This article is another in my series of articles about common mistakes that
the average individual investor makes in their overall portfolio allocation. For
these articles, I drew from the 20 years of experience I had at Charles Schwab
in dealing with clients face-to-face and helping them meet their financial
goals.
In previous articles, I wrote about two areas which were dramatically
under-represented in most clients portfolios – commodities and international
securities. There is a third area which I found to also be under-represented and
that is fixed income investments. Many clients had little or no
exposure to fixed income investments.
The most difficult task I believe for allocating funds to fixed income
investments is to choose what type of bonds an investor should buy from the
myriad of choices available. Obviously, an investor's specific financial
circumstances will dictate the final choices. In this article, I will choose an
area of the fixed income world that I believe most investors should currently
allocate funds toward.
TREASURY MARKET FANTASY
Right now the Treasury market is enjoying it's own titillating little
fantasy. It is the ultimate dream of everyone in the bond world. It is nirvana
for bond market junkies. It is the D-word – deflation.
The media and financial authorities have fallen in love with the word
deflation. The dim bulbs that appear on CNBC air are constantly talking
about deflation. This fact alone sets off alarm bells in my head. When
is the last time that the conventional wisdom as presented on CNBC ever came
true? In fact, when is the first time?
I believe that all of this deflation talk is simply a way for the
financial authorities to prepare the public for incredibly massive government
spending over the next several years. It simply helps to justify even more
massive government bailouts and spending programs. Look at the amount already
spent on the “bailout” - nearly $8 trillion. I fully expect that figure to rise
by tenfold or more.
I notice that CNBC conveniently seems to have forgotten about how the
Treasury market crazies got it wrong in 2003. There was a huge
deflation scare at that time too, although on a smaller scale than the
current nuttiness. What followed that deflation scare? One of the most
massive upward moves in history of the price of many commodities.
Right now, the Treasury market crazies have priced in massive deflation that
will occur in the United States for the next decade or longer. They have also
priced in corporate default rates of 21%! And this is in the face of massive
printing of money and multi-trillion dollar annual deficits.
There is a major headwind that the Treasury market crazies will soon be
facing.
