The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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On The Bubble?

Back in 1973, when I first walked into a stock brokerage office, I saw old men watching a ticker tape cross the wall behind a black & white television. They were “stock guys”, who bet on the American economy. They made fun of the “coupon clippers”, whom they derided as being cowardly, but we call them “bond investors”.

The same year, I became a trust officer and noticed that the portfolios of widows and children were heavily invested in bonds, because that was considered less risky than stocks. After all, bond investors are lenders to companies and must be repaid before stock investors get anything. Those investors who were extremely risk adverse were usually invested in Treasury bonds.

Since the beginning of 2008 thru the end of June this year, investors have pulled $232 billion out of stock funds and put an incredible $559 billion into bond funds! What are they thinking??

Long time readers know how I feel about long term bond funds: They scare me to death! When interest rates rise, losses are certain in long term bond funds. With rates this low currently, a rise is inevitable . . . losses are certain.

Amazingly, the most dangerous bond right now appears to be the “safest”, traditionally speaking, i.e., U.S. Treasuries. Unless you plan to hold a particular Treasury bond to maturity, which doesn’t happen to investors in mutual bond funds, I don’t see how losses can be avoided.

When there is a collapse in Treasury prices, there will be even greater psychological damage, as wounded investors wonder if anything is safe. Treasury bonds are just another asset class. Losses can and will occur. The same is true for corporate bonds.

I’ve had this feeling before . . . just before the tech bubble burst . . .