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Tuesday, January 10, 2012

Strange financial news

#1: Negative bond yields

Today’s WSJ notes “Investors agreed to pay the German government for the privilege of lending it money.”  That’s right – yields are below zero.

This has happened in various safe haven currencies several times since 2009. The Journal mentions the US, the Netherlands, and Switzerland.

Evidently, the money has to be invested somewhere, and who wants to invest in Greece or Italy?

#2: Bonds more profitable than stocks over 30 years

Yesterday’s WSJ looked at 30 year returns for long term Treasury bonds versus the S&P 500.  By 30 year returns, we mean that in 1956 we are looking at investing in 1927 and then redeeming in 1956, or investing in 1982 and redeeming in 2011.   They are then reporting all these overlapping 30 year periods from 1956 to 2011.

There is only ONE of these 30 year periods in which T-bills were the better investment. That’s the period ending in 2011.  Paradoxically, this means bonds are probably a bad investment now.

Bonds did so well because yields declined from the dizzy heights of the early 1980’s (when I got CD’s at 14%!) to the practically zero yields of 2011.  But there’s no further decline in interest rates to be had.   If (when?) inflation comes back, there will be a great decline in the value of bonds – or if people lose confidence in the country’s bonds, as is happening with Italy and Greece now.

So, what about that common advice to those near retirement to put more money in bonds each year and less in stocks? The advice is likely to be a good way to have your principal decline.  Better to put that “safe” money in CD’s that pay almost nothing but have their principal insured.

#3: The great stock selloff

The third bit of information is that investors pulled out $115 billion more from US stock mutual funds than they put in last year – about $43 billion out of variable annuities and about $71 billion out of other mutual funds.  More billions were withdrawn from international funds.

Some of this went to exchange traded funds (ETFs), which rose $37 billion. And some went into bond funds ($52 billion).

So why the decline?  It could be those pesky baby boomers again.  The great stock boom in the 1990’s and early 2000’s occurred as baby boomers invested in retirement. But now they are retiring (voluntarily or involuntarily) and will become net sellers of stocks for the next 30 years or so.

With the large baby boomers as net sellers, and with their children burdened by student loan debt and a lack of home equity, who’s going to be on the buy side of transactions? Maybe not enough people to keep the market growing.

#4 So what to do?

Haven’t figured that out yet.  This might be a good time to invest in real estate if I knew anything about it, but I don’t.