About a year ago, my father invested in a Merrill Lynch bond. I looked it over… noted its high rating… and saw nothing wrong with it.
Not long after that, I was speaking to a vice president of Bank of Nova Scotia. I asked him about the bank’s exposure to the subprime crisis. He said it was negligible. I then asked him about the GMAC loans it had recently bought. He said they were fine… the defaults lower than they had projected. So I added the bank to one of the portfolios I recommend to my subscribers.
The Merrill Lynch bond has since plunged and then rebounded. And the Bank of Nova Scotia’s shares are almost exactly where they were when I made my recommendation. That’s much better than most North American banks have done over the past year.
No harm, no foul?
I’d be the stupidest guy on the planet if I thought there were no lessons to be learned just because those investments didn’t turn to mush.
Fact is, my assumptions have changed.
Had I known then what I know now, I would not have touched that Merrill Lynch bond with a 10-foot pole. And I wouldn’t have cared if a high-ranking bank official swore to me they weren’t exposed to the U.S. subprime mortgage market. I wouldn’t have believed him. I definitely would have put off investing.
The housing bust, subprime mess, credit crunch, and resulting financial crisis have done more than just bring the market down. They’ve led to a stunning collapse of confidence that has infected the entire investment world. Banks don’t want to lend to each other… institutional investors no longer know what’s safe… and retail investors don’t believe anything anymore.
How can they? The rating agencies have proved beyond a shadow of a doubt that they do not understand derivatives. Their ratings are worthless.
And the brokers and analysts who follow every twist and turn the market makes? The last year must have made them so dizzy that they can’t see the forest for the trees. They’ve been making one bad call after another.
A few months ago, for example, Buckingham Research estimated that Bear Stearns had $35 billion in liquid assets and borrowing capacity, enough to operate for 20 months. Turns out it had enough for three days. This is one of dozens of examples I could cite.
There’s so much uncertainty in the investment world that we can no longer fall back on our long-held ideas of what makes a safe investment.
Munis? Sorry. Thanks to the shaky status of the monoline insurance companies (which insure munis), they’re no longer the safe investments they used to be.
Money market funds? They’ve been hit too. Some brokerages are covering losses with their own money rather than pass them on to those who invested in these supposedly safe havens.
Good move. I don’t blame them.
What’s left? Oh, yes. How could I forget U.S. government bonds? Okay, they’re still safe… but are they really investments? I mean, can anything you get a negative return on be considered an “investment”?
I don’t think so – and that’s exactly what you’re getting with them. A 10-year Treasury note would give you a 4.01 percent yield. Meanwhile, inflation is running at 4 percent, and that excludes food and energy prices. The real rate of inflation would be much higher.
Investing in U.S. bonds is worse than giving the government a free loan. Instead of the government paying you for the loan, you pay the government for the privilege of loaning it your money.
Do you feel honored? Or cheated? Well, I can’t speak for you. But this is the kind of honor that could land me in the poorhouse. I’d say cheated.
So… is there any investment that is truly safe?
There sure is. Australian government bonds have never looked better than they do right now. And this is the perfect time to jump into them…
Not only because Australia has one of the strongest economies in the world. Unemployment is at a 33-year low. And prices of its two big exports – coal and iron ore – are at historical highs. It doesn’t hurt that around 66 percent of Australia’s exports are commodities.
And not only because Australia is effectively shielded from the problems we’re having in the U.S. They trade mostly with fast-growing Asia. In fact, 60 percent of their exports go to Asia.
The biggest reason the timing couldn’t be better is because the Aussie government has been raising its key interest rate to stave off inflation. They’ve raised it all the way to 7.25 percent. They’re at or near the top of their rate-raising cycle.
Other interest rates, including bond rates, feed off this basic government rate. If this rate is more than twice as high as the U.S. benchmark interest rate, then most of the other rates will be too – including Australia’s government bond rates.
Sure enough, the Queensland 10-year government bond pays a nice 6.99 percent interest. That’s not quite twice as high as the equivalent U.S. government bond rate, but it’s close.
What’s more, you can buy these bonds for a discount. And the discount isn’t going to get any better. Here’s why…
The Australian government paused its key interest rate hikes three months ago. That means, for now, interest rates have peaked in Australia. The only way they would go higher is if the Reserve Bank of Australia resumed rate hikes. That’s possible, but unlikely.
And if you don’t want to tie up your money for 10 years? There’s another group of Australian bonds that could be perfect for you. I’m talking about corporate bonds, including bonds issued by GE – one of the biggest companies in the world.
These GE bonds are triple-A rated – the highest rating bonds can get – which means they come with very little risk. Usually, the lower the risk the lower the yield. But these highly rated bonds offer high yields of 7.97 percent. (Ask your broker for 8.5 percent coupon February 2011 maturity bonds from GE in Australia.)
Or you might prefer Australian bonds from Nestle, the huge Swiss firm. Its bond is double-A rated and offers a yield of 7.0 percent. (Ask your broker for 7.25 percent coupon January 2011 maturity bonds from Nestle in Australia.)
Because these bonds mature in 2011, they would tie up your money for less than three years. To get in before prices go higher (and yields go lower), you should buy Australian bonds NOW.
Buying international bonds is pretty easy… as long as you go to the right place. You can always go to a full-service brokerage specializing in international bonds. But many of the bigger brokerages are able to trade them, too, so call a few and find out.
You could also call up your broker. Ask him to recommend someone who does overseas bonds.
[Ed. Note: Sometimes, as ETR's Investment Director Andrew Gordon just explained, making money is as simple as looking overseas. In fact, there's plenty of money to be made in the markets. It's practically raining cash - and all you have to do is set out a bucket to catch your share. Andrew can show you where to put the bucket.]
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