This is not restricted to US or India, it is a world wide phenomenon, but let us take a hypothetical case of a nice honest, hardworking lower – middle class American.

He started life long ago and lived in the usual American style. Let us say he took a huge mortgage and bought a big nice house for himself, his wife and his 3 kids.

Kids grew up, got educated, are not able to get a job. Did you know that for the job of an Air hostess, there were 100,000 applicants in an American airline? There were 1000 vacancies. Applicants included lawyers, doctors, graduates, etc.

So the educated kids are finding it difficult to find a job. His house has gone down in value and his wife has lost her job.

Children who have completed their education AND NOT FINDING jobs are asking Dad for support.

His portfolio in equities has been performing so badly that he has not seen he impact of ‘Dollar Cost Averaging’.

Real estate, gold and equities are a no no for him. He has burnt his hands in all 3 asset classes. Goddamn asset allocation was on leave?

Now that he had burnt his hands in equity and real estate, he turned to the ‘safest’ asset class viz., Gilt – the American Government’s debt.

Fantastic, over the past 3 years, HE HAS GOT A NEGATIVE REAL RETURN. In fact his banker is asking him to invest more money in Gilt mutual funds.

Good idea? No. Not at all. When inflation is about 5%p.a. keeping his money in Gilt at 1.5% MAKES NO SENSE. When interest rates go up – it is not whether, it is SURELY going to reduce the value of his bonds…

With today’s low Treasury rates (giving a NEGATIVE RETURN already) , Bernstein says bond investors are looking at “an extreme low return/high risk proposition.”

One of the hardest things in investing is making a reasonable, disciplined decision and then being wrong for years after, says Bernstein. “Such was the case for sane equity investors in the ’90s, who watched in horror as their uninformed neighbors got rich — temporarily — in tech stocks, while they sat in fuddy-duddy value stocks or cash or bonds,” he says. “I think we’re in a similar period now with bonds.”

Bond interest rates are bound to go up…:-)


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  1. Subra Sir,

    Conversely would that mean the Indian Bonds are expected to go up & would make good profits, especially Medium to long maturity ones….

  2. I know someone who has lost 50% of her retirement money, had to scale down her retirement plans, and will not touch anything but US treasury bonds.
    Even with the social security, things are v tough.

  3. Subra,
    The US Federal Reserve tried to raise interest rates post QE2 (the Twist version), but failed badly as there was severe opposition from all sides. Hence the new “perpetual” QE3 was launched amid much fanfare. US long term interest rates are destined to remain depressed for a very long time to come (lost decade?) a-la Japan.

    Meanwhile, since the US government continues to operate on a deficit basis year after year, you can be rest assured that there will be inflation. Now where will the inflation show up? It will definitely show up in all essential goods/services. Food, Gas, Utilities, Healthcare, Education, Govt services, traffic penalties, local taxes etc will see 5+% inflation in the coming years in the US. Non-essential goods/services will see severe pricing collapse as households and businesses further cutback on discretionary spending. Similarly, essential jobs where the employee is not easily replaceable (or Govt Jobs) will see healthy raises but in other areas (burger flipping), the job market will be in the dumps.

    And amid all this, because the US Dollar is the world’s reserve currency, and India is now totally dependent on the US for service jobs/export orders, expect Indian rupee to perform abysmally against the US dollar. Every 5% inflation in the US will translate into 15%+ inflation in India. RBI will not only be unable to reduce interest rates, it may even be forced to raise it as inflation reaches and remains stubbornly in double digits.

  4. on the other hand,instead of listening to the gubmint and alleged free market lovers george bush the dumber and alan ‘exuberant’ greenspan,if they amricuns had bought gold which those crazy goldbugs were peddling,they would be sitting quite purty by now

  5. “The US Federal Reserve tried to raise interest rates post QE2 “. um,by no means. they were trying to depress rates and not increase them. it is their official policy to have lower than imagined rates for as far as the eye can see.
    this is is like turning on the green signals everywhere when the highway has collapsed just a few kilometers away

  6. Hi Subra,

    //over the past 3 years, HE HAS GOT A NEGATIVE REAL RETURN

    I guess this is the best decision by the investor, as all his other investments depreciated so much and he chose to go to Bonds where the real return is -3.5% (The highest in his point of view 🙂

    You also say,
    //Good idea? No. Not at all. When inflation is about 5%p.a. keeping his money in Gilt at 1.5% MAKES NO SENSE

    After burning his hands in Real estate & equities, what else is his option? I think he’s forced to think Bonds, isn’t it?

  7. Why should an investor crib for negative real returns? It is part of economy. He was not cribbing when stocks were giving 12% of real returns. 🙂
    To be candid, negative real return is a norm than exception. It is only for a small duration for which asset class really zooms. For example gold from 2008 to 2010. Otherwise it just keeps giving 1-2% negative real return year over year.

  8. For example gold from 2008 to 2010 . uh uh. more gold hate?
    by that token all of the stock market return happened only during a few weeks time.
    infact thre was a wonderful study done on the S&P in the US.if one took out the returns one day prior to any major announcement by the US FED from 1987 to 2010, yearly returns were a measly 2%. so all returns went to insiders who knew what the fed was upto -goosing the market on their whims.

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