June 11, 2012 at 13:26 PM EDT
Get Out of Bonds!
megaphone Shakespeare wrote in Hamlet, “Neither a borrower nor a lender be.” With long-term rates repressed artificially by the Federal Reserve to historically low levels, I want to modify this phrase to “Neither a lender but a borrower be.” Clearly a bubble has formed as conservative and risk adverse capital has fled to the “safety” of US Treasury Bonds. The decision for bonds is not whether to exit the market, but when.

Relative tickers include Federated Investors (NYSE: FII), Barclay's (NYSE: BCS), T. Rowe Price (Nasdaq: TROW), State Street (NYSE: STT), BlackRock (NYSE: BLK) and J.P. Morgan Chase (NYSE: JPM).

Sell Bonds

Arizona real estate I have had the privilege of interviewing Charles Nenner when in mid- 2011 he forecast the bottoming of the CPI in April 2012 and the bottoming of the PPI in October 2012, heralding the end of the deflationary cycle of 30 years which began in the Volcker years of 1981-1982. The 1975-1979 timeframe exhibited the final stages of inflation with a “blow-off” era of double-digit inflation. Perhaps 2012 will exhibit the final deflationary dip this summer. According to Charles Nenner, in late 2012 the inflationary cycle starts again, and will be active for the next 30 years, when bond rates are so low there is very little room left to drop lower; the path of least resistance is up. Charles Nenner, in recent interviews, has again reiterated his call that long-term bonds will bottom this summer. This does not bode well for the stock and bond market. Furthermore, Lakshman Achuthan of The Economic Cycle Research Institute has again re-affirmed ECRI's call for an imminent recession, coinciding with the regularly published concerns of our Editor-in-Chief, Markos Kaminis; this also does not bode well for stocks. Typically, a recession kills inflation, which by combining both forecasts would indicate more immediate deflation and a slow building into an extended inflationary period. Interestingly, the array of ECRI indicators shows an uptick in the Housing Index.

If bond rates are bottoming and inflation is beginning, asset allocation will become paramount to protecting and growing wealth. The onset of a recession should drive rates down; an attempt by the Federal Reserve to stimulate the economy once again with QE3 may drive rates lower yet, for a very short-term. This window presents an enormous opportunity, perhaps a generational buying opportunity to purchase Real Estate at still discounted pricing to capture historically repressed and artificially low long-term rates; it’s an irresistible package. Mortgages in the US are typically obtained with an interest rate fixed for the entire length of the loan and amortized fully over a 15 or 30 year term. This will be an enormous advantage to a family or an investor in the coming years should rates return to 5% to 7% or higher.

Initially, should the US enter a recession, the cash flow generated by the rental income would mitigate reduced earnings from stock dividends and any bonds still held. A recession would reduce new construction and further exacerbate a tightening housing market, balancing the rental market between declining personal income from a weakening job market and the need for basic shelter. The income stream generated by rental property should remain viable, with possibly a little downward pressure; more so if the economic downturn turns vicious, but still producing a dependable monthly revenue source several basis points above US Treasury Rates.

There is a strong possibility we could endure a very vicious economic slowdown. As our chief here at Wall Street Greek has warned regularly will happen, and as Lakshman Achuthan has indicated in several of his interviews, an “event or black swan” can turn a mild recession into something worse. In order to protect one's wealth and future, personal debt costs need to be reduced, reserves need to be expanded to withstand a two-year slowdown, and any underwater or non-cash flowing properties need to be reviewed for liquidation via the short sale process to reduce the income and fiscal drag from these negative properties.

Qualified investors should start to position for the recovery that will certainly follow the slowdown, and accumulate quality properties that have the potential to grow in both value and increase revenue. A slowdown will bring properties held by weaker investors to the market, perhaps at very attractive pricing. Going forward, pricing may soften as higher mortgage rates depress affordability and dampen demand. The offset will be rising rents, as supply is further curtailed spiraling into shortages; higher rates brings higher mortgage and housing payments which evolves into higher rent. Currently, a package of both discounted pricing and historically low and repressed fixed mortgage rates present an appealing mixture. Further, the US Leading Home Index of ECRI has been trending positively against a back drop of declining indicators, forecasting a possible bottom in the devastated U.S. housing market. ECRI has a stellar record of forecasting inflection points and trends. As devastated as housing has been, it may be the safer asset to protect and grow wealth in the coming years.

