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The One Investment You Want To Avoid At All Costs
Submitted by Simon Black of Sovereign Man blog,
4.1%.
I read it twice to make sure my brain had processed the number correctly. Yep, 4.1%.
This was the annual yield promised on a new 5-year bond investment that a private banker colleague had sent to me. I couldn’t believe it.
The bond issuance was by a state-owned company in India. And despite the Indian government having a -very- recent history of capital controls, price fixing, and asset confiscation, and despite the company being rated near JUNK status, the bond only carried a yield of 4.1%.
This is really amazing when you think about it. Central bankers have destroyed money and interest rates to the point that near-bankrupt companies in shaky jurisdictions can borrow money for practically nothing.
It’s an utter farce. The rate of inflation is -at least- 3% in many developed countries. Central bankers will even say they are targeting 3% inflation.
This means that if investors simply want to generate enough income so that their after-tax yield keeps pace with inflation, they have to assume a ridiculous amount of risk.
This is a really important point to understand given that the global bond market is so massive– roughly $100 trillion, with nearly $1 trillion traded each day in the US alone.
This is almost twice the size of the global stock market. And even if people never invest in a bond themselves, they’re directly connected to the bond market.
Your pension fund owns bonds. The bank that is holding on to your money owns bonds. The companies listed on the stock market that you invest in own bonds.
Yet bonds are some of the worst investments out there right now. And that’s saying a lot given how overvalued stock markets are.
Here’s the bottom line: adjusting for both taxes and inflation, bondholders are losing money, even on risky issuances.
Think about it– if you make a 4% return and pay 25% in taxes, your net yield is 3%. If inflation is 3%, your entire gain is wiped out… so you have taken that risk for nothing.
If inflation rises just a bit then you are in negative territory.
There are those who suggest that deflation is a much greater risk right now than inflation… and that bonds are great investments to own in the event of deflation.
But here’s the thing– even if deflation takes hold and prices fall, anyone who is deeply in debt is going to feel LOTS of pain. Instead of their debt burden inflating away, now they’ll be scrambling to make interest payments.
So while bonds are a sensible deflationary investment in theory, in practice deflation will only increase the likelihood of default. This puts many bond investments at serious risk.
Last, if interest rates rise from these all-time lows, a bond’s value in the marketplace will plummet. So not only will you have made zero income, you would be looking at a steep loss if you try to sell.
Longer term, fixed rate bonds in weak currencies are almost guaranteed losers and should be avoided at all costs. You would be much better off setting your cash ablaze in a bonfire. It’s at least a better story to tell and will save you years of anguish watching your position erode.
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Send the fucker to Janet, that fuckwit will buy it
The value of anything is discovered at the time it changes hands. If fiat can be borrowed at virtually no cost, what is the true value?
Haven't you forgotten a few requirements?
Such as that change of hands should take place on public record, without force, or intent to deceive, or gain made by third parties through it as a major factor?
You speak like a MOPE shill.
Of course, all trade should be voluntary and absent fraud. You speak like a dickhead!
You mean to imply that buyers of Indian bonds will get scalped?
That's ray cyst. Those Indian casinos are an asset to their communities.
If you don't buy that bond you lose 3% a year to inflation.
So in real terms, you can buy the junk bond and break even, or not buy the junk and lose 3% a year.
Delay buying junk for just 3 years and you're down 10%.
The best thing to do is to buy the junk bond and cover your ass in the CDS market. That way if the TSHTF you know they will throw depositors under the bus before you lose a penny.
Or remortgage your house with your bank on an interest only mortgage (3.3% in UK) and then buy corporate bonds IN THE SAME FUCKING BANK which yield 8%. Play these bastards at their own game.
If they bank gets in trouble, it's bye bye depositors, bondholders are invincible so long as Central Banks are up to their balls in bonds.
Damn i like the way you think.
bondholders are invincible so long as Central Banks are up to their balls in bonds.
Ummmm thing GM bond holders and Detroit bond holders. Invincible might be a bit strong.
"Ummmm thing GM bond holders and Detroit bond holders. Invincible might be a bit strong. "
That was before the central banks were up to their balls.
Theres a bank in the UK (RBS) where the government owns 86% of the equity. Think those bonds will ever get a haircut? Pffff.
The corporate bonds still trade at a higher yield than mortgage rates though. You have to play the banks at their own game.
IMO I wouldn't invest in any currently borrowing institution. Borrowing indicates that the business model is incapable of supporting itself.
@ NidStyles
Good insight! There are two ways I can react to your post:
1) First, I would not invest in any financial services company.
