Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

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Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Lauretta » Tue Sep 10, 2019 3:59 am

At present Eurozone AAA rated government bonds have negative yields for residual maturities of up to 30 years (and more)
https://www.ecb.europa.eu/stats/financi ... ex.en.html
For all government bonds as a whole, the yield is negative for up to 10 years of residual maturities.

As far as I understand, this means that the only way that you can make money by purchasing AAA rated bonds (or all governement bonds of residual maturities of less than 10 years) is by betting that yields will go even lower, so that the value of your bonds will increase.

So would you say that this would be a speculation rather than an investment? (meaning that if I buy bonds and hold them till maturity I am mathematically certain to lose money). The speculation has worked well in recent months (e.g. MTXX has gone up a lot recently https://www.londonstockexchange.com/exc ... ml?lang=en ), but in the long term I don't see what the point is of buying bonds for a buy and hold investor (except perhaps for the rebalancing benefit in case of a crisis).

Linked to these reflections, I am thinking that for people who will retire in the Eurozone, gold is probably a better hedge in case of a crisis than eurozone bonds. What do you think?
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Forester » Tue Sep 10, 2019 5:16 am

Yes they are a speculation similar to Dotcom stocks or Bitcoin because they need to be passed on to "greater fools". Respectable speculation. LT US bonds are nearly as bad.

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Lauretta » Tue Sep 10, 2019 5:33 am

Forester wrote:
Tue Sep 10, 2019 5:16 am
Yes they are a speculation similar to Dotcom stocks or Bitcoin because they need to be passed on to "greater fools". Respectable speculation. LT US bonds are nearly as bad.
:D thant's a good way of putting it. Yes LT Us bonds have nominal positive yield but after inflation and taxes people probably end up losing money if they just hold them I guess.
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by GermanDoc » Tue Sep 10, 2019 6:03 am

I started to put my safe Bond allocation into savings Accounts. If you stay under 100k per bank and live in a AAA country, you can get an asset backed by the same debtor as the AAA gov bonds with a positive (before inflation) return. (I guess the banks pay the interest to keep customers.)
But I will not sell my gov bond ETF, even though it has an expected return of -0,12% if interest stays the same, because of the tax consequences.

I would not call EU gov bonds speculation. In € it's the best rated debtor you can get. So if you buy it to get safety for your portfolio you are not speculating, you are paying for safety.

I you buy a 30 year AAA bond to get a profit, you are speculating for even lower interest rates. Then it's speculation.

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Valuethinker » Tue Sep 10, 2019 7:44 am

Lauretta wrote:
Tue Sep 10, 2019 5:33 am
Forester wrote:
Tue Sep 10, 2019 5:16 am
Yes they are a speculation similar to Dotcom stocks or Bitcoin because they need to be passed on to "greater fools". Respectable speculation. LT US bonds are nearly as bad.
:D thant's a good way of putting it. Yes LT Us bonds have nominal positive yield but after inflation and taxes people probably end up losing money if they just hold them I guess.
If you have deflation in the Eurozone then these bonds could have a positive real return.

With Swiss Franc bonds, I think that has to be a reasonable bet - that currency appreciation (as the result of greater creditworthiness & capital inflows) will actually produce a negative inflation rate (possibly even for the long term) and a positive currency return for a Eurozone investor (given the structural weakness of the Eurozone).

That's a harder call, for, say German government bonds.

However investment is all "relative to what?". Other alternatives for institutional investors are even less appetizing.

For the individual investor, if you believe your government can afford to bail out your bank, then 100K in Eurozone bank account looks quite attractive - generally zero interest rate.

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Valuethinker » Tue Sep 10, 2019 7:48 am

Lauretta wrote:
Tue Sep 10, 2019 3:59 am
At present Eurozone AAA rated government bonds have negative yields for residual maturities of up to 30 years (and more)
https://www.ecb.europa.eu/stats/financi ... ex.en.html
For all government bonds as a whole, the yield is negative for up to 10 years of residual maturities.

As far as I understand, this means that the only way that you can make money by purchasing AAA rated bonds (or all governement bonds of residual maturities of less than 10 years) is by betting that yields will go even lower, so that the value of your bonds will increase.

So would you say that this would be a speculation rather than an investment? (meaning that if I buy bonds and hold them till maturity I am mathematically certain to lose money). The speculation has worked well in recent months (e.g. MTXX has gone up a lot recently https://www.londonstockexchange.com/exc ... ml?lang=en ), but in the long term I don't see what the point is of buying bonds for a buy and hold investor (except perhaps for the rebalancing benefit in case of a crisis).

