Get a safe, hold cash, and wait for the buying opportunity.

[raja]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Spartacus,

Thanks for your reply.

In a high-inflation environment, with US treasuries you could be paying taxes on inflation "gains".

Unfortunately, very true.
I've been aware at this downside of Treasuries, but chose to look at them from the perspective of "Where can I invest to lose the least during the next 5 years?"

I hadn't thought of tax-free municipals, which would get around the problem of taxing inflated gains.
But there are a couple of things that come up for me about this . . . .

Just out of curiosity, what do you think would happen to the bonds of the safest, best-run municipalities in the US?

I don't know much about municipal bonds, but I suspect that their returns aren't indexed to inflation.
So, if the Fed decides to inflate away the current economic problems, one is stuck with a low interest rate for several years.

The benefit of Treasuries is that they can be short-term, so as inflation rises, one can continually reinvest at ever-increasing interest rates. (I'm assuming Treasury yields would rise along with inflation, but maybe that's not the case.)
I suppose if you could find very short-term municipals, you could accomplish the same thing, but I don't know if these exist. Do you know of some?

Regards safety . . . .

According to one source, there are 3 types of municipal bonds, two of which concern the small investor:

1. General obligation bonds are backed by the full faith and credit of the issuing agency. For municipal bonds, full faith and credit also means the taxing power of the issuing municipality.
2. Revenue bonds are backed by the funds from a designated tax or the revenues from a specific project, authority, or agency. These bonds are not backed by the full faith and credit (or the taxing power) of the issuing agency. In other words, revenue bonds are only as good (and as creditworthy) as the ventures they support.

#1 is obviously the safer of the two . . . .

If there is a recession in which many businesses fail, people lose jobs and housing is devalued, there would be a dramatic reduction in municipal tax revenues. I don't know if municipalities invest in securities, but if they do, they may also experience a loss of assets and income from this.

What would municipalities do in the case where they couldn't pay off their bonds due to decreased revenues?
At first, I expect they would just delay payments, extending the payoffs to a later time in the hope that things would get better.

They also could sharply cut services to raise money, but then the public would be up in arms. Perhaps there would be a lot of pressure to shift the losses to the bond holders.

If there were a protracted recession/depression, they might just default and say, "Sorry, we haven't got it." My Ukrainian wife tells me that's what happened in her country after the Soviet breakup in 1991.

As discussed above, if the Fed decides to inflate out of the economic mess, then the value of longer term municipal bonds would plummet.

So, all things (that I can think of) considered, I don't see how municipals are better than Treasuries.

Finally, you suggested:

Still, if you're going the government backed bond route, a little diversification would not hurt, as long it doesn't cost too much extra.

After seeing the unison drops in the world markets in the past weeks, I'm thinking no one country is safer than another. It seems that everyone is invested in the dollar, and if we go down, they go down. That makes me hesitate to invest in another country's government bonds.

I'd appreciate your thoughts on all this . . . .

[raja]

Re: Get a safe, hold cash, and wait for the buying opportunity.

GoldMoney
BullionVault
Perth Mint
I think that these are good places to stash some money without reporting it.

Interestingly, Paul Tustain of BullionVault wrote in a previous iTulip post:

"The 1933 USA confiscation occurred when gold and money were effectively the same thing. The USA underpinned the 1933 dollar with gold, so private hoarding, which was widespread, was punching a hole in the government’s faltering monetary honesty. Since the dollar and gold are now wholly independent there is no similar motivation for confiscating gold today. . . . My view is that a modern government finding itself short of a few hundred billion dollars a year is very unlikely to chase an insignificant sum of hard-to-get foreign gold when it has a sitting duck in the form of its citizens’ stock of privately owned real-estate."

clue1, you mentioned "currency controls".
Could you elaborate on what that might entail?

Thanks

[Spartacus]

Re: Get a safe, hold cash, and wait for the buying opportunity.

I agree completely, worldwide asset markets are coupled like they never have been before, and US short term treasuries seem among the safest.

My own biggest bet is in precious metals and I do not feel very safe and secure about it.

Marc Faber started pointing out the worldwide, all-assets-inflating phenomenon in 2004 and I've been watching it and worrying about it ever since.

If there has been significant dollar decoupling of Asia we have not seen much evidence.

chose to look at them from the perspective of "Where can I invest to lose the least during the next 5 years?"

municipal bonds ... their returns aren't indexed to inflation.

great point

Finally, you suggested: After seeing the unison drops in the world markets in the past weeks, I'm thinking no one country is safer than another. It seems that everyone is invested in the dollar, and if we go down, they go down. That makes me hesitate to invest in another country's government bonds.