2) Through time, a company borrowing was OK if the borrower could find a better use for the money than paying the interest on it. Unfortunately, the prospects of getting positive returns on invesments are not very good, so, yes, I would agree that investing in companies that must borrowwould be a mistake.
(Our company in Peru has been paying down its debt to me, before long we may one fo the few companies in Peru with no debt)
From my standpoint, any company that is borrowing past the first few years of it's existence is over-reaching it's market capability. If the market is not generating enough revenue for them to expand under their own sails then they are likely about to fail anyways. In these markets, that means just about every major corporation out there.
There are a lot of smaller businesses that would be doing extremely well if the system itself were not so corrupt. As a business owner, no debt is the goal at all times. Once you reach that then you can say you made some profits without lying to yourself.
While you are correct, using common sense, that isn't how a frac reserve system works, mathematically.
Theoretically, Apple, for example, should go to the debt markets in this environment (and they have), despite $100b+ in cash. Interest rate risk is on the creditor, IE person buying the debt.
If you were to loan me $1,400 at 3%, payable in 20 years, I'd buy an ounce of gold, get some worthless cash in 20 years, and pay you back so you can buy a loaf of bread with it. The same principle as paying off your mortgage early right now...
*EDIT: And more importantly, currency devaluation is obviously on the creditor, as well.
The math doesn't matter at this point, and that is the key to why so many of you are so misguided.
Paper currencies do not mean anything anymore. Eventually everyone will be aware that it's essentially theft, so they will die out yet once again. What really matters is market penetration, if your company has no penetration into the local economy that sustains you, you are going bye bye when the debt has to be repudiated. Which it will given time.
What the currency is worth, or how it makes out in the end mathematically will not matter, because the public will not support the currency once it becomes apparent that the currency no longer works for them.
LOL, it is funny you call me misguided, after I said I understood where you are coming from, without calling out your illogical statement.
This is getting to be the problem on ZH. People that are simply pissed-off about the state of affairs, spouting off to people who actually have a clue...
Why the fuck would you not take a long-term loan and simply buy metals? You have the asset that matters and you are paying the creditor back in toilet paper.
Think before you post, dude.
You have to be willing to lose the asset/property they liened as security. The risk is that they may re-adjust loans as a result of a currency crisis at the same time that property prices drop. It's been done before in SA.
It's taken you this long to figure out how this place works...
Damn straight, now is time to load up on debt that you can safely service....
The DOW the S&P!!!!
Here are the culprits: Group of Thirty Central Bankers
www.group30.org
I don't see rep from russia in the members list, am I missing something?
yeah, but what is the value per user of that enterprise???
https://www.youtube.com/watch?v=YOMTnLHDWRA
About to tear up Abu Dhabi we are
http://www.emirates247.com/entertainment/the-rolling-stones-have-arrived-in-the-uae-2014-02-19-1.538740
But if Money is a Medium of Exchange, why shouldn't "job creators (aka 'companies') borrow Money for free? They are merely growing the Money Supply from the Demand side, to grow the GDP. And that's "all good", per Austrian Economics. Right? :-)
That is BS. You can get CDs in India yielding about 9-10%. Maturity 1-3 years. Maybe his private banker colleague need to find another profession.
Simon Black is likeable, like a retarded kid.
You know he's just making shit up, but it's usually endearing nonetheless...
I think we've unmasked Simon Black, International Man of Mystery, he's the (#winning) twelfth man on the deal team...
I've been out since before they invented the iPhone and they still show me more luv on a regular basis- this week I can get 8-9% USD denominated floater indexed to sovereign or LIBOR out of a country that is a net exporter of both oil and gold.
Simon needs some better banker buds...
amazing how much spare change the .01% have they can throw $$$ at this garbage with nary a thought to the return OF their $$$ than ON their $$$. oh, its OPM
Agree with the deflation assessment. At first, deflation makes bonds/cash look great until the largest debtors realize that deflation will destroy their ability to service the debt. Deflating environments reduce prices and thus drive down profits resulting in the need to decrease expenses (read wages) which reduces real income levels and the consumers ability to purchase goods and service debt. The ugly death spiral will punish debtors and reward savers (but only if you own the right assets which does not include junk debt). Eventually, this will lead to a debt crisis with defaults and soon after a currency crisis for the largest indebted countries in the world (i.e., US, Japan, and the majority of the EU). BTW, as cash flows decrease, so does the value of the assets supporting debt which results in significant collateral damage.
This is why CBs are so afraid of deflation as it will crash the entire house of cards (and why the IMF is so worried and why Japan has been fighting this battle for decades) given the enormous leverage and debt levels in today's global economy. Remember, out of control inflation will just cost the CBs their jobs. Deflation will cost them their jobs and lives.
