Refuge

Investors watched a Band-Aid being slapped on Greek debt woes yesterday. So stock markets moved higher. Money flowed out of the bond market to buy equities. Therefore bond prices came down and yields went up. And that’s why long-term mortgage rates at the Royal Bank rose.

If you don’t quite follow that, you’re normal. Not many people get the bond market. And that explains some of the moronic comments made on this sniveling blog about fixed income. No wonder most Canadians fail at investing – with a mess of high-risk, high-cost equity mutual funds on one hand, and do-nothing GICs on the other. The end result is pathos.

Smart investors own bonds, even when interest rates are in the dirt and set to rise. That’s because it’s just as easy to make a capital gain owning a bond as owning a stock. Bond prices rise not only when interest rates decline, but when people are desperate to own them. In fact, demand is the biggest factor. So when stock markets roil and falter, bonds rally and plump. Given the shape the world’s in at this moment, you might want lots.

The bond market’s 14 times bigger than the stock market, and is where the serious money is made. But it ain’t simple. Bonds may pay you interest and always mature at 100 cents on the dollar (at least quality ones), but nobody buys a 15-year bond to hold it to maturity. Instead, bonds are best viewed as marketable assets whose price fluctuates, while they continue to pay you money to own them.

In general, if inflation swells then interest rates will rise. Existing bonds become less valuable, so their price falls and the yield jumps for new investors. That’s because the bond is now purchased for less money, and yet still maintains its original interest rate, called the coupon rate. So the first thing to understand is that the coupon rate is not the same as the yield – yield flips around and is determined by a bond’s price.

But rate changes are just one factor. As I mentioned, when people are freaked out by current events, like wars, debt defaults, tsunamis or a 50th anniversary Rolling Stones tour, they dump equities and embrace bonds. It is this surge in demand which jumps prices the most, and is also most likely. So owning bonds and equity ETFs gives an investor a high degree of negative correlation. When one sucks, the other blows.

Still with me?

Here’s what I mean. If you have a corporate bond with 7 years remaining until maturity and it comes with a coupon of 5% and is currently selling for $92 (per $100 of face value), what’s it really pay you to own it? The formula is simple. Yield = Income / Price. In this case that would be .05 (the annual interest payment) divided by 92, which ends up being 5.4%.

Bonds which trade at less than $100 are said to be at a ‘discount’ while those over $100 are at a ‘premium.’ An older bond which carries a coupon rate well above today’s levels will obviously be more valuable than one paying less, so investors are willing to shell out more for it.

And here are three things to always keep in mind when buying a bond (there’s far more than you ever want to know in my current book):

(1) Credit Quality.  Bonds you never have to worry about going into default come from government, most particularly the Government of Canada – although a provincial government bond  isn’t going to fail, either, likewise a security issued by a governmental body like the Export Development Corporation or a utility. However, don’t assume a bond pays peanuts just because it comes from government. For example while five-year GIC rates were 2%, 100% secure provincial bonds in my portfolio were paying in excess of 4.5%.

(2) Coupon rate. With corporate bonds this largely depends on the credit rating of the issuer. Those with less strong credit ratings are forced to offer higher rates of return – but many of these bonds could be ideal for your portfolio, since it’s highly unlikely outfits like Air Canada or Ford Credit will be going belly-up.

(3) Maturity, or length of time outstanding on the bond. Bonds issued in the past continue to trade right up until they expire, and the price keeps changing according to the number of years or months left of interest payments, the original coupon rate, and current market interest rates.

So, a 15-year government bond issued with a 6% coupon rate ten years ago would today be a five-year bond, still with a 6% rate. If prevailing interest rates are higher when you come to buy it, the bond will probably sell at a discount to face value, and if rates are low, then it will come at a premium.

Bonds with the greatest volatility in their pricing are the longest ones. That’s because interest rates can bounce around a lot more over 10 or 20 years than they do over two or three years. Also, bonds with lower coupon rates are more volatile than ones with higher rates, since a relatively small change in market interest rates will affect the price of the lower-coupon bond more dramatically. Mostly, bonds are the world’s refuge.

