Livinglies's Weblog

Events today lead me to say that the risk in holding “safe” AAA government or corporate bonds is far higher than they are priced. This does not mean that there will actually be defaults. But my analysis indicates that, at a minimum, several municipalities and corporations will default on their bonds this year and next year. How bad the situation will actually get is really anyone’s guess, but the comments released today from Dodd, Paulson and Bernanke are blunt admissions of the risk of something much worse than anyone is actually saying out loud.

Even if the situation does not get as bad as it looks to me now, it is going to at least look far worse and that will have its own repercussions. Times like these are not necessarily buying opportunities.

The bottom line is that the dollar continues to be at risk, corporate earnings are at far greater risk than one might suppose, price-earnings ratios are almost certainly going to decline on average on U.S. based companies and probably all companies, and bond and loan defaults of all types and sizes are going to rise for sure. The outlook, in terms of risk, is basically red alert for any U.S.  Security or any account held in U.S. dollars. I would say that at a minimum this outlook cannot change for at least 2 years. I am suggesting that you consider this in making your investment decisions.

In my opinion, any (and all) investment in a dollar denominated account holding any security or “money” should be migrated to a non-dollar denominated account (even if the investment vehicle remains the same), and any “safe” (almost cash) investment vehicle should be closely examined even if maintained in another currency. Any reliable insurance or hedge vehicles that are available should be considered as options as well. Buffet’s offer to provide insurance on municipal bonds is expensive, but worth it.

I am deeply concerned for family and friends, that their “nest eggs” might be more at risk than they know. Risk is a relative term. But when it is on the rise, you have to be able to say to yourself, as my wife says, “what is the worst thing that could happen?” and if you can’t deal with that, then do something else.

If you choose not to migrate and you are depending upon your investments to cover your debt (mortgage, car etc), then I suggest you hedge the problem by liquidating investments to pay off debt. If you are going to migrate, then you should not pay down debt, as you might be able to do so later with much cheaper dollars arising from a gain in foreign exchange.