With Treasury Bonds in a possible bubble, a prudent investor should consider capturing gains on a large portion of his fixed income portfolio. Furthermore, he should move capital into rental properties capable of maintaining current income and growing forward earnings, which is extremely important in a deflationary environment, but also important for hedging in an inflationary environment. Accumulating investment properties with dependable monthly income as well as offering potential for asset growth should be considered and reviewed with your adviser. The risk to a bond portfolio may soon be much, much, greater than ever anticipated. Thus, it’s time to get out of bonds.

Article should interest investors in SPDR Dow Jones Industrial Average (NYSE: DIA), SPDR S&P 500 (NYSE: SPY), PowerShares QQQ Trust (Nasdaq: QQQ), ProShares Short Dow 30 (NYSE: DOG), ProShares Ultra Short S&P 500 (NYSE: SDS), ProShares Ultra QQQ (NYSE: QLD), NYSE Euronext (NYSE: NYX), The NASDAQ OMX Group (Nasdaq: NDAQ), Intercontinental Exchange (NYSE: ICE), E*Trade Financial (Nasdaq: ETFC), Charles Schwab (Nasdaq: SCHW), Asset Acceptance Capital (Nasdaq: AACC), Affiliated Managers (NYSE: AMG), Ameriprise Financial (NYSE: AMP), TD Ameritrade (Nasdaq: AMTD), BGC Partners (Nasdaq: BGCP), Bank of New York Mellon (NYSE: BK), BlackRock (NYSE: BLK), CIT Group (NYSE: CIT), Calamos Asset Management (Nasdaq: CLMS), CME Group (NYSE: CME), Cohn & Steers (NYSE: CNS), Cowen Group (Nasdaq: COWN), Diamond Hill Investment (Nasdaq: DHIL), Dollar Financial (Nasdaq: DLLR), Duff & Phelps (Nasdaq: DUF), Encore Capital (Nasdaq: ECPG), Edelman Financial (Nasdaq: EF), Equifax (NYSE: EFX), Epoch (Nasdaq: EPHC), Evercore Partners (NYSE: EVR), EXCorp. (Nasdaq: EZPW), FBR Capital Markets (Nasdaq: FBCM), First Cash Financial (Nasdaq: FCFS), Federated Investors (NYSE: FII), First Marblehead (NYSE: FMD), Fidelity National Financial (NYSE: FNF), Financial Engines (Nasdaq: FNGN), FXCM (Nasdaq: FXCM), Gamco Investors (NYSE: GBL), GAIN Capital (Nasdaq: GCAP), Green Dot (Nasdaq: GDOT), GFI Group (Nasdaq: GFIG), Greenhill (NYSE: GHL), Gleacher (Nasdaq: GLCH), Goldman Sachs (NYSE: GS), Interactive Brokers (Nasdaq: IBKR), INTL FCStone (Nasdaq: INTL), Intersections (Nasdaq: INTX), Investment Technology (NYSE: ITG), Invesco (NYSE: IVZ), Jefferies (NYSE: JEF), JMP Group (NYSE: JMP), Janus Capital (NYSE: JNS), KBW (NYSE: KBW), Knight Capital (NYSE: KCG), Lazard (NYSE: LAZ), Legg Mason (NYSE: LM), LPL Investment (Nasdaq: LPLA), Ladenburg Thalmann (AMEX: LTS), Mastercard (NYSE: MA), Moody’s (NYSE: MCO), MF Global (NYSE: MF), Moneygram (NYSE: MGI), MarketAxess (Nasdaq: MKTX), Marlin Business Services (Nasdaq: MRLN), Morgan Stanley (NYSE: MS), MSCI (Nasdaq: MSCI), MGIC Investment (NYSE: MTG), NewStar Financial (Nasdaq: NEWS), National Financial Partners (NYSE: NFP), Nelnet (NYSE: NNI), Northern Trust (Nasdaq: NTRS), NetSpend (Nasdaq: NTSP), Ocwen Financial (NYSE: OCN), Oppenheimer (NYSE: OPY), optionsXpress (Nasdaq: OXPS), PICO (Nasdaq: PICO), Piper Jaffray (NYSE: PJC), PMI Group (NYSE: PMI), Penson Worldwide (Nasdaq: PNSN), Portfolio Recovery (Nasdaq: PRAA), Raymond James (NYSE: RJF), SEI Investments (Nasdaq: SEIC), Stifel Financial (NYSE: SF), Safeguard Scientifics (NYSE: SFE), State Street (NYSE: STT), SWS (NYSE: SWS), T. Rowe Price (Nasdaq: TROW), Visa (NYSE: V) and Virtus Investment Partners (Nasdaq: VRTS).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

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