Handy summary: bonds and houses go in opposite directions.

Now you know you need some.

148 comments ↓

#1 Mark on 07.04.11 at 8:53 pm

Indeed Garth, bonds and houses go in opposite directions. The CMHC-insured mortgages that Canadian banks hold heavily on their balance sheets are ‘money good’ at 100 cents on the dollar. Bank balance sheets, thus, are not vulnerable to a housing downturn, and will actually improve with a housing downturn because the banks can charge higher risk premia on the remaining borrowers. Interest rate risk is non-existent on the Canadian banks’ books because they have tightly matched the duration of assets to the duration of liabilities in their portfolios.

Contrast this with USA banks, where banks were almost universally running a “borrow short, lend long” operation. Once the value of the long-term 30-year fixed rate mortgages started to fall, they faced a run on short-term liabilities (ie: deposits). Voila, US banks were insolvent and required massive capital bailouts.

In short, Canadian banks = rock solid, well positioned to capitalize heavily on a Canadian housing crash. In fact, once interest rates rise and housing values crash, banks will be able to dramatically accelerate their dividend payouts because they will simply need less capital on their books to support their book of mortgage business.

#2 CrowdedElevatorfartz on 07.04.11 at 8:55 pm

Hoof Hearted.
Help. I need Beano. BPOE is unconsious.

#3 phinny on 07.04.11 at 9:06 pm

I’ve been thinking about bonds. Don’t own any- so I’ll throw this out there. What about iShare Bond ETFs? Is that make any sense? Read something about them in Financial Post a couple of days ago.

Also, went to buy bonds last paycheque in my TD Waterhouse account, and, man-oh-man, could I not figure out a thing. Read the part in Money Road, and didn’t understand a lick, either.

So now that I read this, I’m thinking that if I buy a ten-year bond, for 100 bucks, it’ll pay 5%, unless it pays less than 5%, for some reason, and then I sell it at face value – at maturity – if I want to hold it till maturity (which I don’t)…

Help?!

#4 BC Bring Cash on 07.04.11 at 9:07 pm

The Bilderberg plan of 2011. An explanation of the Rockefeller World Order and why it maybe facing some challenges. Perhaps even not becoming reality providing enough people around the world wake up to the scam to enslave the majority of us.
http://www.globalresearch.ca/index.php?context=va&aid=25302

#5 Golden Stu on 07.04.11 at 9:07 pm

Bonds have indeed had a 30 yr bull run…. however if they are such a good idea why did Bill Gross of Pimco (the worlds largest Bond Buyer) just ditch all his bonds in their flagship bond fund?

http://www.zerohedge.com/article/exclusive-bill-gross-dumps-all-treasuries-brings-total-government-related-holdings-zero-flee

He dumped short-term US treasuries in January. Not the same animal. — Garth

#6 T.O. Bubble Boy on 07.04.11 at 9:08 pm

Apparently US Dividend Stocks are on the “recommended” list these days — shove a few of those in your RRSP with your fixed income.

http://opinion.financialpost.com/2011/07/04/expect-advisor-2nd-quarter-reports-to-urge-clients-to-dividend-paying-stocks/

#7 Jsan on 07.04.11 at 9:14 pm

Now the Great and Mighty China is beginning to show it’s banking system cracks. Thanks goodness the world has Canada, the only true sound banking system……oh wait a minute? It’s pretty easy to have a sound banking system when you have a CMHC. All world banks could be so lucky, pass off all of the risk onto the tax payers and reap all of the rewards.

Oh yeah, and Chinese Real Estate prices are beginning to decline. But that’s okay, some round eye white devil realtor from Canada set up a booth in Beijing and told the Chinese people that they should come to Canada and buy real estate, after all this realtor told them, prices go up forever in Canada.

