Share this
Twitter
Myspace
Digg
Del.icio.us
Reddit
Slashdot
Furl
Yahoo
Technorati
Newsvine
Facebook
Export PDF
Print
E-mail
Tags
BY WARREN BOROSON
NEWJERSEYNEWSROOM.COM
BOROSON ON MONEY
Everybody knows that bonds are not the place to be these days. As the economy perks up, interest rates will rise, and owners of bonds will be taken to the cleaners.
Money magazine writes in its latest issue (December 2010): "... there is a real risk that you could lose money on your fixed-income investments in the next year or so if interest rates head up again, as most economists expect. ‘Bond investors are living on borrowed time right now,' says Carl Kaufman, manager of Osterweis Strategie Income."
Did I say everybody? There's at least one egregious exception. Guy from New Jersey named F. Gary Shilling. The Sage of Springfield. And, unfortunately, he has this really annoying habit of being right. I say "unfortunately" because, if he IS right, a lot of people – herd-followers – are going to lose out.
In his latest book, "The Age of Deleveraging," Dr. Shilling (Ph.D. in economics from Stanford) writes that 30-year Treasuries and other high-quality bonds are what you should be buying now. He believes that long-term Treasury yields will drop to 3.0% or lower – because the economy will slow down even further and we will be entering an era of deflation – one that may last for ten years. (The long-bond's yield recently was 4.21%.)
A decline of a 4% yield to 3.0% may sound like chickenfeed, he writes, but the bond's price would then appreciate by 20%. If the decline takes two years, then you get two years' worth of interest to boot, and your total return would be 28%. (20 plus 4 plus 4.)Now, a "zero-coupon" bond pays no interest, but is issued at a discount.
When the bond matures, you get the full face value. And the total return on such a zero, if the yield fell from 4% to 3%, would be 34%.
Dr. Shilling prefers the 30-year bond to the 10-year note. Why? "If you really believe, as I do, that interest rates are going down, you want to own the longest-maturity bond possible."
As for zeroes, they work best in tax-free accounts, Dr. Shilling notes. You're taxed on the appreciation every year — even if you hold onto them and don't sell.
The Sage of Springfield also likes high-quality corporate and municipal bonds — which should also provide relatively generous yields in a deflationary era.
So, what about TIPs? Bonds that protect you against inflation? Obviously, he notes, deflationary times are bad news for TIPs. And he adds, "Even if I'm dead wrong and inflation rises, TIPs don't work well in taxable accounts." Investors pay ordinary income tax on the interest and the inflation-adjustment to the principal.
Okay, what else does Shilling like besides 30-year Treasuries and zeroes?
Income-producing securities, like stocks of utilities, health-care firms, and other companies paying good dividends that are likely to rise. Food and other consumer staples. Along with discount retailers, as people avoid national brands and buy cheaper products.
Small luxuries. The U.S. dollar. Investment advisers and financial planners. Factory-built housing and rental apartments. Health care. Productivity enhancers, like new technology. North American energy sources.
For more about these ten investments to buy, along with 12 to avoid, buy Dr. Shilling's very worthwhile book ($39.95)
Oh, one more thing.
Please remember that sometimes contrarians are actually wrong and that the conventional wisdom turns out to be right.
Warren Boroson will answer financial questions sent to him at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
