Brideway’s John Montgomery on bonds, from their recently released semi-annual report:
If we turn back the hands of time to the period after the deepest recession of the last century, we may see in vivid terms what could be in store, or at least the risk that presents itself. Take a sixty-year old retiree in 1940. She has just lived through the Great Depression and is convinced that the stock market is for speculators only. Looking for the “safest” instrument around, she invests in 90-day U.S. Treasury Bills. As long as America is in business, these investments can’t go down…or can they? Each month over the decade of the 1940s, her monthly statement shows an increasing balance as interest is reinvested. However, putting her money in Treasury Bills over this ten year period from 1940-1950 would have yielded a dramatic, portfolio destroying, inflation-adjusted drop of 41%. Note that at no time was there a sudden decline; she may even have been lured into a false sense of security. But “waking up” in 1950 to the reality that food, rent, and other expenses have increased far faster than her account balances leaves her unable to maintain her previous standard of living. Perhaps even worse, there is no hope of such a fixed income investment ever recovering from such a major hit. Coming off the heels of the second worst recession and worst bear market since 1940, one has to wonder if investors aren’t once again taking money from stocks and positioning it into one of the most risky asset classes - fixed income - for the decade of the 2010′s. It seems extremely likely that the only way out of the mounting national debt is for the U.S. government to “inflate” its way out. Only time will tell, but we are highly concerned that investors have just moved their commitment away from stocks into fixed income at the worst possible moment.