“China debt woes point to bank bailout”

http://www.marketwatch.com/story/china-debt-woes-point-to-bank-bailout-2011-07-04

“Hidden debt may hobble China, trip up the world”

http://www.iol.co.za/business/opinion/columnists/hidden-debt-may-hobble-china-trip-up-the-world-1.1080062

.

#8 Jsan on 07.04.11 at 9:19 pm

#4 BC Bring Cash on 07.04.11 at 9:07 pm

The Bilderberg plan of 2011. An explanation of the Rockefeller World Order and why it maybe facing some challenges. Perhaps even not becoming reality providing enough people around the world wake up to the scam to enslave the majority of us.
http://www.globalresearch.ca/index.php?context=va&aid=25302

===================================

BC Bring Cash,

You have probably seen this but if you haven’t, here’s one for you.

“They Did It On Purpose: The Housing Bubble & Its Crash were Engineered by the US Government, the Fed & Wall Street”

http://www.globalresearch.ca/index.php?context=va&aid=10654

.

#9 Hoof - Hearted on 07.04.11 at 9:26 pm

#2 CrowdedElevatorfartz

Quickly….BPOE up over a stool

Call the Village People.

If that doesn’t work…..sell him as a store manniquin.

#10 Tim on 07.04.11 at 9:35 pm

“In a world of near-zero interest rates, the best place to find yield right now is old-fashioned dividendpaying stocks, says Wharton School’s Jeremy Siegel.”

http://www.financialpost.com/news/Dividend+paying+stocks+where/5020722/story.html

Why own bonds when rates cannot go lower?

Because rates are not the main influencer of prices. Did I just waste 800 words? — Garth

#11 CrowdedElevatorfartz on 07.04.11 at 9:37 pm

Hold the phone. BPOE just woke up…..
BPOE is ok folks. Not to worry.
The little real estate “savant” is busy with his mortage calculator……Something about prices in Rich-man dropping like a pig from a helicopter.

#12 Sunny on 07.04.11 at 9:38 pm

Dividend stocks will outperform

http://opinion.financialpost.com/2011/06/28/stocks-best-bet-in-a-world-of-near-zero-interest-rates-jeremy-siegel-says/

That is no argument to eschew balance with fixed income. — Garth

#13 CrowdedElevatorfartz on 07.04.11 at 9:41 pm

@#9 Hoof
Great idea! as soon as the stool came into view BPOE flipped it upside down and played ‘musical legs” ??????
kinda revolting but amusing all the same.
I sold him to the Arabs.

#14 SMOKING MAN on 07.04.11 at 9:42 pm

Best post since I have been here….. to bad 90% of the bubble heads will not understand it, nor care too. They are more interested in hoping for a crash in Real estate to up one man ship their rivals and competitors who bought Real Estate and made some $$$$$$$

They are not motivated by making money, they are motivated with revenge for their inaction and fence sitting.

I like shorting equities (Gambler in me) but it’s dangerous( your timing need to be perfect and you can’t hold a short for too long) as you pay out the dividend that sucks.

Bonds hedge you against your long bets and pay you to own them. But Boaring!!!!!!!!!!

What a stroke of luck fools dumping Canadian bonds. I got a bit of Greek in me and I can tell you, they are going to BF Germany and France a lot sooner than the power are expecting, Real power is just buying a bit of time to re balance and make the hurt less painful but it’s coming.

And faster than anyone can imagine.

#15 jshum on 07.04.11 at 9:44 pm

thanks for this post.

#16 bigrider on 07.04.11 at 9:47 pm

Garth ,any worries over U.S government reaching there debt ceiling limit? I mean no agreement from congress to raise yet. I know that it has been raised something like 74 times since 1962 but never more polarization (hate) between the two parties as today.

Do markets go into a tailspin on August 2 similar to 2008 meltdown?

Non issue. — Garth

#17 Mark on 07.04.11 at 9:58 pm

Why own bonds when rates cannot go lower?