Linked to these reflections, I am thinking that for people who will retire in the Eurozone, gold is probably a better hedge in case of a crisis than eurozone bonds. What do you think?
On gold it has a zero income return, and it's highly volatile.

That does not sound like a great insurance policy. It does work as a portfolio diversifier though, if you can accept long periods of negative returns. Volatility and relatively low correlation with other assets (at least historically) is helpful.

If you think - and I think there is a case - that the US, China, Japan & EU are now in a competitive currency devaluation war, alongside their trade wars - then I think you could make another case for gold.

A Eurozone govt bond, with no credit risk, offers a negative nominal return but possibly not a negative real return. And in nominal terms your money is safe. The Eurozone looks more and more like Japan*, and Japanese government bonds have been a decent bet these last 30 years.

* serious structural problems. Terrible demographics. Politics which are not likely to make things better (let's leave it at that and avoid getting shut down by Forum rules ;-)). Banking system mired in past bad loans (depends on country - but German banks are structurally unprofitable, and Italian banks are in a slow motion bad debt crisis).

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by nisiprius » Tue Sep 10, 2019 8:43 am

1) Bonds, like almost everything, can be either a speculation or an investment depending on how you use them. There's no point in playing verbal games about whether negative real or nominal return automatically disqualifies something as being "not an investment." One dictionary I checked defines investment as "Property or another possession acquired for future financial return or benefit." "Benefit" covers a wide range of territory.

2) Whether gold is "likely to be a better hedge in case of a disaster" depends entirely on the specific disaster envisioned. Most disasters involve black swan events, uncharted territory, and thus you cannot be sure what anything will do in an arbitrary "disaster." Speaking as someone who owns no gold except a 10-caret (yes, really, 10) wedding ring, certainly it is easy to imagine scenarios--total national IT meltdown, for example--in which gold might be directly acceptable as a local medium of exchange, while your "investments" would be unavailable. It is also easy to imagine scenarios in which armed bandits steal your gold, while your investments remain safe behind their passwords and 2FA.
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by LadyGeek » Tue Sep 10, 2019 8:59 am

This thread is now in the Non-US Investing forum (Euro zone bonds).
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Lauretta » Tue Sep 10, 2019 9:16 am

Valuethinker wrote:
Tue Sep 10, 2019 7:44 am


For the individual investor, if you believe your government can afford to bail out your bank, then 100K in Eurozone bank account looks quite attractive - generally zero interest rate.
Now Intesa San Paolo has negative rates for current accounts in Italy, but yes one can find accounts with zero interet rate, which are more attractive than bonds and which will appreciate even more in case of deflation.
However I am thinking of bonds for the hedging properties in case of a market crisis (i.e. highly rated bonds presumably appreciate in case of a collapse in the stock market). But my thinking is that gold is probably a better hedge, because of a number of arguments Dalio gave, and because simply put highly rated government bonds have the mathematical certainty of giving a negative yield, at least in nominal terms.
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Lauretta » Tue Sep 10, 2019 9:46 am

nisiprius wrote:
Tue Sep 10, 2019 8:43 am
1) Bonds, like almost everything, can be either a speculation or an investment depending on how you use them. There's no point in playing verbal games about whether negative real or nominal return automatically disqualifies something as being "not an investment." One dictionary I checked defines investment as "Property or another possession acquired for future financial return or benefit." "Benefit" covers a wide range of territory.
I am not playing verbal games really. It seems to me that if an individual investor has the choice between a safe current account yielding say 0% and AAA 10 year bonds yielding -0.53% and she chooses the latter, she can do it only for one these 2 reasons:
- she speculates that the yield will get even more negative, so the bonds will appreciate in value and she can sell them at a higher price (a special case of this would be the flight to safety scenario in case of a stock market crisis, and te rebalancing bonus one gets from selling bonds and buying stocks when their price has fallen)
- she is crazy
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by DJN » Tue Sep 10, 2019 10:11 am

Lauretta wrote:
Tue Sep 10, 2019 9:46 am

I am not playing verbal games really. It seems to me that if an individual investor has the choice between a safe current account yielding say 0% and AAA 10 year bonds yielding -0.53% and she chooses the latter, she can do it only for one these 2 reasons:
- she speculates that the yield will get even more negative, so the bonds will appreciate in value and she can sell them at a higher price (a special case of this would be the flight to safety scenario in case of a stock market crisis, and te rebalancing bonus one gets from selling bonds and buying stocks when their price has fallen)
- she is crazy
Hi,
its an interesting problem that you have posed.
What does she do if she has €5,000,000 to invest safely?
DJN
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by not4me » Tue Sep 10, 2019 12:16 pm

