I once had a family relative who was a big believer in U.S.
government bonds (NYSEArca: TLH). It was his opinion that
government bonds were always a safer bet relative to other assets.
And for that reason, he believed an investment portfolio consisting
of 100% U.S Treasuries (NYSEArca: IEF) was the way to go.
Unfortunately, my relative is no longer alive but if he were, I
wonder if he would agree that lending money to today's U.S.
government is a safe bet.'
Given the U.S. government's deteriorating financial situation is it
wise to own government bonds (NYSEArca: TLT)? And if you still own
government bonds directly or a broad bond fund (NYSEArca: AGG) is
it too late to bail?
Public Disdain for U.S. Debt
Bill Gross, manager of the Pimco Total Return Fund (Nasdaq: PTTAX)
has been one of today's most vocal critics of U.S. government
In a shot at the traditional view that investment portfolios
should always have exposure to government debt, Gross said,
'Old-fashioned gilts and Treasury bonds may need to be exorcised'
from model portfolios and replaced with more attractive
alternatives both from a risk and a reward standpoint.'
Gross explains that free handouts have gotten the government
into a fine mess.
'To rebalance debt loads and re-equitize financial institutions
that should have known better, central banks and policymakers are
taking money from one class of asset holders and giving it to
another. A low or negative real interest rate for an extended
period of time' is the most devilish of all policy tools,' said
Gross in written piece titled 'Devil's Bargain.'
Anyone that has followed Gross' suggestion to completely bail on
U.S. Treasuries has watched them rise. Like many on Wall Street,
Gross is a better philosopher than a market timer.
The Wolf and the Boy
What can be said of the Three-Musketeers - Standard & Poor's,
Fitch Ratings and Moody's (
)? Like the boy that cried wolf, the credit rating agencies are at
it again. How many pre-warnings and pre-pre-warnings about a
potential downgrade in the U.S. government's credit score are they
going to give us?
The public has already stopped listening to this rating nonsense,
probably going back to 2008. Why has the Securities and
Exchange Commission permitted these so-called independent agencies
to be so accommodating with the U.S. government? Haven't raters
created a double standard? Would credit raters, for example, cut
the same sort of slack for other bond issues they rate? What about
troubled municipalities (NYSEArca: MUB)? When their credit quality
is in doubt, do they get dozens of warnings like the U.S
government, or do they just get the rug pulled from beneath their
feet with a cut?
For whatever it's worth, Standard & Poor's (
) is forecasting that national debt will rise to 84% of gross
domestic product by 2013. Maybe they should stick to forecasting
instead of rating bonds.
Another King Kong-sized Headache
The concern about the deteriorating credit quality of government
debt is impacting another important element of the financial system
- money market funds. How?
Money market funds (Nasdaq: TRSXX), which are sometimes referred
to as 'cash,' are an important component to the financial system
because they provide investors with a place to park cash. Money
funds are regulated under the Investment Company Act of 1940 and
are typically sold as a 'safe' place to invest cash because they
are designed to keep a steady net asset value of $1 per share. How
do they achieve this goal? By investing in commercial paper, U.S.
Treasuries and other short-term financial instruments.
The first U.S. money market fund was started in 1971 by Bruce R.
Bent and Henry B. R. Brown. It was called the Reserve Fund and the
idea was to provide investors with a cash management tool that
would give them stability and liquidity. In subsequent years, other
money market funds offered from banks and fund companies
Money market funds get themselves into trouble when they venture
into riskier assets to squeeze out a higher yield. Trouble can also
happen when money funds buy assets that a purportedly safe, like
government bonds, but are camouflaged rubbish. Is another repeat
run on money market funds just ahead?
Although low interest rates have bought the U.S. government time to
get its financial house in order, they're just as much of a mess
today as they were before. Conventional wisdom says to immediately
sell all U.S. Treasuries, but we've all seen the poor results
conventional wisdom often delivers.
August ETF newsletter
handicaps the odds of a U.S. debt default - with a unobstructed
look at history. It also highlights specific actionable strategies
for investing with the government's debt crisis in view. We take a
detour from the crowd mentality to put 100% of your investments in
precious metals (NYSEArca: GLD), coins, baseball cards or the
mattress. History proves that crowd behavior is dangerous to your
financial health. Will this time be any different? Probably