The devil is in the details. Long-term bonds tend to lose quite a bit of price when interest rates are on the rise, but short term ones preserve their nominal value, and allow a person to use the proceeds to eventually purchase depreciated longer-term assets.

For instance, Canadian banks’ portfolios are comprised mainly of short-term bonds, ie: <5 year CMHC-insured mortgages. As rates rise, these bonds will constantly be re-pricing themselves at increasingly higher interest rates as people renew their mortgages.

Someone who owns a short-term bond will be able to use such a bond to purchase depreciated housing in a downturn.

When house prices crash, a) bond rates will be much higher, due to the greater risk, b) Canadian banks will be flush with investible cash because their portfolios are essentially short-term bond portfolios , and c) banks' funding costs will remain low because the Bank of Canada will be aggressively attempting to reflate a deflationary economy. This adds up to huge bank profits. Which is why a 50% discount for housing, but a 50,000 TSX level is quite a likely outcome going forward.

#18 Increasing that 1% on 07.04.11 at 10:10 pm

Well that was some brain exercise
==========
#14. Smoking Man
I dunno, I’m kinda missing your usual spelling

#19 Bond on 07.04.11 at 10:16 pm

Sorry Garth,
“Bond” = James Bond. A franchise that has value in name and entertainment.

Cheers,

#20 TurnerNation on 07.04.11 at 10:17 pm

Garth, there is also risk of corporate bonds being callable, ending the fun early (eg. sinking fund provision).

And what about exchange traded convertable debentures.?
There are a number of good names and I follow a few on my watch list. Coupons are 4-6%, or up to 8-9% for the riskiest small caps.
Easily bought and sold on the TSX.

#21 Kevin in Winnipeg on 07.04.11 at 10:18 pm

Nice post Garth. Very helpful for anyone who wants to learn something valuable.

#22 HouseBuster on 07.04.11 at 10:22 pm

Record auto sales in June. Interest rates are going up b!tche$!

#23 Bobby on 07.04.11 at 10:22 pm

Ah bonds, I love them. But I leave the management to the experts. PHN Bond fund paid returned 4.6% last year with minimal risk. And only .59% in annual fees.
Most people have no idea who they are as they are too busy rushing to their financial advisors for advice. Most financial advisors won’t recommend them as PHN does not pay trailer fees. Of course, now that RBC is involved they offer Adviser Funds, but at a higher fee. Who needs it? My guess, the same clowns who think real estate is a good long term investment.
Thank goodness for Greater Fools. It makes the rest of us wealthy!

#24 nonplused on 07.04.11 at 10:27 pm

Air Canada isn’t ever going to go belly up? You mean “ever again”, don’t you? And yes they will. Higher energy prices are going to kill most airlines. And I would have Ontario on my “negative watch” list as well. Their debt is monumental by provincial or state standards. Much worse than California. If yields rise they are going to have a real funding problem.

Canadian bonds should be safe at lest another 5% higher, but if it ever got to there austerity looms large at the federal level too. Another reason there probably won’t be significant rate rises until we have 70’s style inflation. Just enough to cool the credit bubble, not enough to cause a housing crash.

Another reason short term bonds are less volatile is because if rates rise you can “ride them out” to maturity and get your principle back with a shorter wait.

I thought bonds and houses went in the same direction? I.e., if Carney were to do something unthinkable like raise rates 3% in total, won’t bond prices go down whilst house prices also go down? Although I agree in a real estate crash US style house prices fall, the central bank lowers rates to stop the fall, and bonds thus rise. But I don’t know if Canada gets a crash, maybe more of a mortgage rate inspired correction.

But I agree you definately need some. I’m staying pretty short maturity for now though. And no I will not buy Air Canada. Ford maybe, but not the credit division. Those guys are huge exposed to all the problems Mark “pee on the parade” Carney has been on about lately.