Lauretta wrote:
Tue Sep 10, 2019 9:46 am

I am not playing verbal games really. It seems to me that if an individual investor has the choice between a safe current account yielding say 0% and AAA 10 year bonds yielding -0.53% and she chooses the latter, she can do it only for one these 2 reasons:
- she speculates that the yield will get even more negative, so the bonds will appreciate in value and she can sell them at a higher price (a special case of this would be the flight to safety scenario in case of a stock market crisis, and te rebalancing bonus one gets from selling bonds and buying stocks when their price has fallen)
- she is crazy
I'll step up & be the next to be accused of playing verbal games! Will try & reframe a bit

So given the specific choice you have above, the answer seems apparent. You didn't quantify/qualify what is considered "safe" or "current"...so the investor might decide the safety isn't there, it is a "teaser" rate that will soon disappear, etc. The -0.53% isn't speculation as much (to me) as putting a cap on nominal return....Absent an opportunity to get a capital gain, I know the most my nominal return will be (I'm taking this as literally a bond & not a bond fund). Don't know if it is still the case, but several months ago, a US investor could buy a Japanese bond with a negative coupon, simultaneously hedge the currency, and have a larger after tax return than if they bought US treasury. The Japanese investor lost money if they tried to buy the same US treasury. Point being that it is the same asset, but different results.

Perhaps another way to look at it is to determine which is better....in this case, a Eurozone bond or gold? I think when the term "disaster" is used, that some interpret that as an event -- not sure if that is what is meant by OP? I distinguish that from a prolonged period of 'poor" (another relative term!) returns/investment options.

I've been surprised by the number on the board who shrug off the effect that wide spread, long lasting negative interest rates might have. Won't take the chance of highjacking thread to say much, other than I think it might affect stocks as well as bonds.

So OP, you specified retiree...which I take to mean a shorter time horizon. Perhaps the question is which is better (bonds vs gold) IF there is a 5 year downturn? 8 year? 12 year? And/or, what is better over those time frames than bonds or gold?

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Phineas J. Whoopee » Tue Sep 10, 2019 12:36 pm

Lauretta wrote:
Tue Sep 10, 2019 9:46 am
nisiprius wrote:
Tue Sep 10, 2019 8:43 am
1) Bonds, like almost everything, can be either a speculation or an investment depending on how you use them. There's no point in playing verbal games about whether negative real or nominal return automatically disqualifies something as being "not an investment." One dictionary I checked defines investment as "Property or another possession acquired for future financial return or benefit." "Benefit" covers a wide range of territory.
I am not playing verbal games really. It seems to me that if an individual investor has the choice between a safe current account yielding say 0% and AAA 10 year bonds yielding -0.53% and she chooses the latter, she can do it only for one these 2 reasons:
- she speculates that the yield will get even more negative, so the bonds will appreciate in value and she can sell them at a higher price (a special case of this would be the flight to safety scenario in case of a stock market crisis, and te rebalancing bonus one gets from selling bonds and buying stocks when their price has fallen)
- she is crazy
I don't know where you're located, Lauretta, but where I live a current account, commonly called a checking account here, has a variable interest rate if it pays anything at all. More frequently there's a monthly charge, which isn't negative interest but reduces the balance nonetheless. The bank sets them and can change them. There is no certainty the account's yield will remain above those of longer-term securities for their full terms.

As a more general note, not aimed at you personally, Lauretta, any line of reasoning that relies on everybody is stupid except us can benefit from further analysis.