Good post, I pretty much agree...
Minimal inflation in USD terms until the local bond market breaks... And even that will be deflationary as a lot of debt will go to money heaven in the unwind as bondholders will take a haircut... Sauve qui Peut with the USD being the likely last refuge.... It will be more complicated but my crystal ball is presently a bit foggy...
This is what the lack of real growth will do driven by the most part by a slow strangulation due to oil prices. And before anyone gets excited, oil prices are now driven by cost push inflation in cost of producing new marginal barrel of supply...
Your conditions are only present if the currency itself does not collapse, which is not likely.
Perhaps I should have been more clear, the currency collapse is what does the bond market in...
The interest rate cycle is dead....
No, they fear deflation because it means you have to turn off the printing presses and let the revolving debt finally come to term instead of just rolling it over like most corporations do these days.
True deflation means the debt cycle ends and the debt obligations of the bankers are finally the ones on the chopping block instead of them taking everyone else to the chopping block.
This world needs a deflationary event to take place badly. The bankers need to start paying what they owe.
Yup, but tptb won't allow a deflationary collapse until they're prepared to reap the benefits. Until then, inflation.
Jubilee.
We may very well be witness to the greatest financial battle ever being waged. The unrelentless efforts of the world's CBs to drive inflation and for lack of a better term, "inflate" their way out of this mess versus the incredible pressure and forces of a deflationary environment or event that grow by the day. For the near-term, the CBs appear to have the upper hand but over the longer-term, there is just no way that the debt timebomb will not eventually implode and produce a deflationary event (which I agree, is absolutely needed).
Really no different than sinking in the ocean as the pressure continues to build as you get closer and closer to the bottom. Eventually, the pressure is so great that even the strongest vehicles can't withstand the crushing pressure and implode. The only question that remains today is how many fathoms the system has sunk to date (and how many are left to go).
I like it, Greenspam, the Bernank, Old Yeller, honorary captains of the USS Thresher (SSN-593)
This is the problem the central banks have created, isn't it? They purposely destroyed the bond market in order to force people into stocks in order to wealth effect the economies into growing.
So, stocks are sky high, and unsafe.
Bonds are at the bottom of the ocean, and unsafe.
And, CASH is unsafe thanks to their print driven inflation.
FUCK YOU BEN!
Sometimes things are a lot more complicated than it superficially appears....
Actually Ben has left the building, so allow me to make the adjustment.
FUCK YOU BEN YOU ASSHOLE AND FUCK YOU JANET YOU FUCKING CUNT!!!!!
There, fixed it for ya!!
Don't be a dick.
From the article: Here’s the bottom line: adjusting for both taxes and inflation, bondholders are losing money, even on risky issuances.
Think about it– if you make a 4% return and pay 25% in taxes, your net yield is 3%. If inflation is 3%, your entire gain is wiped out… so you have taken that risk for nothing.
Simon Black claims that If you Bought a Bond at 4% and the Inflation Rate were 3% that a Capital Gain Tax of 25% would wipe out any profits. While I agree that Bonds are a Piss Poor Buy...THAT IS NOT TRUE. The Tax would be Levied on the 1% PROFIT. 25% of that would be paid in taxes. Thus you net 75 Basis Points.
That is a fucking LAME ANALYSIS from Mr. Black, Tyler.
We can do with better here on ZH.
<FACEPALM>
First of all, he's not talking about capital gains tax. Second of all, a capital gain is not defined as coupon interest minus inflation. Third of all, if we were talking about capital gains, they are not indexed to inflation, at least in the US.
What a maroon.
I know. FACEPALM. You are right. I am not thinking. Too tired.
I made a maroon statement and you replied too damn quick.
I Downarrowed myself. Junk me please and kill me. Put me out of my fucking misery.
I need to go to sleep. I made a fucking error in judgement.
odd...the DOW has only returned 4% over the last 15 years; the last 10 years too. Government and corporate and even muni bonds have done better. : ) Let's see...Japan is down from 39,000 in 1989 to 14,000 today. China is flat for 20 years. I think 6% to 7% in bonds looks quite good. That is what we can get today in investment grade bonds. : )
Take a look at how the metals have done over the past 10-15 years.
I actually enjoyed this article by Simon.
Simon, did you get a ghost writer?
Bonds are for n00bs. I invested in cocaine and got about 10000% return. Used that money to buy some gators and a nice hat.
Well some people made the same charge. Peter Schiff talked about negative real returns of bonds for years, but nobody really takes this seriously at all. One media said bonds "are relatively safe", careful to say they are not 100% safe, then there is the arguement of where you will put your money, what is a better place? Cash? Not really. It's a trade off of risk, and how much you lose.