Saturday, February 27, 2021

Bonds

 

Captured from Zero Hedge
If you follow the financial markets you have probably seen headlines like the one shown above.

What does it mean when bonds get hammered?

It means that interest rates went up and are expected to continue going up.

Interest rates are unusual. They go up when inflation is expected and since interest is a major cost of doing business for some businesses rising interest rates can cause inflation to accelerate.

It is a vicious, not-virtuous cycle.

Sailors furl the sails and batten the hatches when heading into a storm. The financial equivalent furling and battening is to pay off debt and stock up on durable items you KNOW you will use in the next few years.

If you expect that hyper-inflation might be in the cards then you might consider what kinds of businesses (enterprises) you can get into that do not require purchased inputs or, most especially, inputs that are not produced within your country of residence. Making a small investment (no more than 10% of your assets) in foreign countries is also a hedge although I cannot suggest any country that stands out above the others.

10 comments:

  1. Since I am rural and planting more trees. I purchased 150 6' t-posts, 2 rolls of 2"x4" fence and 2 rolls of 4' chicken wire.
    Don't need them today but I will and they will hold value better than fiat.
    Thanks for keeping us thinking.

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  2. I bought 2 rolls of barbed wire for my back yard even though it is fenced. Just in case.And since the price of gasoline is already up over 50 cents, I bought a small motorcycle that gets over 100 miles per gallon. It was also for fun, but I can haul my groceries home on it too.Paid cash for it. Don't want any stinking debt during the coming bad years.

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  3. At the end of 1978 my accountant told me I had a net worth of $1.3 million. Jimmy Carter's stupidity was kicking in and I furled the sails and battened the hatches as best as I could. At the end of 1980 my net worth was a Negative $58,000. There was nothing I could do as real estate values, both residential and commercial which was most of my assets crashed and interest rates exploded putting cost above income. I worked my way through it but I can say from personal experience that it was easier to go from Zero to One Million, as I did it twice, than it was to go from Negative $58 thousand up to Zero. I have been very cautious since then and admit that I missed a lot of good investments but we kept net worth far above debt. I have no doubt that we are now on the edge of a catastrophe, worse than anything this country has seen. Get out of debt now. ---ken

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    1. If hyperinflation comes, and you have a variable-priced income source (making/selling products) debt is a great thing because you can pay it off quickly with nearly-worthless dollars.

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    2. The problem with that theory is that the bankers are able to increase their rates [variable rate notes and mortgages] faster than you can increase you prices. And your other fixed costs skyrocket and markets fall as the purchasing power of your customers reduce as wages don't keep up with household cost increases. I knew many people that believed that theory in the 70s and they nearly all went broke. And I came very close. Everybody looses except the banks and government supported businesses that the government bails out.

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    3. OUCH!

      I feel for the smucks who own property in Detroit and other, deep-blue hell-holes. They are still taking it in the shorts for property taxes, insurance and mortgage payments while their tenants are refusing to pay their rent.

      There is not happy-ending for those landlords.

      Some of them fell into it when Granny died and left them the house. Others actively embraced the risk.

      As Baron von Rothschild is reputed to have said, "Nobody ever went broke selling too soon"

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    4. Ken, you're absolutely correct about variable-rate debt. Most mortgages are fixed rate. And other than the practical necessity of borrowing (fixed-rate) on a mortgage for real estate I agree that one should owe no debt.

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    5. You are Right. Residential mortgage are mostly fixed but I was thinking about commercial mortgages that are generally either variable or short term. However people have a tendency to buy the most expensive house that they can afford and don't leave themselves any room for job loss, sickness or other problems that can put them in a crunch. And add in expensive cars and worse yet toys that max out their ability to make payments. Bottom line is I have never known anyone to go bankrupt that didn't have debt but with most people that doesn't seem to click. Normalcy bias I guess.--ken

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  4. We're working as fast as we can to produce as much food as possible. Have to get some pigs onto the pasture before they're all gone. Livestock sells fast around here.

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  5. From the comments that are posted, you can see that some of us are working on completely different scales. At the end of 1978, my net worth was approximately $1.30 . It is higher now, thank the Lord. But our challenges are the same. Reducing or eliminating debt, conserving wealth, accessing a steady food supply, maintaining heating and cooling levels, and protecting our assets physically.

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