As for the bonds, this could turn out to be a really bad time to move into fixed income -- possibly the worst in living memory. Two things we know for sure: interest rates are incredibly low right now, and recovery values given default have also never been lower. A third thing we can be pretty sure about: the number of defaults is going to go up substantially before it starts coming down. Yes, spreads are quite wide, but only arbitrageurs care about spreads. Retail investors care about yields.
Put all that together, and you have a bond market where the downside is vastly greater than the upside. Yields can't fall much further than they have already, and default rates can certainly rise. So why buy bonds? Stay in cash, and you get a very similar yield for much less risk.
How long 'til analysts start touting canned goods and ammunition?
Given the dropping real-estate prices; I'd say land (most particularly, undeveloped land, forest land, and farm land) would be the best investment now.
It's the primary investment I'm hoping to make in early 2009, anyway.
But not any old piece will do; you really should have an eye for the places with something to offer, including a pure water source, proximity to sunlight, good drainage for both water and cold air, etc., and fertile soil.
then, you can build your remote bunker filled with guns and you canned goods.
I'd rather put up a greenhouse and a few windmills, myself.
I'm putting all my money into Barack Obama commemorative coins.
There a lots of bond that are priced very cheap. There is little downside an lots of upside. If the company does go bust, the dividend could cover the cost of the bond alone in just a few years. You are less likely to get burned by default than you are with stocks. If the company doesn't go bust, you might get a bigger return on the bond price recovering than you'll see in stock price movement.
Stay in cash? Easy to say, but its damn hard to manage right now. You have to do a rather thorough sovereign, macro, and micro evaluations of the entities in which you place your "cash" once you're past deposit insurance caps. You also have to check that your cash is actually in a true cash instrument, and not something being called cash but nowhere like cash or cash-equivalent.
It used to be easy to roll over cash investments. Buy commercial paper from an established multinational that wasn't in trouble. You're only lending 30 days so there was minimal risk. Then this year we had failures and near failures in firms that went from solid to dead in a week. Goldman issuing 10% prefs to Buffet. GE doing the same. Goldman and GE used to be better risks than the US Treasury and now they're essentially borrowing at LIBOR + 800 points!
It's too soon to be investing in anything at the moment, there's a closet full of shoes left to drop that would impress Carrie Bradshaw. But Q3 09 would be a good time to start pikcing up equities and real estate.
Don't forget guns. All ammo and no guns leaves you throwing stuff at the guy trying to take your tv.
My personal guess is spring of 09 is a good time to start looking at investments. We've been printing so much money though, I'm just afraid its going to drop into the system and the inflationary consequences with it.
Actually with what's happened to the prices of lead and copper, investing in ammunition would have been a fantastic idea.
"Stay in cash, and you get a very similar yield for much less risk."
What Bloomberg screen is Felix smoking? Cash yields nothing (although you will squeeze money funds for a few bps for a few more weeks before the whole concept goes up in smoke); the aggregate credit part of the bond market yields about 5.6% above treasuries, so 6.5 to 8% depending on maturity. Even if you take out financial bonds you see yields at just under 5% over treasuries.
I just picked up a great counter-cyclical company for over 10% yield. I may experience a a 14% real yield over the next year even if there is no price appreciation. Equity returns in a protected part of the cap structure.
Equity markets are at long-term average P/E, with much of the earnings damage yet to go (in order for it to be the average, folks, you have to go below it...). Bonds are a pretty good deal unless your standards for return are derived from the late '90s equity markets.
Noah,
Huh? - the price of copper is down nearly 70%. From 9000 to 3000 in the past 6 months.
Don't forget guns. All ammo and no guns leaves you throwing stuff at the guy trying to take your tv.
Right now is a terrible time to be buying guns. They're up 10-100% YoY.
Noah,
In dollar terms Copper has gone from $4.06 in July to $1.30 today.
Yup, inflation... that's what we need to fear....
How about convertible bonds? how are those doing?
I don't know about buying them now, but I sure am glad most of my money was in bonds this year.
