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Bond Funds and the Liquidity Trap
May 20, 2003 5:59 AM   Subscribe


 
Luckily, I have all my funds in an old mason jar under the bed. Shhhh, don't tell anyone.
posted by caddis at 7:11 AM on May 20, 2003


If we really are on the brink of a deflationary economy, then loaning someone money at 0% interest may turn out to be a good deal.
posted by Nelson at 7:17 AM on May 20, 2003


Oh MAN!

I'm not a "sky is falling" kind of guy (well, okay, I am, shut up) but this is worrisome.

Isn't it true that when the markets are bad, people are told to stock up on bonds? What does it mean when the markets are bad, but don't stock up on bonds they're for suckers and people who don't pay attention to the bottom line?

This is a crazy time we're living in, yo. Interest rates at a 40 year low? I guarantee you that expenses are at an all time high? How can an investor make any money? It seems like there's the crux of the situation.

As I digress more and more, let me mention two things:

1. I remember during the Enron debacle how some Wall Street sage said that putting more rules in place would damage the economy, because investors LOOK for sweetheart deals, etc, and if there were laws in place preventing that, well, investment would suffer. With this weird interest rate situation, I wonder what that means for sweetheart deals. Are they even possible? It seems like we're going to have a good illustration of what happens to an economy when investors can't get special treatment, heh.

2. My step-father manages a company. When he talks to some friends of his who are millionaire investors, they want to be able to get 20% per year out of whatever company they invest in (as venture capital). That seems absolutely crazy after reading these two articles.
posted by taumeson at 7:37 AM on May 20, 2003


taumeson: Isn't it true that when the markets are bad, people are told to stock up on bonds? What does it mean when the markets are bad, but don't stock up on bonds they're for suckers and people who don't pay attention to the bottom line?

When the (stock) markets are bad, you're supposed to buy stocks. Buy low, sell high. You should buy bonds before the stock market turns sour. Then, as the Fed cuts rates to help the economy (and the stock markets) recover, your bonds grow more valuable.

When bond yields are low, you have two problems: The risk of losing money when interest rates rise, and very little compensation for taking this risk. While I don't see rates climbing, I could be wrong, and earning a percent or two more than cash isn't worth the risk that my intermediate bond fund could plummet 10-15% if rates go up a couple of points.

And I'm sure there are plenty of ventures that will return 20%. The trick is sorting them from the ventures that never return a thing.

Last, comparing expenses to interest rates isn't really useful. You could compare interest rates to other rates, like the rate of inflation, or the rate at which your landlord increases rent. But anything else is apples to oranges.
posted by trharlan at 7:47 AM on May 20, 2003


Does this explain the deluge of 0% credit card offers I keep getting?



Meanwhile, Falling Producer Prices Stoke Fears of Deflation [RUETERS, May, 2003]

The headline of this story was changed since I archived it. Now, it's "Underlying Inflation Flat for a 2nd Month" Click on the link to see what I mean. here is a JPG of the OLD headline (considered too disturbing, I guess)



Along the same lines,

Another Bush, another jobless recovery [The Economist, May 8 2003]
posted by troutfishing at 7:54 AM on May 20, 2003


While I don't see rates climbing, I could be wrong, and earning a percent or two more than cash isn't worth the risk that my intermediate bond fund could plummet 10-15% if rates go up a couple of points.

This is a sage point worth repeating, so I'm repeating it on behalf of trharlan.

Actually, the phrase should be when rates go up a couple of points.
posted by Holden at 7:57 AM on May 20, 2003


Because we're looking to move over the next year or three, we recently refinanced our mortgage, going from 7% fixed to 3.5% adjustable. Sweet!!!! yay for low rates
posted by luser at 8:06 AM on May 20, 2003




caddis:

> Luckily, I have all my funds in an old mason jar under the bed.

If the Fed plans on creating any money soon they should give it to me. I promise to spend like a maniac. Do not, repeat, do not give it to me buddy caddis, who will just sock it away in a mason jar. Likwidity Twap!


taumeson:

> It seems like we're going to have a good illustration of
> what happens to an economy when investors can't get
> special treatment, heh.

And is that not, as Martha Stewart would say, a Good Thing?

> they want to be able to get 20% per year out of
> whatever company they invest in (as venture capital).
> That seems absolutely crazy after reading these two
> articles.

Pssst. Dilithium mining on the moon. Bonds offer 70%.
posted by jfuller at 9:46 AM on May 20, 2003


I'm pretty sure the VCs want to get 20% a year ROI but that's over the entire portfolio and not each company. Several homeruns make up for the obligatory 7-9 dogs.
posted by billsaysthis at 3:32 PM on May 20, 2003


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