#25 Helicopter Ben on 07.04.11 at 10:36 pm

I dont understand Bonds that well even after reading this article. Bonds today dont keep up to real inflation do they? (not the government cooked inflation numbers). After a lost decade of investors getting smoked in the stock market i wonder how much longer they will stay in the game till they say enough is enough. risk vs reward just isnt worth it anymore, atleast i dont think. I dont know much about investing in stocks in bonds but neither does your local banks financial planner.

#26 Duke on 07.04.11 at 10:56 pm

Garth thank you for telling Canadians about the bond market. Many of us just don’t get it. It took me a while to figure out “bonds” when I was peddling mutual funds and segregated funds for the man!

Now I’m an independent financial adviser and tell clients to buy Canadian Government Bond ETFs. You are dead on with that! You should also toot the virtues of owning Canadian Oil Sands companies that pay 4-5% dividends and that have enough oil supplies to last 20-30 years easy. Sure there is market risk but over the longterm I think we all know where oil is rising like a cow jumping over the moon.

Government bonds presented a great selling opportunity early last week and I’m glad I took it. I’m hoping to jump in about 3-4% cheaper then where I sold last week!

#27 Grooby on 07.04.11 at 11:01 pm

I also have a similar question as someone indicated earlier already.
With the ishares XLB, XRB bond ETFs and others (mixing gov’t and corporate), is this a good way to invest in bonds without purchasing the bonds themselves?

Or should one purchase the bonds directly instead? ETFs just seem so much easier…!

#28 The InvestorsFriend (Shawn Allen) on 07.04.11 at 11:02 pm

Garth Saiz:

Money flowed out of the bond market to buy equities.

That’s a common description of what happens when a market goes down – money flowed out, right?

Well not really. Aside from a few bonds that might have matured today, what happened was some bondholders sold to new investors. On those trades “money in” was equal to “money out” (well except for a little bit for the croupier, I mean dealer).

When any market falls in price people say money flowed out. But in reality for every dollar sold, someone had to put in a dollar. So in the net when markets fall, money does not flow out in the net.

The total market value falls. Where does the money go when a market like stocks, bonds or houses falls? It does not go anywhere. It simply dissappears into thin air. Itwas not money in the first place, it was market value measured in money.

If you don’t understand this you are normal. If you do, you are one step ahead of the game.

#29 Hoof - Hearted on 07.04.11 at 11:08 pm

The “Feminist” Movement was an Illuminati plot

http://www.youtube.com/watch?v=Br92HMnqM5E&feature=related

#30 City Slicker on 07.04.11 at 11:13 pm

Garth how is it that Greece’s interest rates got to be so high. Is it bond related?

More risk = higher rates. — Garth

#31 The InvestorsFriend (Shawn Allen) on 07.04.11 at 11:17 pm

Garth Saiz:

nobody buys a 15-year bond to hold it to maturity.

I Saiz:

If you buy a 15-year bond to hold to maturity then you are an investor. One who is taking some inflation risk but definitely an investor. You are apparently happy to receive your interest for 15 years and then your principal back.

If you buy a 15-year bond because you think interest rates will fall and you can then make a quick capital gain then you are a speculator in interest rates. Nothing wrong with that.

If you buy a 15-year bond despite the fact that you don’t like the low interest rate and you think rates will rise but you think you can sell to someone else before rates rise, and you will avoid a capital loss, then you are a fool. Perhaps a greater fool.

If you think rates will rise, stay with short-term bonds.

Buffett saiz: If you would not be comfortable holding an investment for 10 years then don’t even think about holding it for ten minutes.

Who’s right?

Nobody holds 15-year bonds to maturity. Your previous statement was without merit. — Garth

#32 not 1st on 07.04.11 at 11:17 pm

Corporate bonds can be a good deal, if the company is sound.

But gov’t bonds are linked in with sovereign debt and central bank policy and currency manipulation. For example, while the U.S. continues to owe investors their promised return on bonds when they mature, they have devalued the dollar on the other hand and will pay back this obligation with devalued currency, so the bond holder will really not have any substantial gain. They are just a place holder for debt.

