NO MORE SAFE INVESTMENTS?
December 4th 2010 22:17
Bruxelles Bourse - pic source Wikipedia
I understand, all investments have risks, but...
A newbie has got to ask a lot of questions too, right? I mean, especially somebody who is at a loss on how to make ends meet - somebody who has to keep on working like a horse for the rest of his life, well hopefully, until he makes it to the big time – if at all.
Anyway, when this newbie started to put his nose to the grindstone and tried his darnedest to learn the ropes of investing, he was given the impression that the safest of all investing instruments is the government bonds.
As newbies, it was explained to us in a classroom that the reason the government bonds are the safest is because they are guaranteed by the government. That was not very hard to understand despite the fact that there is a possibility of default. The government, after all, is the one that prints money.
Of course, if they print more money the guaranteed income from government bonds will be subjected to other consequences such as inflation, but let us not muddle the discussion with so many things that befuddle the minds of untrained newbies.
Just the fact that German Chancellor Angela Merkel is trying to insist to change the established rules of the game, in mid-game, is more than enough to confound our already perplexed newbie minds.
I am probably being too simplistic, but I can easily understand (if true) why an article here is saying that the bonds are possibly in a turning point.
What I cannot understand is this: Greece was in trouble because of profligacy, Ireland had to be bailed out because its banks had too much exposure on the real estate boom that went bust and god knows what else the other European countries, that are said to be in trouble, did.
Amidst all the (expletives) those (expletives) decision makers did that led them to need more money than they can afford, the private investors who want safe investments were always there to tide them over – probably to give them another chance to correct their mistakes without causing too much damage – and if I may go a bit farther, to practically bail them out.
To my newbie mind, government bond holders are conservative investors (of course not all of them are) who want safe investments. That’s the reason why they have those bonds, they are supposed to be safe! They bought them because they do not want to take too much risk.
Now, when a country goes bankrupt for reasons that has nothing to do with an investor’s wish for a safe investment, why do the safe investor have to take a hit - the way Merkel is insisting they should?
Merkel’s proposal naturally spooked quite a number of bondholders, which in turn exacerbated the European financial problems.
Can anybody help us, newbies, understand why Merkel seem to be trying to solve a problem by creating another problem that worsens the situation?
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Comment by British Bulldog
Why should bonds be a safe investment when governments decide to bankrupt themselves by bailing out banks at the same time as their tax revenues fell in a recession and unemployment costs rose.
Look around the western world and that quasi western country Japan and all you see is sovereign debt so why would anyone want to own it. And then too the printing of money in the US at the same time as zero interest rates produces a weak dollar and so expensive commodities and that lies directly to inflation.hence bond prices have fallen and yelds risen in recent months.
Bail out the Private sector and make the tax payer pay has been the name of the game this last few years and 'the chickens are finally coming home to roost'.
2011 will be another year of living dangerously as the non Protestant countires of Europe will continue to all run to Germany for a bail out and Merkle will say enough is enough, after fifty years of it in the EU 20 years of bailing out the former East Germany too.
The bond holders are usually the banks, and those banks will be technically insolvent again once they've been forced to take a haircut on the redemption price of the bonds and way short of Basel 2 tier 1 capital requirments, which is why i'm shorting the banks right now.
The stock market propped up by government money in large parts of the west cannot sustain the gains, which as on Friday's weak US unemployment figure suggest is not enough.and the US has to negociate another higher debt ceiling in March this time with a Republican congress.
Ahead in the first half of this year we've got a very rocky road ahead. Fasten your investor seatbelt carefully.
I give more of this to Bong Valentino whenever I see him in San Jose. You'll perhapsd note the PSE has been static now for a while. maybe a calm before a storm.
Regards, .