My dad, too, who is 78 and retired. In 1999, a broker tried to persuade him to get into internet stocks with the explanation he "could have even more money" if he went that route.
How about convertible bonds? how are those doing?
With convertibles, I think you're usually paying for the right to convert to equity, a right that is probably worthless at this point. So, not so good.
jmo -- Yep. What do people think recessions are for, anyway?
I'm putting all my money into Barack Obama commemorative coins.
Just think, on the off chance the Rezko/Blago thing rolls over to him and he ends up in jail before inauguration, they could be worth a bundle someday.
TallDave,
You want to hear something that will blow your mind. Right now there is someone out there who owns a 30 year US Treasury Bond bought in March of 1980 that yields 12.34%.
Gold bars, canned goods and ammunition. Meet me in the Adirondacks.
Wolverines!
jmo - Heh, yeah, that really makes me grind my teeth in envy. I doubt we'll ever see rate like that again.
A friend told me his mother bought CDs around that time -- with a promotional addendum that they could be indefinitely renewed at the original rate.
TallDave,
It's interesting to think of the thought process that led to these investments. The CPI in 1980 was running at 13.58%. It's certainly conceivable that the guy who bought that bond was ridiculed by his friends, as surely inflation would hit 20-30% and his principle would be inflated away.
Wouldn't this be a buyers market? So if your in your twenties and investing now is a really good time. Or even you fifties, its when you start getting to that 59.5 that you should start thinking about moving to more stable, low-risk options.
There are some corporate issues that look quite safe with relatively high yields. The big downside is in US Government debt from 2 years out to 30. Those may still have some upside left over the next 1 to 2 years, but the time to buy them was this summer, not now. We are now seeing the blow-off top on the greatest bubble of them all, and when it bursts the damage will be astonishing.
Yancey,
You mean treasuries?
I thought he meant oil.
Head over to Crunchy Con. They've been hitting the bags of grain, canned goods, and guns angle for a weeks now.
JMO is correct, Treasuries have to be the biggest bubble
I am buying high-yield, preferred stock, and convertible bond funds. It is truly a great opportunity to get in on the end of the panic of '08. Yields of 20% plus you will get some capital appreciation when the bonds pay off.
interest rates are incredibly low right now
Is this guy kidding?
Interest rates on Treasuries are extremely low. But interest rates on private sector issues are through the roof -- e.g.: the rate on Baa bonds has rocketed from 6.4% to 9.2% in the last 12 months; hey, there's a crisis going on folks! And even rates on tax-exempt munis are very high, they're paying more tax-free than Treasuries pay taxable.
If the Treasury/Fed "rescue" plan work faster than expected and these rates normalize in the near future, recent purchasers of Treasuries are going to find they bought at the top of our latest "bubble" and take a pounding, while buyers of the Baas are going to make some nice bucks.
"If ..these rates normalize..": the concept of normality may need review.
My portfolio is in Gold, food, and guns. I may sell the gold soon the way things are going.
I'm a big fan of Felix Salmon, but what does this statement mean?
"Yes, spreads are quite wide, but only arbitrageurs care about spreads. Retail investors care about yields."
Umm... while selling CDS protection is not the same as holding a bond, it's fairly close and the correlation between spreads is fairly high. Salmon is dead wrong. In fact, now bond yields have widened _more_ than CDS spreads since a long bond is a funded transaction (you pay notional now) whereas selling CDS is unfunded (you don't have to put up notional upfront). Bond funds, hedge funds, etc. are now facing redemptions and don't have the balance sheet to actually buy bonds. So, the yields on those have actually widened more than the CDS.
It is always astonishing to me how little professional economists know about the nuts and bolts of the financial world.
Short 10s and 30s treasuries with futures. We are going to sell a trillion dollars worth of debt next year, and the long yields are in the 2s? Look for the corp/treasury spread to narrow from the treasuries side. Corp debt will not begin to come in until q3 of next year.
Canned goods? I remember carting canned goods out of a cellar ten years after someone had put them down there. I reckon with the pressure in those cans, it was more risky than carrying unstable old ammo out of another cellar.