I'd appreciate your thoughts on all this . . . .

As you write, UST bills are the safest place to be.

If there is any kind of currency crisis the $US probably will benefit from the flight to the thing people are most familiar with, the flight to the least dangerous (not necessarily the flight to safety).

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

I think it's a mistake to pile everything into what you think is the best short term trade. And we should not delude ourselves that US treasuries are anything but a short term posture.

The best position (as long as you are convinced of it's fundamental merit going out 3-5 years) is to be positioned in what will be the best intermediate and long term trade.

In today's environment, the vital criteria seem to be any asset class that's not being inflated in it's issuance, is historically a safe haven asset in international volatility, and is negatively correlated to equities. Then, despite the widespread skepticism you will hear chattered by all around you about the short term gale blowing the other direction, you will have a winner. Anyone who hitches their wagon to a rising dollar will have to be perpetually on their guard night and day to un-hitch it in a hurry thereafter.

All the rest is short term "market timer" nerves, which can easily trip you up due to mis-timed exits and entries. Trading is riskier than standing still in the asset class with the best mid-term fundamentals and the definitive set of parentheses around the decade's trend. Adhering to that principle is adhering to the market's likeliest mid-term outcome, rather than yielding to jagged swings in momentary investor sentiment which is highly fickle, and which will have you hopping around incessantly from year to year tethered to it's manic swings.

Personally the thought of being on a desert island and not being able to instruct a broker to sell my US treasuries promptly at some point in the next six months would fill me with uneasiness.

Spartacus' jitters about the PM position seem to me unwarranted, but to each his own. I think he should continue to trust the instinct which guided him there to begin with.

[quigleydoor]

Re: Get a safe, hold cash, and wait for the buying opportunity.

I've been aware at this downside of Treasuries, but chose to look at them from the perspective of "Where can I invest to lose the least during the next 5 years?"

I hadn't thought of tax-free municipals, which would get around the problem of taxing inflated gains.
But there are a couple of things that come up for me about this . . . .

I don't know much about municipal bonds, but I suspect that their returns aren't indexed to inflation.
So, if the Fed decides to inflate away the current economic problems, one is stuck with a low interest rate for several years.

The benefit of Treasuries is that they can be short-term, so as inflation rises, one can continually reinvest at ever-increasing interest rates. (I'm assuming Treasury yields would rise along with inflation, but maybe that's not the case.)
I suppose if you could find very short-term municipals, you could accomplish the same thing, but I don't know if these exist. Do you know of some?

Shops like Fidelity and Nuveen have municipal money market mutual funds. They are state specific.

Think about municipal bond yields for a minute. Because munis are tax-exempt, the efficient market causes the yields to be lower. You should expect the spread between a muni-bill and a T-bill is going to be roughly the marginal tax rate of the average investor. That means that you won't actually benefit from the tax-exempt status, unless your marginal tax rate is lower than the average investor (i.e. you are stinking rich).

Investing in municipal paper has a number of pitfalls. I'll summarize them if you are interested. Suffice it to say that your broker or fund manager will rip you off, unless you are rich and/or educated in this area.

Regards safety . . . .

According to one source, there are 3 types of municipal bonds, two of which concern the small investor:

1. General obligation bonds are backed by the full faith and credit of the issuing agency. For municipal bonds, full faith and credit also means the taxing power of the issuing municipality.
2. Revenue bonds are backed by the funds from a designated tax or the revenues from a specific project, authority, or agency. These bonds are not backed by the full faith and credit (or the taxing power) of the issuing agency. In other words, revenue bonds are only as good (and as creditworthy) as the ventures they support.

#1 is obviously the safer of the two . . . .

I am not sure you should generalize so much. Revenue bonds backed by pay-per-use infrastructure revenue (such as a toll turnpike authority) might be relatively safe.

If there is a recession in which many businesses fail, people lose jobs and housing is devalued, there would be a dramatic reduction in municipal tax revenues. I don't know if municipalities invest in securities, but if they do, they may also experience a loss of assets and income from this.

Orange County, California, comes to mind.

[lobodelmar]

Re: Get a safe, hold cash, and wait for the buying opportunity.

I understand the desire to be Chicken Little in times like these, but I am not sure that pulling money out of the market and waiting to swoop back in makes sense for most people.

No one talks about dollar-cost averaging much on these boards, but it is precisely why you are supposed to stay in the market, long term, rather than trying to time the market. You can buy more on a down cycle and get a better return overall. I am not sure it makes sense to panic and run.

