Until the governments of the states and localities decide that their only hope is to raise RE taxes."

(that's what they HAD been doing going up, but now it's all going down)

They can decide anything they want, but it's the execution of their decisions that matter.

I'd stated a couple of years ago that property taxes would be coming down, and for these reasons:

1) Can't squeeze blood from a rock- as wages drop and people become unemployed they're not going to be able to carry higher taxes; foreclosures and sales bring lower assessments, which drops property taxes (I'd say that this is one of the prime reasons govt has helped bailout the banks- keep them from churning RE sales that would also push down property tax receipts);

2) As banks and other consolidators of assets/money acquire more RE they have more lobbying power to hold/lower property taxes; anyone who doesn't believe this has missed the FACT of how the banks have made out so far.

It's only one anecdotal, but MY property taxes HAVE decreased (12.9% since 2011).  And my taxes are lower to begin with because I have Ag land.

If you don't think smarter then out on that road you're more likely going to end up road-kill.

Bicycle Repairman's picture

You really do underestimate the local taxing people.  They can subdivide the classifications of RE to get at the people who have $ and can pay.  The big boys will then find a loophole at the federal level.  Don't think so?  Research the Tax Reform Act of 1986 and see how Reagan and his buddies socked it to the little guy in RE.

Never One Roach's picture

Repairman has it right. My RE values plunged 20-30% after that 1986 "Reform" act. It was targeting certain groups while exempting others. Right now, house an dcondo insurance rates are soaring. Taxes increasing to pay for things like, "additional school security."


Localities keep nibbling away at house owners. I was a landlord awhile back and it's impossible to pass all these onto the tenant. And as a home owner you are stuck with these higher costs.

RealEstateWannabe's picture

Where are you finding 11% cap rates? Which property type(s)? 

TruthInSunshine's picture

As someone immersed in a real estate issue deposited onto my lap by RE investors of various sizes on at least a weekly and often daily frequency, unless he's literally tied in with the boys at the NYFRB (i.e. Blackrock) or amongst the literal top 1% of RE investors (whether by sheer luck or mad skills), he's not.

caimen garou's picture

your right some may be clueless, but not all!

Seer's picture

Hm... most that I personally know ARE/HAVE BEEN.  Maybe it's because of my influence?

847328_3527's picture

Boomers are almost clueless and most missed the 250% increase in gold and over 300% increase in silver. Instead they lost their hard earned savings in the stock market or in housing.


Most are too brainwashed to stop watching MSM "business news" and recommendations on TV. 

CheapBastard's picture

maybe the Boomers will get into the house flipping market so they can lose what's left of their savings. I don't know. Many are desperate with their 0.01% 'high yield savings accounts.'


Too bad AARP does little for them. Seniors have essentially zero voice in gubbermint from what I can see. Anybody disagree?

lasvegaspersona's picture

Retirees are ALWAYS the victims of currency collapse. Read "When Money Dies". Read Daniel Amerman. Screwing retirees and pensioners is the PLAN! They fail to understand inflation and even if nominally they do OK (which they usually do not) then inflation and the taxes on their inflation derived 'profits' leave them robbed of purchasing power. Financial repression is not an accident, it is a government/ CB POLICY! Youngsters have the advantage of longer horizons and can often take advantage of inflation adjusted wages. Retirees are stuck, frozen at the moment they quit working. They are easy pickins for rapacious governments. It has been this way for a long time. It is even more true in this age of cradle to grave 'security'.

TheDuke's picture

Governments are thieves. Their primary modus operandi is to steal from the present (taxation).

When that doesn't satisfy them they also steal from the future (debt).

When that form of extortion is exhausted they also steal from the past (inflation/currency devaluation).

If that doesn't work then the whole system collapses. Retirees are cannon fodder.

Parrotile's picture

You'll find thet 99% (or more) of the population are cannon fodder. This will become far more evident when "things start to get interesting".

StandardDeviant's picture

Very well put, sir.  I'll have to remember that sound bite about stealing from the present/past/future.  Like Dickens' Christmas ghosts, but scarier.

Never One Roach's picture

"When Money Dies" is a must. Amerman is very good also:


All Boomers should learn/read both.

Seer's picture

"Seniors have essentially zero voice in gubbermint from what I can see. Anybody disagree?"

Didn't they do well in the 2010 elections?  Most of the older vote goes GOP.

carambar's picture

I like it. this time I can accumulate good quality companies whose stock price are not bid up by the early boomers like in the 90s.

It will not last for ever though.


ebworthen's picture

While you're at it smoke some Meth and buy AAPL.

Seer's picture

I think that Meth users buy FB... (this would be the most fucked up combo I'd think)

Seer's picture

I think that Meth users buy FB... (this would be the most fucked up combo I'd think)

Oldwood's picture

You are buying nothing but pieces of paper to place bets with. They have no value other that what you can convince another fool to pay you for them. They only have value to people who would rather gamble than produce. No different than the ponzi game the government is selling. You can olnly win if you stay in the game, right?