PJW

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Lauretta » Tue Sep 10, 2019 2:54 pm

Phineas J. Whoopee wrote:
Tue Sep 10, 2019 12:36 pm
Lauretta wrote:
Tue Sep 10, 2019 9:46 am
nisiprius wrote:
Tue Sep 10, 2019 8:43 am
1) Bonds, like almost everything, can be either a speculation or an investment depending on how you use them. There's no point in playing verbal games about whether negative real or nominal return automatically disqualifies something as being "not an investment." One dictionary I checked defines investment as "Property or another possession acquired for future financial return or benefit." "Benefit" covers a wide range of territory.
I am not playing verbal games really. It seems to me that if an individual investor has the choice between a safe current account yielding say 0% and AAA 10 year bonds yielding -0.53% and she chooses the latter, she can do it only for one these 2 reasons:
- she speculates that the yield will get even more negative, so the bonds will appreciate in value and she can sell them at a higher price (a special case of this would be the flight to safety scenario in case of a stock market crisis, and te rebalancing bonus one gets from selling bonds and buying stocks when their price has fallen)
- she is crazy
I don't know where you're located, Lauretta, but where I live a current account, commonly called a checking account here, has a variable interest rate if it pays anything at all. More frequently there's a monthly charge, which isn't negative interest but reduces the balance nonetheless. The bank sets them and can change them. There is no certainty the account's yield will remain above those of longer-term securities for their full terms.

As a more general note, not aimed at you personally, Lauretta, any line of reasoning that relies on everybody is stupid except us can benefit from further analysis.

PJW
hi Phineas, I don't think everybody else is stupid, though as someone said 'Two things are infinite: the universe and human stupidity; and I’m not sure about th’universe!' As far as I understand institutional investors have no choice and have to buy these bonds; but retail investors really have to be crazy IMO to do that. I mean, think about it, you are lending your money and paying these goverments (or firms) to borrow it! It's totally insane IMO, and I think many people think so too.
Another weird phenomenon is this: I was chatting to a fund manager some time back; he told me that he had written to a CEO in Switzerland advising them to issue negative yielding bonds. They cound earn some money this way - and use the capital raised to buy back their own shares...
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Lauretta » Tue Sep 10, 2019 3:07 pm

DJN wrote:
Tue Sep 10, 2019 10:11 am
Lauretta wrote:
Tue Sep 10, 2019 9:46 am

I am not playing verbal games really. It seems to me that if an individual investor has the choice between a safe current account yielding say 0% and AAA 10 year bonds yielding -0.53% and she chooses the latter, she can do it only for one these 2 reasons:
- she speculates that the yield will get even more negative, so the bonds will appreciate in value and she can sell them at a higher price (a special case of this would be the flight to safety scenario in case of a stock market crisis, and te rebalancing bonus one gets from selling bonds and buying stocks when their price has fallen)
- she is crazy
Hi,
its an interesting problem that you have posed.
What does she do if she has €5,000,000 to invest safely?
DJN
she puts them in a good bank, too large to fail, if she needs them within a few years. If her time horizon is 10 years or more, I would say stocks are the safest bet.
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by DJN » Tue Sep 10, 2019 8:50 pm

Lauretta wrote:
Tue Sep 10, 2019 3:07 pm
DJN wrote:
Tue Sep 10, 2019 10:11 am
Lauretta wrote:
Tue Sep 10, 2019 9:46 am

- she speculates that the yield will get even more negative, so the bonds will appreciate in value and she can sell them at a higher price (a special case of this would be the flight to safety scenario in case of a stock market crisis, and te rebalancing bonus one gets from selling bonds and buying stocks when their price has fallen)
- she is crazy
Hi,
its an interesting problem that you have posed.
What does she do if she has €5,000,000 to invest safely?
DJN
she puts them in a good bank, too large to fail, if she needs them within a few years. If her time horizon is 10 years or more, I would say stocks are the safest bet.
Hi,
thanks for replying, I wouldn't consider this approach to safety to be optimal. She would need (in a European context and I am sure it is the same in many other jurisdictions), 50 separate bank accounts, and that is 50 separate bank entities considering the EU bank guarantee system. The question of the safety of your money in banks is not theoretical considering the outcome of the Cyprus bank haircuts. And all that for next to zero returns.
I think that stocks as part of an investment approach wouldn't in my case be part of my safer side.
I don't consider REITs or commodities to be on the safe side. Maybe others think differently.

Therefore in a low interest environment the investor looks like they have to carefully consider the potential returns versus the risks of cash, cash equivalents and fixed income.
I would also look on physical real estate as a wealth sink or store which although potentially volatile can be reliable on a long term basis to hold value as long as you can sell at your leisure.
DJN
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Lauretta » Wed Sep 11, 2019 2:01 am

DJN wrote:
Tue Sep 10, 2019 8:50 pm
Lauretta wrote:
Tue Sep 10, 2019 3:07 pm
DJN wrote:
Tue Sep 10, 2019 10:11 am
Lauretta wrote:
Tue Sep 10, 2019 9:46 am

