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Yesterday, I brought to your attention a bit of speculation from Bloomberg, namely, that the Fed’s “Operation Twist” will likely keep interest-rates low for an extended period. (This, mind you, is on top of the Fed’s explicit promise to do so anyway, at least through the end of 2013.) This is excellent news for those who already own bonds. But it is bad news, of course, for those who trying to get into them.
Today, from another source, comes another suggestion that interest-rates will remain low for an extended period, namely, an article in The Telegraph that “China [is] to liquidate US Treasuries, not Dollars”. The article comments on what is already known to be happening, namely, that China is recycling the piles of depreciating US dollars it receives for its trade goods into global hard assets and would, if it were allowed, begin buying up US manufacturing companies.

Nearly a decade ago, when I first began posting in this forum, I warned of the dangers that “savers” would create for themselves by buying “principal-protected” debt instruments to the near or total exclusion of those that carry credit-risk (and that can offer a genuine hedge against the erosions of taxes and inflation). My warnings weren’t heeded, of course, because I was speaking to an issue that few want to consider, namely, just how wrong the conventional financial wisdoms can be. But during that past decade, I more than doubled my account size, and I’m on schedule to do so again within a comparable amount of time, even as we all face an extended period of financial challenge. In other words, as I’ve said many times before, those who chose the conventionally safe path for fixed-income investing chose the one that has proven to be the most risky if one’s intentions are the preservation of capital, never mind its appreciation. As the well-documented levels of poverty increase in this country, nearly everyone bemoans them. But few accept responsibility for the poor financial choices they made for themselves. So-called “savers” are suffering a declining net-worth, because they chose to substitute a cash-management strategy for an investment strategy. Both are need to properly manage a portfolio. But the former is not a substitute for the latter, despite glib arguments to the contrary built on very short historical look-backs and the counter-factual assumption that “past is prolog”.

Ask yourself this. How many years has it been since you’ve been able to walk into a bank and get 5% on a deposit account? More importantly, how many more years will it be before you can do so again? It will happen, because interest-rates go up, as well as down. But all available indicators suggest that “savers" face several more years of famine. Their choice; their problem. Me? I own several “principal-protected” debt instruments, in addition to a healthy slug of cash. But those PPs aren’t even 5% of total assets, because I could foresee where their prices were headed, which was up, up, up as the yields on them went down, down, down. So to continue buying them (using the lame excuse that anything else was “too risky”) would have been the financial equivalent of trying to pick up nickels in front of an oncoming bulldozer, all the while arguing that it was a safe thing to do. If your brother-in-law is the driver, that might be so. But when his boss tells him, “Get that machine moving!”, you’ll suffer the fate you deserve. Who is the “boss” that drives interest-rates, the Fed or markets? Does it matter if you’re stupid enough to try to pick up the nickels that principal-protected instruments can offer if another bulldozer is coming your way, the one that is driven by INFLATION?

Why are low-interest rates at least a temporarily good thing? Because they drive the weaker players out of the market, creating opportunities for them that remain. Good or bad, that’s what’s going to happen, because the US intends to borrow its way out of debt, just as Japan tried to do and has failed for the last 20 years. It’s going to be a long, dry spell for “savers”. So I'm glad I'm not trying to be one of them.

Lokicious or Wendy, I invite you to reply since you were, and are, the principal advocates of a "convervative investing strategy" which I claim might have served each of you quite admirably but has misled a lot of naive fixed-income investors who wandered into this forum into making some very bad choices for themselves.
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