Updated: Jul 23, 2019
A cruel surprise for Americans who hope for a comfortable retirement.
Our country is about to experience a cruel surprise. One hundred million Americans are depending on Index Funds and Corporate and Municipal Bonds to finance their retirement. Just about every pension fund in America, every 401K, and every investment account is full of these same Bonds and Index Funds.
All of us rely on them because they've made us the richest people on planet earth over the last 40 years. This amazing success is the problem!
Let me explain. Few investors alive today, were investing forty years ago.
It's natural for any investor whose experience began after 1980 to believe that any strategy that has worked consistently for the past forty years, will work forever.
You may be surprised to learn…
In the 20 years leading to 1980, investing in the stock market was a frustrating, losing proposition.
The Dow first hit 1000 in 1964, and despite massive inflation, the Dow was only at 700 in 1980 - a full 16 years later!
Corporate bonds also consistently lost money prior to 1980.
Smart investors avoided them like the plague!
Everything changed in 1980. At that time, 15% bond yields were shocking investors, and the economy was near collapse.
But starting in 1980, with the election of Ronald Reagan and the advent of Art Laffer’s Supply Side Economic Policy… Interest rates started to fall from double digits. Stock prices began to recover, starting at 700 on the Dow.
The economy, the bond market and the stock market were consistently kind to investors for the next 40 years. That’s right – 40 years.
Of course, markets fluctuate. It wasn’t a straight trip up.
But over that forty years, the Dow soared from 700 to 26,000.
Bond Interest rates fell from 15% all the way to near zero, and bonds were even more profitable than stocks.
Now every investor believes safe investing means bonds.
Instead of risking investment in companies, you lend them your money. You're paid interest twice a year, and your principle is repaid at maturity. What could go wrong?
So for 40 years corporate and municipal bonds have meant a safe harbor for investors.
In fact, we are all taught that the older you get, the more bonds you should own.
This is the greatest danger our economy faces today.
So now, we have a giant generation of Americans counting on investment grade corporate bonds and some equity investments in Index Funds to keep them alive for 20, 30, or 40 years in retirement. You, my listener, are probably a member of this large, growing group.
I’m not going to bore you with a lot of unnecessary detail, but understand that pension funds, quality bond funds and quality money managers are required to stick to investment grade bonds. No Junk.
To understand this, you have to know what junk means in bonds. It means below investment grade.
We all rely on rating agencies, Standard and Poors and Moody’s to rate the bonds.
Twenty years ago, we could rely on Triple A bonds. The highest grade.
Most of them have been downgraded over the years to a or triple B. Most managers now rely on Triple B bonds to fill their funds. They are still investment grade, w0 what’s the problem?
Well during the last ten years, with interest rates kept near zero, the companies we are talking about had incentive to borrow money and buy back stock. The amount of money they owe is huge compared to what they owed twenty or even ten years ago. Huge.
They have been downgraded to triple B, but they are still investment grade.
Now what happens with all that debt, when the economy slows down a little. They borrowed so much money, that even before they have trouble keeping up their payments, they will be downgraded by the rating agencies.
Big deal, right?
Well all those money managers -all those pension funds – all those bond funds that are required to only use investment grade bonds, will have to sell all the bonds that are downgraded.
But they were already down to one step above junk – or non-investment grade. So when they are downgraded by one more level, below BBB, they must be sold. But all these pension funds and money managers will have to sell all those downgraded bonds at around the same time.
Remember when something like that happened in the mortgage bond market back in 2008.
They all want to sell them, but there isn’t anybody to sell them to!
You think you can sell that fund with the push of a button. You think it because it has been true throughout your investment life.
But what happens when everybody is selling them, the bonds have to be sold, and the buyers aren’t there to buy them.
That’s what a crash means. When the market maker doesn’t have the money and isn’t willing to buy them back, we call that a crash.
The bottom falls out.
As a seller, you push the button and your fund can’t get a reasonable price for the bonds to redeem you and send you your money. So you either get back a fraction of your money, or the bond manager actually becomes insolvent. He goes broke or crashes.
You saw it happen to the banks in 2008. The mortgage bonds crashed. The government bailed out some of the biggest banks, but the people lost their money. People didn’t get bailed out, only the biggest banks.
Here we have a whole generation of retirees counting on those bonds, as the value disappears.
This is what the next financial crisis is going to look like.
What do you do about it?
Replace those bonds while you have the chance.
The story I’m telling you isn not happening now. It will be the NEXT crisis.
I can tell you what I’m doing about it.
I’m investment in the most solid assets, that generate solid, reliable income.
Simple as that.
Residential Real estate for middle class people who have to live somewhere.
Oil and gas pipelines that are contracted to move oil and gas to the refineries, and to the buyers around the world. This is about as safe as you are going to get.