Buy Stocks Or Buy Bonds?

| July 24, 2012 | 0 Comments

The Financial Times ran a story of profound importance last week, but few noticed.

They reported that some brokers, including Merrill Lynch, believe that stocks are actually becoming safer long-term investments than government bonds.  For some of you, this probably comes as no surprise since the 10 year Treasury note is only yielding 1.45%.  In other words, if you buy a 10 year government bond now, you’ll only get 1.45% on your money for 10 years.

It’s hard to believe, right?

What seems to be happening is that we’re nearing a true paradigm shift in the world of finance and investing.

And as we all know, attempting to make specific predictions is a fool’s game.

However, certain factors are lining up in a way that suggests we’re near the beginning of a new bull market.

The problem is…

I think that stocks are under-owned and that Treasuries are over-owned.  As a result, we’re nearing a point where the dollar will increasingly flow into equities rather than bonds and where money will gradually migrate away from “safe assets”.

With the average life span increasing, people just don’t have enough money to sustain, so investors will be forced to invest in other equities that will return higher yields.

What’s more… there are real problems with government bonds.

First, it’s important to realize that Treasuries have enjoyed the greatest bull market in history since 1980.  Yields consistently ticked lower in good times and bad.

However, they now seem to be near levels where they can fall no further.  (The Fed can’t push rates much lower and the 10 year Treasury yield seems to have formed a double bottom in the last two months.)

Second, government bonds are now showing all signs of a bubble in its final stages, with people plowing money into them indiscriminately.

Supply has surged in response, just like dot-com stocks in the late 1990s and residential mortgages in the middle of the last decade.

And finally, assets similar to Treasuries have already started to fail.  Remember Fannie Mae and Freddie Mac? 

Also, look at sovereigns in Europe and municipalities in California. Mortgages are another case study because they have been supported by the federal government since the 1930s.

Just turn back the clock 10 years. None of those assets were priced based on credit risk.  They were based only on interest-rate risk.

In some ways, the crisis of the last five years resulted from nothing more than the market waking up to the credit risk in mortgages and sovereign debt.

But that consideration of credit risk has not yet been applied to Treasuries. How many investors, after all, analyze the credit-worthiness of US risk before buying bonds?

You got it… none!

What about stocks?

There’s no denying that US public companies have become increasingly weak. However, we must realize that this has been the result of global economic fears out of Europe as well as the fear of global slowdown.

During the same periods over time, companies have done the exact opposite and have grown increasingly strong.  Their profits have risen from 3 percent of GDP in 2002 to more than the current 8 percent.   And they’re better capitalized now than at any other time in history.

Bottom line…

We must never forget that modern capitalism actually began in the 19th century. That’s when companies and private individuals ruled the world… a world with no Treasuries.

And now, once again, we can see something similar seems to be taking shape.

The most important thing to remember is that you shouldn’t chase stocks at the highs, but rather buy the dips and enjoy the ride.

That’s how we’ll make money in stocks versus bonds in this crazy market.

Safe Trading,

Marcus Haber

Tags: , , , , , , ,

Category: Options Trading Basics

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.