Get rid of your bonds

I am reading the book In Pursuit of the Perfect Portfolio. I continue to be amazed at supposedly smart guys investing in bonds and recommending bonds. I am now reading the late Jack Bogle (Vanguard) chapter. Even he owned bonds.

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He even recommends that old chestnut that the percentage of your savings that is in bonds should equal your age. No. That percentage should always be zero no matter your age.

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When there is inflation, you must look at the real (adjusted for inflation) yield. When the nominal (the interest rate written on the bond) bond yield is less than the inflation rate, you are LOSING purchasing power. That’s nuts.

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Several types of bonds purport to be indexed to protect against inflation. The problem is they adjust so slowly that they are the equivalent of the abortion clinic with a ten-month waiting list.

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And in the event of very high inflation like hyperinflation or prolonged double-digit, the doctrine of impossibility will permit the government to default on the indexation promise. Where in the name of God is the government going to get all the money to give you to make you whole in terms of purchasing power after, say, 1,000% inflation?

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In the event of hyperinflation, USD-denominated bonds become worthless. Note I did NOT say “worth less.” Worthless.

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Shame on every financial advisor who recommends bonds.

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You CAN protect yourself from inflation using other instant-adjust-to-inflation assets like life estates and being a borrower on a H.E.C.M. Also by investing in business inventory, real estate, equipment, long-shelf food. I call them in-kind annuities because they cut out the recklessly risky cash middleman aspect of USD-denominated assets like cash and bonds.

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Government bonds worked in the Great Depression. That is because the debt-to-GDP ratio of the US government when FDR was inaugurated was 17%, not the current 126%.

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And because the Great Depression was deflation, the opposite of inflation. In the Great Depression real estate and stocks fell 90%. By definition that meant that the purchasing power of the USD went up.

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When inflation was invented—in 400BC—bonds should have become obsolete.

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By the way, if you are the issuer of the bonds—the borrower—bonds like mortgages are great to OWE even though horrible to OWN. If you own fixed-interest-rate mortgaged assets when high or hyperinflation hits, you literally make a real (adjusted for inflation) profit as a consequence.

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Anyone who puts other people’s money into bonds ought to be sued or prosecuted. Their defense will be that bonds have long been purchased by hundreds of millions of people.

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Irrelevant. They are lousy investments in inflation and wipeouts in hyperinflation. The defendants in such cases would be forced to admit that inflation risk exists and that it produces either a negative real return or a wipeout depending upon how high the inflation goes. Bonds are utterly naked against inflation risk.

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US pennies and nickels are NOT exposed to either inflation (because of their melt value) or deflation (because of their face value) risk, yet are quite liquid.