Gilt (Guilt) is Risky!
When all of us feel that there is no risk, risk happens. Like all of us were sure that the markets will go from 21000 to 25000 it went to 9000.
Market is a great humiliator -and exactly when you feel you have understood it all, it slaps you. At times it hits you in the solar plexus. Let us look at the GUARANTEED RISKS in the Gilt securities – US gilt specifically.
1. Guaranteed NEGATIVE returns: If the current yield on the gilt is 1.98% p.a. in a country with inflation of about 2 (my expectation is you will see 4-5 % also) you are guaranteed to get a HUGE negative return post tax.
2. Guaranteed PANIC: If I told you 25% of the floating stock is held by ONE person in any stock, it should scare the shit out of you. China holds very close to 25% of the US debt. Even a rumour of ‘China was talking to its broker’ can cause prices to dramatically rock.
3. Guaranteed Mark to Market Loss: Taking off from point no. 1 – as and when the Fed increases rates of interest (holding it down caused the earlier market crash did it not?) to say 4% – you will see a 50% fall in your 30 year US Gilt. Vow! MTM losses in Gilt? Have fun.
Now let us look at the non guaranteed losses:
1. What happens if China and other countries refuse to buy US bonds? Remember an emerging economy like India may not consider another emerging economy like Brazil to be a high risk. So if some emerging economies decide to diversify their portfolio, people may not bite Uncle Sam’s offer.
2. Uncle Sam only knows to borrow and spend (how GDP is calculated is a fraud anyway)..so his ability to repay is a suspect. The deficit will ensure that inflation is high. So high deficit, low growth, – another disaster waiting to happen.
So if foreign governments stop buying US bonds, inflation is high, US exports get expensive, the world does not fight enough (the 3 big industries are arms n ammunition, pharma and sin!) – there will be HUGE risk in so called gilt.
Are we buying the GUILT of the Americans? Watch out, Gilt is Risky. Obama has no magic wand.
I enrolled for my Bcom in 1977, and it has taken me 34 years to know what is a fictitious asset – US Gilt Bonds by the naked emperor should now be classified as ‘Fictitious asset’. The belief that it is an asset is a fiction…Ganpati Bappa Morya
Jagadees
what if deflation happens? In that case bonds would be the best investment to have, isn’t it? For the inflation to materialize, the animal spirits need to be kindled. But given current anemic growth, no matter how hard fed tries to lure the people with cheap money, people not going to bite it. Until the debt in the system marked down to comfortable level, my bet is on deflationary pressure. what you say?
Regards
JS
Simple reason why china will continue hoarding US treasuries: it ensures that the biggest consumer of chinese exports remains intact. And lets also accept one simple fact: US treasuries are the world’s safe-haven, now whether the whole thing is a ponzi scheme or not is a different question
pravin
safe haven .really? the US dollar has lost 98% of it s value in the last 100 years.how safe is that
Ravinder Makhaik
Subra you paint a very scary and dark world out there, knowing that all the possibilities expressed are very plausible.
But nobody messes around with Joe.
You for sure know what is happening to S&P.
China is building a strong muscle and will definitely rock the American boat.
But US is a democracy and democracies do show resilience even in the face of adversity.
An Anna Hazare movement in China would have caused another Tinnamen Square.
In a democracy it has provided an opportunity for the government to clean up some of the mess around.