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Lobodelmar - There speaks a sober minded investor.

With regard to muni-bonds - why parse the relative merits of USD denominated MUNIS when you can obtain yields within 1% of those US muni-bonds in Swiss Cantonals and the Swiss Franc is currently so beaten down as to be a bargain?

I don't get it. If you want bonds, there are excellent buys in Switzerland, Denmark, Germany, Singapore, all over the place in currencies with much better relative strength than the US dollar. What use is it to parse the minutiae of US bonds when the denominator is junk in any but the shortest time frames?

Buying US Munis all you have standing between you and the cliff is the yield.

The yield on US bonds of all stripes is looking increasingly dubious against the yield from even US stocks. A value investor would spot the difference.

By employing the microscope to examine local investments the larger universe of options fades into a blur.

[raja]

Re: Get a safe, hold cash, and wait for the buying opportunity.

My own biggest bet is in precious metals and I do not feel very safe and secure about it.

I've got some gold positions, and it makes me a little nervous, too . . .
Many people I read are convinced that gold will soar, but a few say it will drop to the commodity only price.

I believe that government (in some form) will always be with us, so I'm more confident in the stability of government. Sure, the government rips us off, but if one is careful, the level of stealing is usually limited.
On the other hand, gold's value is mostly whatever people think it is, and so can rise and fall dramatically, as we've seen in the 80s.

That being said, here's my gold-positive picture of the future . . . .

After a big scare, which I think we're due for in the near future, many people will start thinking a little more deeply than usual . . . driven by fear, of course. In this process of contemplation, they will realize that any solution that the Fed comes up with is going to involve big inflation, so they will turn to gold to protect themselves from that.

Will most investors come to this conclusion? I doubt it. But enough will so that the price of gold will go up.
Therefore, I don't believe that a Ka event will result in a drop in gold. Instead, I think gold will go up. Then it should really soar for the Poom, when the majority now realize what's really happening.

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

This is just the start - US treasuries are going to be a lousy bet in the next couple of years.


Symbol: TYX

Bond Report: Treasurys lower after higher-than-expected headline PPI
By Leslie Wines MarketWatch
8/14/2007 9:49:00 AM

NEW YORK (MarketWatch) -- Treasury prices came under early pressure Tuesday, pushing yields a touch higher, after a U.S. report on producer-price inflation revealed a larger-than-expected increase due to rising energy prices. Complete Story...

[quigleydoor]

Re: Get a safe, hold cash, and wait for the buying opportunity.

With regard to muni-bonds - why parse the relative merits of USD denominated MUNIS when you can obtain yields within 1% of those US muni-bonds in Swiss Cantonals and the Swiss Franc is currently so beaten down as to be a bargain?

How would a US investor buy Swiss Cantonals? You are talking about some kind of fixed income security, right? When I feed this term to Google, all I find are pages about stamp collecting.

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Quigley -

Got to have an account there ... :cool:

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

QuigleyDoor -

I found one lead for US residents, and I believe valid for Canada and UK too -

http://swiss-bank-accounts.com/e/ban...s-account.html

Seems US nationals can proceed through this entity. US is in the eligible list. It would seem a handy thing to have!

[quigleydoor]

Re: Get a safe, hold cash, and wait for the buying opportunity.

QuigleyDoor -

I found one lead for US residents, and I believe valid for Canada and UK too -

http://swiss-bank-accounts.com/e/ban...s-account.html

Seems US nationals can proceed through this entity. US is in the eligible list. It would seem a handy thing to have!

Including set-up fee and bank transfer fees, this is expensive. However it is much less expensive and less exclusive than I ever imagined. Thanks!

[Spartacus]

Re: Get a safe, hold cash, and wait for the buying opportunity.

A good reference/URL I could read at some point (if I ever get some time) would be good.

There were academic studies that showed that municipal bonds were the highest performing asset class for long periods of time If everything is taken into account.

"everything" being things that a lot of "technical systems" don't account for

trading costs
bid/ask spreads
tax considerations (this was the biggie that pushed munis to the top in the studies I remember)

Investing in municipal paper has a number of pitfalls. I'll summarize them if you are interested. Suffice it to say that your broker or fund manager will rip you off, unless you are rich and/or educated in this area.
.

[Spartacus]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Tax benefits

Can be massive for some people.

With regard to muni-bonds - why parse the relative merits of USD denominated MUNIS when you can obtain yields within 1% of those US muni-bonds in Swiss Cantonals and the Swiss Franc is currently so beaten down as to be a bargain?