The economics of investing in bonds (and most financial assets) has become stupid
In this post I rant about macroeconomic policies the Fed has enacted and why bonds are one of the most useless financial “assets” out there today. I also talk about how I am positioning my portfolio to withstand a potential inflationary environment and what you can do as well.
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Cash is trash
The purpose of all investing is to create a store of value that increase over time. There is no other rationally sound reason to invest. You invest a seed in the ground to have a money tree in the sky.
Eons ago investors used equities and bonds to create money trees for the future. Equities were considered more risky as they were more volatile. As classic economic literature states, volatility is a function of risk. Bonds were considered safer as they were less volatile and generated a fixed rate of interest for investors.
The old rule of investing was to allocate whatever your age was into bonds, the remaining in stocks. As a 31 year-old male, grand knowledge told me to allocate 31% of my portfolio into bonds and the rest into equities. Sounds antiquated huh? Who the hell even invests in bonds these days?
This rule may have worked 30 plus years ago, but makes zero sense now. Back in the 1980s it wasn’t hard to find safe haven bonds yielding in excess of 10-15%. Today if you can eek out a 10-15% return every year, pat yourself on the back, you are one of the greatest investors in the world.
A few years ago I was really big into the “early retirement” mindset. Build up enough assets where you work when and where you wanted. Don’t worry about money and drop out of the hedonic treadmill. Build up enough assets and coast. Back when I was reading up on all of this financial independence stuff, I came across a podcast that had Mark Cuban on it.
In the podcast Mark Cuban was talking about his early career life when he first started out. His goal was to save up enough money so he didn’t have to work anymore.
Cuban told the story how he ended up going to the library and scrounging through books on how to retire as quickly as possible. He ended up finding a book that said all you need is $1 million bucks. Earn your way to $1 million and dump it all in a diversified portfolio of bonds yielding 8-10%. That will allow you to generate $80,000 to $100,000 per year.
Fast forward 40 plus years and Mark Cuban is a billionaire and interest rates are at zero percent.
Forty plus years ago it made sense to allocate a portion of your net worth into bonds. It was a safe and reliable way to generate predictable and easy income. With interest rates at zero percent and the Fed hinting they are going to stop their massive bond purchases it seems like a very stupid time to own bonds.
Interest rates at zero means you make zero income
Inflation is much higher than zero percent meaning you lose money every year
If the Fed stops buying bonds the bond market will crash as decades of artificial demand for these useless assets are wiped away
As Ray Dalio eloquently stated (much better than I could)…
If I give $100 today how many years do I have to wait to get my $100 back and then start collecting the reward on top of what I gave? In US, European, Japanese, and Chinese bonds an investor has to wait roughly 42 years, 450 years, 150 years, and 25 years respectively to get one’s money back and then one gets low or nil nominal returns. However, because you are trying to store buying power you have to take into consideration inflation. In the US you have to wait over 500 years, and you will never get your buying power back in Europe or Japan. In fact, if you buy bonds in these countries now you will be guaranteed to have a lot less buying power in the future. Rather than get paid less than inflation why not instead buy stuff—any stuff—that will equal inflation or better?
Inflation is here to stay. There is too much money in the system. Every major world power is overextended on debt. And now we have a new rising superpower (China) that could eventually take over the U.S. as the reserve currency of the world.
The government created so much artificial debt that there wasn’t enough demand by the free-market to gobble up this debt. This resulted in central banks buying the debt. The issuance and artificial demand for this debt resulted in a whole lot of money printing in order to buy the debt. Finally, the constant money printing resulted in interest rates being drove down to near zero rates. Most importantly, all of this funny money printing has created multiple layers of asset bubbles.
If the dollar fails it is the financial endgame. Now is the time to get prepared. The dollar is trash when inflation is roaring. Your purchasing power is rotting away. As an active investor it will pay to borrow cash at low fixed rates and plug it all into cash flowing assets that appreciate with higher rates of inflation.
Real estate is a great example of this. Borrow 75% of the asset price and lock in artificially low rates. If we hyperinflate, your fixed debt will be wiped out and you will end up owning a debt free asset that continues to appreciate in value every year.
It is a dangerous game the Fed has been playing. I don’t see any other outcome other than much higher taxes or the complete oblivion of the dollar. The only way this ends is through hyperinflation when we the great reset happens. Own real assets.
Assets I am currently accumulating or in the process of accumulating to survive an inflationary environment:
Low valuation high cash flowing equities — my bread and butter
Day one cash flowing real estate
A personal residence (multiple ones) with a low rate fixed thirty year debt handle
One years worth of living expenses in gold, silver and other hard currencies
Land (specifically timberland and land on large bodies of water)
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