- she speculates that the yield will get even more negative, so the bonds will appreciate in value and she can sell them at a higher price (a special case of this would be the flight to safety scenario in case of a stock market crisis, and te rebalancing bonus one gets from selling bonds and buying stocks when their price has fallen)
- she is crazy
Hi,
its an interesting problem that you have posed.
What does she do if she has €5,000,000 to invest safely?
DJN
she puts them in a good bank, too large to fail, if she needs them within a few years. If her time horizon is 10 years or more, I would say stocks are the safest bet.
Hi,
thanks for replying, I wouldn't consider this approach to safety to be optimal. She would need (in a European context and I am sure it is the same in many other jurisdictions), 50 separate bank accounts, and that is 50 separate bank entities considering the EU bank guarantee system. The question of the safety of your money in banks is not theoretical considering the outcome of the Cyprus bank haircuts. And all that for next to zero returns.
I think that stocks as part of an investment approach wouldn't in my case be part of my safer side.
I don't consider REITs or commodities to be on the safe side. Maybe others think differently.

Therefore in a low interest environment the investor looks like they have to carefully consider the potential returns versus the risks of cash, cash equivalents and fixed income.
I would also look on physical real estate as a wealth sink or store which although potentially volatile can be reliable on a long term basis to hold value as long as you can sell at your leisure.
DJN
Thanks for your feedback.
Concerning the EU bank guarantee system I honestly haven't thought about how effective it is; I remember a banker telling me that yes there was this rule; however if it really came to that (i.e. big banks failing) there would not be enough funds to enforce this regulation anyway. But perhaps he was just saying this to dissuade me from taking money out of his bank (the amount beyond the garanteed sum).
Concerning real estate I am not confident about it being a store of value. In Italy it has been a disaster in the last 10 years or so. In the Uk I was surprised that prices continued to go up after the referendum but who knows what will happen in the near future. I mean, if you have a globally diversified stock portfolio I think that even though it's more volatile, it will in the long term be less risky than having your investment concentrated in one or a few countries which might fare terribly in real estate.
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Lauretta » Wed Sep 11, 2019 2:17 am

DJN wrote:
Tue Sep 10, 2019 8:50 pm
Lauretta wrote:
Tue Sep 10, 2019 3:07 pm
DJN wrote:
Tue Sep 10, 2019 10:11 am
Lauretta wrote:
Tue Sep 10, 2019 9:46 am

- she speculates that the yield will get even more negative, so the bonds will appreciate in value and she can sell them at a higher price (a special case of this would be the flight to safety scenario in case of a stock market crisis, and te rebalancing bonus one gets from selling bonds and buying stocks when their price has fallen)
- she is crazy
Hi,
its an interesting problem that you have posed.
What does she do if she has €5,000,000 to invest safely?
DJN
she puts them in a good bank, too large to fail, if she needs them within a few years. If her time horizon is 10 years or more, I would say stocks are the safest bet.
Hi,
thanks for replying, I wouldn't consider this approach to safety to be optimal. She would need (in a European context and I am sure it is the same in many other jurisdictions), 50 separate bank accounts, and that is 50 separate bank entities considering the EU bank guarantee system. The question of the safety of your money in banks is not theoretical considering the outcome of the Cyprus bank haircuts. And all that for next to zero returns.
I think that stocks as part of an investment approach wouldn't in my case be part of my safer side.
I don't consider REITs or commodities to be on the safe side. Maybe others think differently.

Therefore in a low interest environment the investor looks like they have to carefully consider the potential returns versus the risks of cash, cash equivalents and fixed income.
I would also look on physical real estate as a wealth sink or store which although potentially volatile can be reliable on a long term basis to hold value as long as you can sell at your leisure.
DJN
It also depends on where one is based I think and which currency one's savings are in. I will retire in Italy so I'll be needing Euros, but I was chatting to some people in the UK where I am at present and they have sums of the order of M£ at an institution called NS&I which apparently is very safe.
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by buylowbuyhigh » Wed Sep 11, 2019 4:16 am

Lauretta wrote:
Tue Sep 10, 2019 9:46 am

I am not playing verbal games really. It seems to me that if an individual investor has the choice between a safe current account yielding say 0% and AAA 10 year bonds yielding -0.53% and she chooses the latter, she can do it only for one these 2 reasons:
- she speculates that the yield will get even more negative, so the bonds will appreciate in value and she can sell them at a higher price (a special case of this would be the flight to safety scenario in case of a stock market crisis, and te rebalancing bonus one gets from selling bonds and buying stocks when their price has fallen)
- she is crazy
Obvious reason missing is reinvestment risk as mentioned above. If negative interest already exists in a bank account, your 0% yielding account could start yielding -1% before year 5 and lose more in the end than the -0.53% 10-year bond. You should at least look at longer term CDs. In Finland we had an online savings account paying 1.75% that dropped to 0.75% with a one month notice last year.