#33 Utopia on 07.04.11 at 11:19 pm

#6 T.O Bubble Boy

Thanks for that link.

It was a great short article and I agree unequivocally. Quality stocks, those providing a long history of dividends, blue chips and companies with strong balance sheets and good international exposure are the place to be.

I am actually very bullish in this regard. I favour US and Canadian companies including corporate bonds from the best of the pack. They are indeed the least ugly of all the options available.

As I tried to convey yesterday, it is my belief that staying invested in quality defensives and sound producing companies is the right move at this juncture. Income matters. So does security and return of invested capital. It matters a lot.

This is all the more true as certain debt issues become increasingly risky to hold.

Many will disagree but I also believe a debt bomb is threatening to go off and capital return will be unlikely in some cases thus making some debt instruments a gamble.

I do not sense that risk coming from good corporates.

#34 Sumadartson jr. on 07.04.11 at 11:25 pm

17th!

Real Estate Schmeel Eastate, Bonds Schmonds, I got two years supply of Pre Fukushima radiated canned salmon, tuna and dry dog food.

My dogs and me gonna go out in style.

We’re all gonna die so lets party like its 1999.

#35 Guy_in_Regina on 07.04.11 at 11:35 pm

Thanks for the informative post Garth.

#36 Nostradamus Le Mad Vlad on 07.04.11 at 11:53 pm


The pic is nice, didn’t completely understand the column but posters, esp. #1 straightened me out a bit.

BTW, what will happen if PIIGS and a few others default?
*
#7 Jsan — “Now the Great and Mighty China is beginning to show it’s banking system cracks.” — Interesting; see following links — Curious article. Gold to hit US$10K, Silver $500 and China invades, Sweet and Sour Chinese loans, Rare Earth metals not so rare and Rare Earth visual; Banxter Occupation “Moreover, public debt now stands at USD 14.3 trillion, up from USD 10.6 trillion when Obama took office in 2009.”.

11:01 clip and link in. David Icke on how WW3 is being handled. Profitable for the banxters; Greenspan knew about the housing bubble in 2005, and did nothing to stop it.

Monsanto “He who controls the seed controls the food supply; and he who controls the food supply controls the world. “; Links in. When technologies collide, ‘tho there may not be much flying then (peak oil, rampant hyperinflation, etc.); Control Freaks Those with the biggest bux have the most clout; Where have all the pro-Euro politicos gone?

Some recovery Jobless and wageless, and Greek coast guard boat rams Tahrir. If Greece goes bellyup, that’s just desserts.

Hooray for Carbon Dioxide (CO2) “Since 1830, the average global temperature has increased approximately one-half degree Fahrenheit (0.5 degree F.) with most of this half-degree occurring before 1940 and the onslaught of vehicular and air traffic, thus eliminating the argument that CO2 causes global warming.”

#37 viTRifY13 on 07.04.11 at 11:58 pm

Fiance sold her house, made a cool 100k. Didn’t know what to do with it. I got her to open a questrade account, purchased a preferred share ETF (HPR) with 10% of her money, and then the last remaining 90% I split it between the preferred shares of CIBC, HSBC, Bank of Nova Scotia, and Bank of Montreal. Preferred share ETF pays 4.75% and the banks pay just shy of 6%.

I think we did okay, not diversified enough, but it is invested in something she understands and feels comfortable with.

