Re: Coming Catastrophe in Bonds
This blog is in response to a blog posted by TMFPostOfTheDay on February 1st called.
"Coming Catastrophe in Bonds?" http://caps.fool.com/Blogs/coming-catastrophe-in-bonds/794148
Overall it was a great blog. However in the comment's section MegaShort and somrh had some very valid questions.
"Is the possibility of intermediate term bonds losing 3% in a year really that bad compared to the possibility of stocks losing 30%?" - Megashort
"but that makes me wonder why he's choosing to hold cash which has an even greater real loss." - somrh
I agree with the author as I am one of the many people who have been calling a bond bubble for years now. Is it possible that this bubble could never pop? Of course. I would actually prefer that it didn't. But it case it does, it doesnt hurt to be prepared.
Now of course I arrive to the party after everyone has already cleaned up. So I replied to these questions but I doubt any of these people will get a chance to see it on the original post so I will repost it here:
Well if the bond bubble pops as many are predicting it will, we are looking at losses to the tune of 30% and up. Also interest rates will simultaneously skyrocket to levels unseen by many. It will be the 2008 crisis 2.0 and it will be much harder to recover from. If we were only looking at a loss of 3% a year then thats hardly a crisis at all. But thats not what we're talking about here. We are looking at bonds selling for practically pennies on the dollar. That in and of itself could destroy retiree income. The implications are far reaching and dire. So preparations need to be made to reduce exposure to bonds as much as possible. As the author said, stick to short term bonds. There is just too much downside risk in long term. Cash is king because there will be opportunties galore when the bond bubble pops. Stocks are an ok alternative, but I have a feeling that in the event of a bond collapse, commodities will skyrocket. So one should seek to increase exposure there, at least in the short term.
But thats just my two cents.