A safe alternative on a personal level would also be to reduce liabilities in the future by moving consumption to an earlier time and "investing" part of the fixed income assets to personal items that reduce expenses in the long run. I'm thinking paying off mortgage, insurance products, upcoming renovations early, paying more for a more reliable car, solar panels, residential wind turbines, geothermal heating etc. You could also combine this with gold by buying a bunch of jewelry now and waiting x years before gifting or starting to use them :D

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Valuethinker » Wed Sep 11, 2019 4:32 am

Lauretta wrote:
Wed Sep 11, 2019 2:17 am

It also depends on where one is based I think and which currency one's savings are in. I will retire in Italy so I'll be needing Euros, but I was chatting to some people in the UK where I am at present and they have sums of the order of M£ at an institution called NS&I which apparently is very safe.
National Savings & Investment is a government agency, so effectively these are UK government securities.

It is as safe as the UK government.

For the moment, despite the politics, the market views the UK as safer than, say, the Italian government. On the assumption that the Bank of England can always print money, and in 300 years of bond issuance we have not defaulted (yet).

Mind you in our big defaults in the 1300s, it was Luccan wool merchants (the Bardi & the Frescobaldi, from memory) who got legged over by the defaulting English kinds.

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Valuethinker » Wed Sep 11, 2019 4:37 am

Lauretta wrote:
Tue Sep 10, 2019 3:07 pm

she puts them in a good bank, too large to fail, if she needs them within a few years. If her time horizon is 10 years or more, I would say stocks are the safest bet.
The backstop of a "too big to fail" bank is the national government - even in the Eurozone.

So your 5m EUR investor has to take her chances with whichever national banking system she chooses to deposit with. Now you know why large depositors accept negative interest rates on Swiss bank accounts.

So in the case of Ireland the government guaranteed the banks deposits & bonds. Crippling the Irish state and inflicting brutal pain on the Irish people (because of religious issues, suicide is probably underreported in Ireland, as it is in Greece (you cannot be buried in a Greek Orthodox Churchyard if you are a suicide) - but suicide rates undoubtedly rose).

In the case of Iceland, the government nationalized the banks, but inflicted pain on those who had lent the banks money in the pursuit of higher rates of interest - depositors and bond holders. And imposed currency controls to stop capital flight.

That latter was reviled before 1998, but is now part of the standard IMF toolkit for a country in trouble.

It's worth noting that even in the Greece case, they have only just removed controls on the amount you could withdraw. So even with a single currency, exchange controls of a sort are possible.

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Valuethinker » Wed Sep 11, 2019 4:45 am

not4me wrote:
Tue Sep 10, 2019 12:16 pm


I've been surprised by the number on the board who shrug off the effect that wide spread, long lasting negative interest rates might have. Won't take the chance of highjacking thread to say much, other than I think it might affect stocks as well as bonds.

We have the example of Japan.

But remember that nominal interest rates (risk free) can be negative BUT:

- risk adjusted rates, ie what private entities borrow at (or, say, municipal governments), can be positive

- real rates (risk free) can in any case be positive if there are expectations of deflation

In the end you get back to John Maynard Keynes, who wrote his great works in answer to precisely this problem.

If there is an excess of loanable funds, and an insufficiency of positive return investments with which to make such investments, then the money just sits, earning a zero or negative return. This is where China seems to have been in the last 10 years - too much savings, exchange controls and a balance of payments surplus, nowhere to invest the money. Hence the creation of empty cities.

And note there is a carry trade with Vancouver housing prices. A rental yield of 1-2% (or 0%) in Vancouver does not look so bad if your after-inflation interest rate in China is negative (and you can find a way to get around exchange controls).

I agree re the impact on stocks. For the time being, US companies in particular have retired huge amounts of equity, buoying stock prices. But the bond & stock markets cannot stay separated in valuation terms forever. Low returns, barring inflation, in one market implies low future returns in the other.

Recency effect predominates, that message cannot get through. But if you are trained to think in general equilibrium terms (I am not claiming to be a graduate-trained economist) then there's something wrong in the picture.