All the bank preferreds reset in 2014 at a 1 yr rate + 4.5% (around) but there’s speculation the banks will buy back the preferred shares for face value ($25 whereas she paid $26.xx), giving a yield to maturity of 3.3% – Worst case scenario, still beats the pants off of the orange guys shorts / GIC’s. =)

#38 Bottoms_Up on 07.05.11 at 12:01 am

#3 phinny on 07.04.11 at 9:06 pm
————————————–
It sounds like there are two numbers you need to worry about:

1) What the bond currently costs (and what you will get at maturity)

and,

2) The coupon rate, or in other words, the FIXED percentage you will get while you hold the bond (the fixed amount is based on the original selling price of the bond). (Garth was very clear on this)

So, for example, you might pay $120 dollars for a bond that pays 10% interest (on an original bond price of $100). You are guaranteed $100 at maturity, but while you hold the $120 bond you will be paid $10 every year.

#14 SMOKING MAN on 07.04.11 at 9:42 pm
——————————————
Wow, only two spelling mistakes (as well as a few grammatical ones). Must be a record!

#39 AB Bust on 07.05.11 at 12:02 am

Garth/ Blog dogs… what’s the best vehicle to trade bonds? RRSP, Tfsa,etc…Thanks!

#40 Devore on 07.05.11 at 12:08 am

#15 bigrider

Debt ceiling will be raised, put money on it.

#41 Mr. Reality on 07.05.11 at 12:12 am

Sorry Garth but i really think the next shoe to drop we be the bond market.

When you look at how toxic our global financial system is at present, i can’t help to think that will be it. When that puppy tremors everything get’s screwed.

Mr. R.

#42 The Phantom on 07.05.11 at 12:15 am

Hi Garth and Fellow blog dogs (and lurkers):

#3 Phinny:

“I’ve been thinking about bonds. Don’t own any…What about iShare Bond ETFs? Is that make any sense…

Also, went to buy bonds last paycheque in my TD Waterhouse account…

Help?!”

What you want to entertain is some ETFs as suggested; you can also entertain some corporate bonds. Although I wouldn’t touch anything even remotely related to Uranium these days, you can buy some good quality bonds like Fronterra Copper (I have one that pays 10%: it is volatile sometimes but will mature at face value). Another one is Nova Scotia Hydro…if you’re lucky, you can pick one up that has decent yields. I had one I sold over a year ago that paid 9.75% and when it appreciated over $1,000 in one year, I sold it off. I paid a premium for that one however: $12,600 for a $10,000 bond so the premium has to be factored into the rate to form an adjusted rate of return…I have another one that pays 8.4% currently. My point Phinny is that these bonds are out there…you may have to look beyond the banks to purchase these but look around at some investment brokers and perhaps they can advise you…

Night All

the Phantom

#43 Still a question re: rates on 07.05.11 at 12:44 am

Still unsure: if I buy a short term eg 5 yr bond at par, and rates rise, won’t the value of the bond drop if I want to sell it, as opposed to holding it to maturity and not caring about the value of the bond itself?

Rates are only once factor. If equity markets decline, bonds will likely rise. How did I not make that clear? — Garth

#44 Bottoms_Up on 07.05.11 at 1:07 am

#149 Seven Stars and Orion on 07.04.11 at 5:55 pm
———————————————
You rent for 61% of what a conventional mortgage would cost?

I found a ‘liveable’ townhouse in Hintonburg for $345,000:

http://www.realtor.ca/propertyDetails.aspx?propertyId=10773956&PidKey=-416564989

Let’s say you bought it for $340,000. 20% down would give you a mortgage of $272,000.

Your payments on that mortgage would be ~$1200/mo.

Are you saying your rent is ~$700/mo? Please sign me up!!

#45 rental monkey on 07.05.11 at 1:43 am

I can’t believe the amount of rentals coming to market in Victoria. Way, way more than the last few years. A wee bit more flexibilty on pets…..where’s everyone bailing to?

#46 rental monkey on 07.05.11 at 1:45 am

Or, perhaps there is the scent of desperation…..

#47 adam on 07.05.11 at 2:50 am

You must really not think much of your readers if you feel the need to explain bonds in such a simple manner. It seems like your blog posts are being dumbed down quite a bit lately. Hopefully this place doesn’t turn into “Finance 101”. I would like to see more reports on the housing market specifically. We are approaching PRIME TIME, the market is in the process of crashing right now, and you’re talking about bonds? Let’s pick it up a bit Garth, give me a reason to keep visiting here. Did you take a look at Vancouver’s sales this week?