Guns? When the recession ends, second hand gun prices will be way low. If the Mexicans manage to cut down their market for old guns out of the USA, scrap value will be about it.
Gold? About all you can use it for is finding someone else who wants it, if you can find somebody.
Me? round about the end of October I posted that this looked the best time in decades to be selecting equities. (Warren Buffet said the same shortly after.) Still looks that way to me.
I'm a big fan of Felix Salmon, but what does this statement mean?
"Yes, spreads are quite wide, but only arbitrageurs care about spreads. Retail investors care about yields."
I also found the piece to be quite confusing, but I believe that he is trying to say that future corporate bond defaults and ratings cuts will cause corporate bond yields to increase further, causing them to lose value, which makes them a risky investment.
That runs contrary to the current wisdom now being touted by many pundits that predicts that 2009 will be a good year for corporate bonds because they are relatively cheap, as is evidenced by their current spread over treasuries, and because of how the uncertainty of the profit outlook could impact equities prices. He prefers equities in this environment because he believes them to have more upside and to be less risky, given the circumstances.
Assuming that this is what he is trying to say (and no, he did not express it well), he may have a point. If you presume that equity pricing is more anticipatory in nature than is debt, and if you further assume that things will get worse before they get better, it's a fair guess that corporate bonds could suffer hits from downgrades and concerns about short-term cash flows being sufficient to support the debt. Meanwhile, the equity markets should be more willing to look past the downturn, anticipating a brighter future and bidding up equities accordingly.
I suppose that the question is whether it's time to be defensive or greedy. I'm going for greedy myself. Bonds may seem cheap, but equities look cheaper. It is a rare period when bonds outperform stocks, and 2009 may not prove to be an exception.
"How long 'til analysts start touting canned goods and ammunition?"
We've anticipated that. Cf. How to Profit From the Coming Rapture, recently published. We have a chart converting several useful consumer goods into cans of chunk light tuna fish, and our model End Times retirement portfolio includes not just ammunition, but land mines, medical supplies, and pain killers.
Great minds, etc.
Steve and Evie Levy
Steve Levy,
To profit from the Rapture make sure you are not a believer. Otherwise you'll go up with the Rapture and your inheritors will reap all the profit.
I see some Rapture investment angles:
1) Do not own homes in fundamentalist neighborhoods because housing prices will drop when all those believer homes come on the market in estate sales.
2) Believer mortgages are similarly a bad investment bet.
3) Get into cash before the Rapture so you can buy up businesses and housing of departed believers that will sell for cheap in estate sales.
As for how to profit from societal collapse: I think the people who are focusing in guns and canned food are not thinking sustainably. Look, if utilities are going to collapse you ought to be thinking about a country home with solar panels and near a creek with a dam for hydroelectric power.
Think about how to sustain flows when the flows have stopped for everyone else. Now, I'm not saying pairs of 50 cals and lots of ammo aren't useful. You've got to be ready to repel direct assaults on the greenhouses you are going to sustainably operate for food once TSHTF. But dogs are more sutainable for routine guard duty since you can trap rabbits and other small game to feed them and the dogs can reproduce.
Dogs are more sutsainable. Dogs, solar panels, and small scale hydroelectric are what you need.
Get into cash before the Rapture so you can buy up businesses and housing of departed believers that will sell for cheap in estate sales.
I believe that a real End Timer would prefer payment in gold, silver and bronze bullion and trinkets. Purity of the metal matters, with gold at the top of the food chain.
Gold is referenced frequently in the Bible. One example: Then the LORD spoke to Moses, saying, “Tell the sons of Israel to raise a contribution for Me; from every man whose heart moves him you shall raise My contribution. “This is the contribution which you are to raise from them: gold, silver and bronze..." (Exodus 25: 1-3)
Unfortunately, US dollars and credit cards are not mentioned, so I doubt that they would be accepted. Accordingly, a seller-financed transaction is therefore unlikely. Adjust your pricing accordingly.