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Valuethinker » Wed Sep 11, 2019 5:04 am

The idea that gold can substitute for low credit risk government bonds in a portfolio is not one that should be entertained.

Gold is a highly price volatile asset that *might* offer insurance in the case of a financial or societal calamity.

Bonds offer stability in either nominal (or real) purchasing power. Negative yields on bonds right now merely tell you just how big the surplus of savings is out there, relative to actual desire by companies & consumers & governments to spend money. A nearly fixed nominal or real yield is, even if negative, better potentially than a highly volatile asset.

The interest rate suggests deflation is in prospect (signal and noise - you also have Quantitative Easing going on) and that generally is not held to be good for gold, which is thought to prosper with rising inflationary expectations.

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by DJN » Wed Sep 11, 2019 5:12 am

Valuethinker wrote:
Wed Sep 11, 2019 4:32 am
Lauretta wrote:
Wed Sep 11, 2019 2:17 am

It also depends on where one is based I think and which currency one's savings are in. I will retire in Italy so I'll be needing Euros, but I was chatting to some people in the UK where I am at present and they have sums of the order of M£ at an institution called NS&I which apparently is very safe.
National Savings & Investment is a government agency, so effectively these are UK government securities.
It is as safe as the UK government.
HI,
Just to round out the National Savings possibility which is a very useful tool for UK investors the maximum investible amount is £1,000,000. So the lady would be ok to park most of her money there safely whatever about returns (which are not so bad really for capital preservation).

I am interested in the split of the safe side especially in the context of the current debates about interest levels and the like.
I have come to the conclusion that your safe side (bonds) and I am excluding emergency funds and real estate from the following could be made up of:
- Bonds
- Cash equivalents
- Cash
The bonds portion might look like a large tranche of a global aggregate ETF hedged back in the lady's case to Euros. (Biggest investment amount).
A selection of bond ETFs that cover:
- Short term bonds in your home currency. (Both government and maybe aggregate)
- TIPS ETF in dollars if you have some dollars hanging about! Otherwise hedged.
- Longer term bonds? (highest quality)
- Inflation linked bonds.
A cash equivalent or ultra short term ETF:
- such as ERNE (ISIN: IE00BCRY6557)
Local government "bonds" like the National Savings if these are available and fully government guaranteed in your jurisdiction.
Fixed term cash deposit accounts in a few different durations to suit your needs.
Shame about the complexity but maybe simplify to individual taste?
DJN
Yah shure

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Lauretta » Wed Sep 11, 2019 5:48 am

buylowbuyhigh wrote:
Wed Sep 11, 2019 4:16 am
You could also combine this with gold by buying a bunch of jewelry now and waiting x years before gifting or starting to use them :D
that's an idea I hadn't thought of that :D
When everyone is thinking the same, no one is thinking at all

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Valuethinker » Wed Sep 11, 2019 5:59 am

Lauretta wrote:
Wed Sep 11, 2019 5:48 am
buylowbuyhigh wrote:
Wed Sep 11, 2019 4:16 am
You could also combine this with gold by buying a bunch of jewelry now and waiting x years before gifting or starting to use them :D
that's an idea I hadn't thought of that :D
About 5-7 miles from where I live in London, there has been a wave of break-ins to steal jewelry. Using cars or motorbikes to knock down front doors. Sometimes the home owners are home.

The presumption is that the ethnic groups in those areas have a lot of jewelry at home.

We also had a wave of watch thefts - see the person with an expensive designer watch, follow them home, rob them.

It's worth reading Elmore Leonard "Out of Sight" or seeing the (excellent) J Lopez-George Clooney (Dir Steven Soderbergh) film Out of Sight. Does not make one want to keep stuff in the home safe.
Karen Sisco: You think I'll shoot you?
Jack Foley: If you don't someone else will.
Karen Sisco: Put the gun down.
Jack Foley: I'm not going back.
Karen Sisco: Jack please don't make me do this. Put the gun down.
Jack Foley: No more timeouts.

