Want Excitement? You’ll Pay for It

Bonds, for lack of a better word, are boring.  They’re so boring it’s hard to make any article about them interesting. You’ll never see bond traders on the cover of financial magazines, and rarely are they featured on financial television. That’s because bond trading is usually right up there with watching paint dry as a spectator sport. But the fact that the bond market is boring and predictable is normally its strongest selling point. A lot of people put money in the bond market for the very reason that though returns are low, they’re predictable.

Customarily, individuals in their forties and fifties should have a substantial portion of their investment portfolio in bonds or bond funds. You won’t get rich quickly in the bond market but, with the right mix, you can get paid cash in the form of interest every month. If you invest in municipal bonds you not only get a tax break but you’ll be helping to finance the cities of tomorrow. The investments you have in bonds should be safe, secure and, above all, boring.

Consequently, when the bond market becomes an interesting and exciting place, like it is today, that’s not good news. The bond market is in turmoil and it all relates back to central banks being run by crazy people. Bonds and currency are interrelated in many ways, and turmoil in currency markets is what started making waves in the normally reliable bond market.

Casualties in the Currency Wars

Central banks around the world are currently engaged in a race to the bottom on currency valuations. You’d think nations would want their currencies to be strong, but that’s not the way it works in our topsy-turvy global economy. In the world economy, having the weakest currency is the fastest way to make the products and services your nation produces the most attractive to international buyers. Central banks are so desperate to make their currencies appear weak in relation to others that they’ve started doing crazy things to get to the bottom of the pile. The European Central Bank (ECB) has basically cranked up the euro printing presses and let them run, throwing cash around the EU like a conventioneer at a gentlemen’s club.

Negative Interest Rates

The nuclear option, when it comes to debasing one’s own currency, is going negative on interest rates—actually charging government bond buyers for holding their money. That started with a handful of central banks around Europe, then the ECB tried it and, more recently, the Bank of Japan. There are now a basket of negative interest government bonds out there, completely agitating the placid dynamics of the market as companies in Japan and Europe quickly shift stacks of cash to other countries. Moving money out of the country is not exactly what the BoJ and ECB had in mind. They wanted companies to invest that money in the economy by lending it out. Surprise! That didn’t work.

Insanity Breeding Insanity

The flood of money hemorrhaging from countries experimenting with negative rates, called capital outflow, demonstrates the law of unintended consequences. Central banks thought they were being clever, instead they saw a sudden and massive drop in foreign currency reserves. Next they’ll be forced to consider some type of controls to keep money from leaving the country. Those currency controls are likely to be something just as crazy as negative interest rates, because illogical solutions just beget more irrationality. Once central banks started down the interventionist road, unintended consequences will force them into more and more situations where they have to up the ante in a desperate attempt to stay afloat.

Can’t You Just Opt Out?

When it comes to your personal wealth, you can’t trust crazy people with your cash. It wasn’t that long ago when sound, conservative investors would keep between twenty and thirty percent of their wealth in cash. Seriously, who wants to gamble thirty percent of their wealth that the Fed, our central bank, is going to be the responsible one in the world and protect the buying power of your cash? You may have $200,000 in cash in your portfolio, but what good is it if, when you need it ten or twenty years from now, it only buys you a loaf of bread and a tank of gas?

Today it makes sense to increase the percentage of your wealth, particularly wealth you’re depending on for the future, that you keep in liquid hard assets. It’s no longer enough just to save, you have to actively plan to protect the buying power of those savings – or else you’re just right back where you started from.