Instead Of Bonds, Buy This…

This year, if you were invested in a bond fund that promised “safe” long-term inflation-fighting bonds, you were burnt.

The recent pullback in the bond market was a testament to the fact that Ben Bernanke’s vague comments can directly impact your wealth – even if there’s no concrete policy behind them.

Today, in part-2 of our bond discussion, I want to talk about the future of the bond market, Bernanke’s comments and where the real safety resides…

To be sure, there’s still a lot that we don’t know in the bond market. That verdict is still out, you see — and even though long-term (30-year) bonds are off some 9% on the year, the possibility for a turnaround is still a possibility.

Ah, it’s just as Bernanke wants it! On his vague words the bond market can continue lower, or turn and head higher. So what will it be?

From my perch I don’t see a quick about-face for the Fed. Sure, we may see a little bit of the tapering that we’ve heard so much about. But when the rubber starts hitting the road, tapering will be a very slow-go. That is, when/if the Fed announces a pullback in its bond purchases or a slight tick higher for interest rates and the market sputters? You can bet the easing will continue.

In the short-term, betting one way or another with bonds or a bond fund is like guessing what words will come out of Bernanke’s mouth next. Good luck for the daring few that try!

And I’m sure that’s what the Fed Chairman is hoping.

One by one, Bernanke is scaring folks into the equities market.

You want to save money in a bank? Too bad! You get no interest. You want to stuff your money in “safe” long-term bond funds? Too bad! You can’t guess which way they’ll go if you wanted to!

Naturally, after this year’s 9% pullback in bonds, we’re going to see some air flow out of the bond bubble. That is, folks that were looking for safety in bonds were burned and are now looking for safety in other places – cash, equities, you name it.

Remember back in 2008 we saw the same thing — the safety trade had everyone running to bonds. In fact, so much money went into the bond market that some folks were even taking a negative “real” interest rate (meaning you were locking in a lower interest rate than the rate of inflation.)

But soon after the money started flowing out of bonds. Much like we’re seeing today.

Regardless of the short-term direction of the bond market, we’re set to see the same sort of exodus. More and more safety seekers are going to be moving away from bonds and into other investment classes. The ticker tape is telling the tale.

From a long-term perspective, the direction of bonds is becoming much more clear.

“We can’t escape the instinct, confirmed by much of history, that the next major move for Treasury yields will be up” says Bill Bonner. “Whatever else we do, we should be prepared for it.”

With treasury yields heading higher, the inverse-related bond market will head lower. Further exacerbating the bond exodus.

And in a crazy twist of fate, some of the top investment banks CEOs agree with your editor and Mr. Bonner!  CEOs for Wells Fargo and Goldman Sachs have both recently gone on record saying interest rates should, or need to, eventually rise. The market needs to “normalize” they say.

That said, plan on seeing a lot more money heading in to cash, equities or other investment classes. As this happens over time equities will continue to have a breeze at their back.

(For full disclosure I’m probably a lot more optimistic than most folks. Although this pullback in bonds (and looming interest rate hike) could mark of the top of the equities market I think the U.S. economy is much stronger than most folks let on – many thanks to the U.S. shale boom. That said, I like equities right now.)

But besides running in and picking up any old shares, now’s the time to grab a few of your favorite producers on the cheap.

If you’re looking for legitimate yield continue to look at a few of our favorite big dividend payers – like natural gas processer DCP Midstream Partners (DPM) or fertilizer play Terra Nitrogen (TNH.)

Unlike the bond market these dividend payers have been holding their own AND paying over a 5% dividend each. Both companies have real assets that can continue to appreciate in a rising interest rate world – plus they’ve already proven to be profitable companies that continue to pay a stellar dividend.

Another opportunity is found in the gold market.

Although the long-term trend for bonds is lower, that doesn’t mean the Fed has fixed its monetary ailments. That said, insanely-beaten-down gold producers could catch a bid.

Make sure you know the business you’re investing in. If you do, you’ll be one step ahead of the folks blindly following the “safety” of bonds.

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter

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