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Lauretta » Wed Sep 11, 2019 8:14 am

Valuethinker wrote:
Wed Sep 11, 2019 5:04 am


The interest rate suggests deflation is in prospect (signal and noise - you also have Quantitative Easing going on) and that generally is not held to be good for gold, which is thought to prosper with rising inflationary expectations.
If my memory serves me well (I haven't looked at the economic literature for many months now) Prof Shiller showed somewhere that predictions of inflation/deflation and of the way interest rates will move are usually not better than random guesses.
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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by Hector » Wed Sep 11, 2019 10:23 am

DJN wrote:
Tue Sep 10, 2019 10:11 am
Lauretta wrote:
Tue Sep 10, 2019 9:46 am

I am not playing verbal games really. It seems to me that if an individual investor has the choice between a safe current account yielding say 0% and AAA 10 year bonds yielding -0.53% and she chooses the latter, she can do it only for one these 2 reasons:
- she speculates that the yield will get even more negative, so the bonds will appreciate in value and she can sell them at a higher price (a special case of this would be the flight to safety scenario in case of a stock market crisis, and te rebalancing bonus one gets from selling bonds and buying stocks when their price has fallen)
- she is crazy
Hi,
its an interesting problem that you have posed.
What does she do if she has €5,000,000 to invest safely?
DJN
Most individuals are not fortunate to have this problem.

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Re: Is investment in Eurozone bonds really speculation? And is gold likely to be a better hedge in case of a disaster?

Post by not4me » Wed Sep 11, 2019 2:28 pm

Valuethinker wrote:
Wed Sep 11, 2019 4:45 am
not4me wrote:
Tue Sep 10, 2019 12:16 pm


I've been surprised by the number on the board who shrug off the effect that wide spread, long lasting negative interest rates might have. Won't take the chance of highjacking thread to say much, other than I think it might affect stocks as well as bonds.

We have the example of Japan.

But remember that nominal interest rates (risk free) can be negative BUT:

- risk adjusted rates, ie what private entities borrow at (or, say, municipal governments), can be positive

- real rates (risk free) can in any case be positive if there are expectations of deflation

In the end you get back to John Maynard Keynes, who wrote his great works in answer to precisely this problem.

If there is an excess of loanable funds, and an insufficiency of positive return investments with which to make such investments, then the money just sits, earning a zero or negative return. This is where China seems to have been in the last 10 years - too much savings, exchange controls and a balance of payments surplus, nowhere to invest the money. Hence the creation of empty cities.

And note there is a carry trade with Vancouver housing prices. A rental yield of 1-2% (or 0%) in Vancouver does not look so bad if your after-inflation interest rate in China is negative (and you can find a way to get around exchange controls).

I agree re the impact on stocks. For the time being, US companies in particular have retired huge amounts of equity, buoying stock prices. But the bond & stock markets cannot stay separated in valuation terms forever. Low returns, barring inflation, in one market implies low future returns in the other.

Recency effect predominates, that message cannot get through. But if you are trained to think in general equilibrium terms (I am not claiming to be a graduate-trained economist) then there's something wrong in the picture.
Well, I'm quite confident you are closer to being a graduate-trained economist than I; I'm less confident in my understanding of how negative rates will affect personal investors. To be honest, I wasn't completely sure how much we were in agreement & so thought I'd elaborate a bit on what I said.

1sr, to me there is a clear difference between "limited" occurrences of negative rates & all major economies being negative (all points on yield curve or just short end, etc....). I'll go further & say the US is also different for the reason that it is the largest economy & the US dollar acts as a reserve currency -- whichever country is in that position will have (as I understand it) different options than others.

I don't think either of us are trying to be comprehensive. I find many discussion look at this either from being a borrower or a lender; with the assumption the other side is always there & accomodating. I highlighted a few of your assumptions showing how it may work,,,,for example, an excess of loanable funds...I'm not sure that is true and especially if one assumes the rate is palatable to both lender & borrower.

Perhaps I don't fully understand the example of Japan. I know they are in a situation in which Japanese investors own more non-Japanese assets than non-Japanese investors own Japanese assets. They are an export based economy. I believe the Swiss are in the same position. Does that mean what works there would work in ALL other countries? I've seen some (don't recall you being one) that say Sweden has mortgages with negative rates "so we know that will work"....except they don't say these are usually 3 month floating rate mortgages. Does that lesson carry forward to 30 year fixed???? You mentioned the carry trade...& again Japanese yen could be held up as an example. But everyone can't have the weakest currency (not saying yen is weakest...but not strongest either). I also believe I recall that Japan's central bank was largest stockholder of many major companies & approaching owning half the bond market? (that last really would need to be fact checked -- going from sometimes faulty memory...)

So, I see ways to get to having negative rates -- assumptions of 'eternal' central bank intervention while having expectation of deflation with excess loanable funds and carry trade for all....and how robust is this investing environment? Still not getting into how banks, insurance companies fare in a perma-negative world

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