The bubble in technology stocks at the end of the last century occurred in Alan Greenspan's world of easy money. Unwilling to suffer the consequences, credit was increased at a faster rate in the housing bubble last decade. The debt bubble is the grandfather of bubbles and is still with us. The financial crisis of 2008 only transferred much of the debt from the private sector to governments.
To clarify terms, cash and T-bills are of one year or less duration securities. Notes run up to 10 years of maturity, and bonds have over 10 years to maturity. Avoiding bonds is the heart of this discussion.
Bonds are not investable. Bonds are sold by brokers and financial advisors to clients in a fantasy world. With governments cranking up the printing press, these transactions in the future will be laughed at just as IPOs were measured by eyeballs and as bankers and home buyers conspired to purchase houses beyond their means.
Bonds may be purchased, however, as a speculation for short-term economic weakness. When the investor feels the printing press is running too slow, look for bond prices to rally. These purchases must be viewed as short-term positions for price appreciation only. Holding to maturity would assure disappointing results.
As central bankers and government officials consider the political winds and make judgments, know bond prices will be volatile and will trade down in the years ahead.
The allure of bonds is their place in the capital structure. Guarantees exist to get paid. Yet bonds held today are guaranteed to lose significant purchasing power. The repayment will occur in depreciated currency. Wealth will be transferred from the bond holders to borrowers through inflation. The top of the capital structure is not safe when held in long duration.
Substitutes to bonds or alternate means must be employed by the conservative investor. Consider the barbell strategy. On one end of the barbell is safe short-term cash and perhaps some notes. The other side of the barbell contains risk assets.
The size of the safe side of the barbell should be determined by the risk tolerance and market outlook of the investor. This portion of the portfolio will act as an anchor and reduce volatility of the whole. Remembering there are no bonds in the portfolio, conservative investors should be especially cash heavy.
The risk asset side of the barbell may contain any myriad of securities, including income producing assets. For the risk adverse, shares of Exxon Mobil (XOM), BHP Billiton (BHP) and McDonald's (MCD) would be excellent choices. The SPDR Gold Shares (GLD) as a Gold proxy stands out as the most obvious choice. More adventuresome investors have a universe of securities backed by real assets from which to choose.
In the end, stay clear of bonds. Their prices are high and yields extremely low. Central bankers and politicians are conspiring against bonds. The investor must protect himself.