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The following is a snippet from “Conversations with Casey”, a publication that generally offers shrewd, timely analysis. This time, I disagree with a portion of it, or at least have a different view.

L: Okay, so again. Having realized that we live in a politicized economy,[that] it's not a free market, how does one navigate, how does one stay afloat?

Doug: Well, the way I see it, you've got to take advantage of the fact that it's a politicized economy. It's a very bad thing to have a politicized economy, because it's destructive of capital. It generally reduces the standard of living. It's a horrible thing. But you always have to look at the bright side; the government is going to create tremendous distortions and misallocations of capital by the very fact that it's involved, and that does present opportunities. It's not a time to be an investor, because an investor is somebody who allocates capital to create more capital, to grow wealth. That's what investing is all about. Speculation doesn't imply that at all. It's very different; speculation implies capitalizing on politically caused distortions in the marketplace.

And one giant one that we have right now – though a bit tricky to capitalize on – is the current bond bubble. First the Fed created a stock-market bubble in the late '90s, which collapsed in 2000. Then they blew up a real-estate bubble, which is still collapsing. I think both the stock market and the real-estate market are still overpriced, even though they've come down a lot. But the biggest bubble of all, and the most dangerous one, is the current bond bubble.

They've driven interest rates to basically zero levels – actually negative levels in some European countries, which is pretty unbelievable. I learn something new every day; I thought that negative interest rates were almost cosmically impossible, but I've learned different in recent months. This is creating huge distortions in the way people react and so forth. And of course, the biggest one of all is the bond market, which is going to collapse at some point. The time to have bought bonds was in the early '80s, when they were yielding 12, even 15%. Now they are yielding 0%, and everybody's buying them. It's unbelievable.

When I hear and read comments about the damage that will be caused by "a bursting of the bond bubble due to the fact that interest-rates will rise", I have to question them.

-If I bought Alcoa’s 5.870’s of ’22 at 70.099, as I did, for a YTM of 11.9%, how will I be harmed if interest-rates rise?
-If I bought Seagate’s 6.8’s of ’16 at 55.996, as I did, for a YTM of 17.40%, how will I be harmed if interest-rates rise?
-If I bought Ford’s 7.4’s of ‘46 at 62.045, as I did, for a YTM of 12.0%, how will I be harmed if interest-rates rise?
-If I bought GE's 6.1’s of ‘30 at 66.100, as I did, for a YTM of 10.0%, how will I be harmed if interest-rates rise?
-If I bought Hanson’s 6.125’s of ‘16 at 44.555, as I did, for a YTM of 21.4%, how will I be harmed if interest-rates rise?

To buy industrial bonds at steep discounts to their likely, eventual worth is to bet make a two-fold bet. #1, that those companies aren’t going to go away, no matter how bad the economy gets short of total systemic failure and/or nuclear war, and, #2, that their creditors will be paid.

When a substantial portion of a bond portfolio is made up of such credits, and a substantial portion is tied (directly or indirectly) to the “full faith and credit of the US”, and the remaining portion is broadly diversified by issuer and maturity, properly-weighted, and not a penny of income from the portfolio is needed to meet current-expenses (and thus, every bond can be held to maturity), how does the threat (yet to be realized) of rising interest-rates matter? Rather, rising interest-rates represent an eventual opportunity. Just as rates (and prices) go up, they also go down, and a patient, long-term bond investor scales into and out of those opportunities as they occur in decades-long cycles, buying when the buying should be done and then riding out the times, like now, when the buying is hard to justify.

My expectation is that genuine, economic recovery, not the current sugar-high created by free money, is a decade to a whole generation away from us. That's a long time to have to tread water as a fixed-income investor. But it's not impossible to deal with, nor historically unprecedented. It's simply a part of the bond-game (stock-game, securities-game, etc.) that some years and decades will be easy, and some will be tough. No biggie, and there's an anonymous, sixteenth-century, English proverb I'm fond of that speaks to that.

He that cannot abide a bad market deserves not a good one.
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