Parrotile's picture

Depends on how long these "Good Quality Companies" have good-paying customers.

Once the customer base erodes (for a myriad of causes), even the best Companies will have problems.

I wish you luck (we do live in "Interesting Times" after all . . .)

Bicycle Repairman's picture

These companies are finding customers overseas.  As that trend continues, Americans will matter less and less.

surf0766's picture

They are hoping to use them as diapers?

Yen Cross's picture

eur/chf is a good example. The swiss love negative S/T rates.

redpill's picture

Investor Stockholm Syndrome - noun - An affliction typically identified by determining an individual has decided to purchase government bonds.

Yen Cross's picture

 EKM, can nail this one down!  Primary Dealers are playing " Toss Across"...

Atlantis Consigliore's picture

but but but wadda bout REEEL ESTATE,   the realtors say its time to buy, so does the NAR,  do it , for the children.  LOL.   gosh its even pimped on the alphabet pimp channels;


condos for sale, condos for sale,  3 % down fha, condos for sale.    its like an ocean cruise, hold your nose and buy buy buy;. 

Atomizer's picture


Times were different back then. Multi-National derelicts working under the auspicious theme of freedom, dreams, and mercantile global expansion thought they had it right this time around. Guess who ends up falling on the sword? History repeats.  Free markets will prevail, once the past mistakes are removed from the appetizer plate.

Yen Cross's picture

 I'm tired. and stupid. You ZHer's are an articulate crowd. Thanks for giving me a ribbon>

Dewey Cheatum Howe's picture

Boomers, who are invested in pensions (you know the ones that are large part of the labor force and soaking up the remaining job droplets in an evaporating pool), not personal investments are the big driver of private bond purchases. That is the key piece of information missed here. They can't invest their pensions in physical assets like gold. The only safe investment to hedge against a stock market crash right now are Treasury Bonds. The face value is guaranteed when they come due so if nothing else you don't lose your principal. It is about the only wealth preservation strategy with a small return that is fairly risk free right now for people in this particular boat. Those bonds are as good as dollars, if the T-Bills go, everyone has A LOT bigger problems than losing their investments at that point.

Bobbyrib's picture

If Treasury bills go? Don't you mean when?

Go Tribe's picture

Ben has to print. He can't let Treasuries fall until the last boomer is buried.

CrashisOptimistic's picture

And that's that.  The infinite source of all money has said what he's buying.  If you fight the Fed, you die.  We all know he won't let yields rise.  How could he?  And currency collapse?  How?  All the central banks coordinate so that no one can collapse.

Forget this financial stuff.  They have total control of it by edict.  Gold has no importance to society so it can't be the mechanism of disintegration.

Only oil is outside their control, and it is oil that will take it all down.


Seer's picture

"Only oil is outside their control, and it is oil that will take it all down."

And it's oil that is the driver of growth.

"Men argue, nature acts." -Voltaire

Bicycle Repairman's picture

"Only oil is outside their control, and it is oil that will take it all down."

Not completely.  That's what the 700 bases around the world is about.

nofluer's picture

Ben has to print. He can't let Treasuries fall until the last boomer is buried.

Can't stop even then - don't forget the Rebound Generation!!! Population will not drop (without a cataclisim of some kind) into the forseeable future.


ebworthen's picture

Yes you motherfuckers on Wall Street, I DON'T CARE if I lose money.

I laugh out loud when I hear one of those Wall Street fucks saying "People HAVE to invest in equities, they'd be crazy to buy bonds!"

No shit for brains, I'd be crazy to buy into your corrupt casino EVER AGAIN!


I'm in cash and buying Gold and Silver.

I don't care if I lose 50%!

I don't care if I'm not making 7%-10%!

What I do care about is not participating in your criminal enterprise!!!

Go hang yourselves before the People have to do it for you!

Fucking bankers.

HondaFullOfSilver's picture

My grandfather died in 2012 and 50k of his estate was in GM bonds and we all know how that turned out..  I don't think I could buy a bond anymore, knowing that in this brave new world, unions and special interests take precedence over lawful claims.  Granpas will probably forgive Obama and the US government, but he was a die hard Democrat to the very end.  I'm a bit more pragmatic.

I do care if I lose 50%, I do care if I'm not making 2-4% (because it means I'm not beating inflation), and I do believe the deck is stacked against the common American.   Physical assets are probably the best protection we can get.  (Physical assets can include guns, ammo, copper, gold, silver, etc)  However, it would be a mistake not to look at how easy money from the Fed effects stock market returns, which beat gold for many years.  (People who waited for their $800 gold in the 80s to be worth $800 again waited a very long time.)

However, the thing that bothers me most about the 50k in GM bonds?   He was screwed by his own government.

Oldwood's picture

We all see the same things. No one wants to lose, but how do you particiapte in a game that you know is rigged against you. Its like being livestock and acknowledging that the farmer is only feeding you to eat you, but you believe somehow you will escape or be rescued before the fateful day when the trailer shows up from the slaughterhouse. The free food is just too good to walk away?