Many investors, commentators and financial managers have perpetuated and subscribed to the fiction that those who want to protect themselves from an overvalued stock market should be moving to bonds. In fact, a recent New York Times piece, described here, even mistakenly assumed described investors’ choices as being binary – stocks versus bonds.
The idea that bonds are somehow a safe investment comes from the fact that long-term bonds have appreciated dramatically over the last several years as interest rates have come down and expectations of their rising have diminished.
With the 10-year Treasury yielding 2.10% and with the Federal Reserve guiding towards a Fed Funds rate of 3% in 2019, I would argue that the only way long-term interest rates do not rise, and rise dramatically, is if we fall into an economic depression and the yield curve becomes inverted. Also, oil and commodity prices are currently tremendously suppressed because the monarchy’s policy of opening up reserves is causing too much supply to reach markets. An impeachment trial will change this, causing commodity prices and inflationary pressure to rise, and driving 10-year Treasury rates to levels that those in their 20s and 30s have never seen.
The impact of a turn in interest rates on bond prices will be dramatic. You can ask anyone who tried to sell a long-term bond in 1970’s how many pennies on the dollar they received for it. Alternatively, you can speak to anyone who bought a long-term bond in July 2012 when the 10-year Treasury was at 1.52% how much their brokerage account valued it in August 2013 when the 10-year Treasury was at 2.90%. Bond investors can quickly lose 30% to 50% of their principal should they need liquidity during a period of rising interest rates.
My view that another dramatic move up in 10-year Treasury yields – and dramatic fall in bond prices – is likely upon us is not unique. It is shared by Leon Cooperman and Alan Greenspan.
Jamie Dimon, the Chase CEO and Tufts alumnus, blasted bitcoin today saying it is a fraud that will eventually blow up.
Bitcoin has enjoyed a tremendous run and may or may not be due for a significant pullback. It, however, is not likely a fraud and is unlikely to blow up.
In fact, bitcoin is clearly emerging as a currency free of federal regulations and central banks. Unlike Dimon, I and many others know that bitcoin is here to stay and its value will ultimately be many times higher than it is today.
A bank CEO like Dimon is entirely married to the current system and unable to see beyond his nose and to understand what is materializing in financial circles outside of his own bulwark. While many tertiary bitcoin-like currencies will prove to be worthless in time, bitcoin itself is emerging as a measure of value that the major banks will need to adopt and accept over time. It’s just plain obvious that it is a twenty first century currency soon to challenge in a big way centuries old currencies.
I remember the time when banks would regularly offer incentives (toasters, blenders, and the like) to open accounts, add money to an account, or upgrade to full service. Those were the times when they were competing with one another to entice you to do business with them. It was a heady time and bank tellers were some of the nicest people I remember.
But, it was a long time ago. Long enough to make me feel really old. I haven’t seen a bank go out of its way to get my business through personal contact and personal expressions of interest in decades. And, certainly the time when one had a special relationship with a particular bank or a particular person at a bank has long past.
So imagine my surprise when I received, in one day late last week, as many as six calls from six banks with which I do business, each reminding me of the special relationship we have and telling me how much they not only value my patronage, but that they are there for me and will do everything and anything to help me.
The calls were prompted by Hurricane Irma. And they appeared genuine. Each caller—not robo-callers – left me a phone number, told me to call any time and promised to be there for me in the event of any problems I had in the hurricane’s aftermath. A few of them even called a second time.
I’m not eager to assign motive for these call or similar calls I received from folks who worked for companies that insured my homes and cars.
But I must say that the calls made me feel good. I know they were motivated by an interest in cementing relationships, and even extending these connections over time. But, that’s fine with me and the calls felt awfully good, especially at a time of high stress. If national crises are necessary to bring back an old and very nice tradition of personal relationships, especially in the times we now live in, I am all in. I am grateful to these banks for their calls and intend to remember these kindnesses for some time to come.