#48 Beach Girl on 07.05.11 at 2:53 am

What does shorting the market mean? The Readers Digest version please. My ex-husband, I dumped 15 years ago phoned, he is broke. He had considerable funds. I think he fancied himself a Day Trader. I am not brillant with these matters. Have considerable RRSPs with a major bank. Am I glad I am single.

#49 House on 07.05.11 at 3:47 am

So you say you are getting a lot of moronic comments on your site from bond markets. Perhaps the rating agencies are telling them what to say.

#50 bullion.bunny on 07.05.11 at 5:43 am

So stock markets moved higher. Money flowed out of the bond market to buy equities.

WRONG, try a massive short squeeze as everyone went to cover short positions.

Meaningless generalization. — Garth

#51 T.O. Bubble Boy on 07.05.11 at 6:17 am

@ #33 Utopia:

Agreed — and, to explain my post further, I wasn’t implying that US Dividend stocks should replace fixed income in a portfolio (in contrast to some of the other posts here).

Just that in a RRSP — the only place where US Dividends don’t get a withholding tax — I’ve put a few quality dividend stocks for a 3%-5% dividend and a bit of $USD exposure. These would compliment the traditional Bonds and other fixed income-type investments like Preferred Shares.

#52 mississaugasold on 07.05.11 at 6:17 am

Im confused. Not about bonds per say but more how do I look up information on them? I can’t even find symbols or quotes on these things. If I don’t know the symbol how does one purchase these from say TD Waterhouse or BMO Investorline?

Bond buys are not for amateurs. Careful. — Garth

#53 T.O. Bubble Boy on 07.05.11 at 6:50 am

Back to RE – the GTA June numbers should come out today… mid-month numbers were up 16% over 2010, so I would expect that June 2011 easily passed the lows of June 2010 (which was lower than any June of the previous 6 years).

How much do you want to bet that the TREB Press Release doesn’t mention that June 2010 was a crappy June? And, we can all be 100% sure that there will not be any reminders that June 2010 was low because of the G20 lockdown in Toronto. I’m picturing words like “strong growth” instead… even if the numbers are below 2009 and 2007.

#54 Macrath on 07.05.11 at 6:50 am

#48 Beach Girl
What does shorting the market mean?
——————————————————-
It means placing a bet that the market or a stock will go down. If the market keeps going up your losses are unlimited.

#55 T.O. Bubble Boy on 07.05.11 at 7:02 am

@ #39 AB Bust:

Typically you’d want Bonds in your RRSP, since Bonds provide income that gets taxed at your full rate.

Not if you trade for capital gains. — Garth

#56 unbalanced on 07.05.11 at 7:09 am

To Adam # 47. Whats your beef with Garth explaining Finance 101. He’s helping others who don’t understand the world of finances. Some understand , some don’t. If it was so easy why is the Economic World in such a mess? You want to see more reports on the housing market!!! Where you been the last 5 or 6 years??? You don’t need a reason to keep visiting here. You just answered it. Don’t let the door hit you on the way out. If this blog to you is so hum drum, why did you continue to come here after your 1st visit?

#57 jonni on 07.05.11 at 7:20 am

Beachgirl @ 48

Seems we have something(s) in common. Seventeen years for moi and “considerable RRSP’s, TFSA and contributing to a Defined Pension Plan “.

BTW … do you like Pina Coladas ?

#58 BrianT on 07.05.11 at 7:25 am

#48Beach-It is betting on a price decline.

#59 BrianT on 07.05.11 at 7:34 am

#31inv- 1.The foolish and reckless financial mistakes of Warren Buffett were covered by the USA taxpayer. 2. The guy has a long history of saying X and doing Y. He would endlessly badmouth the derivatives market while risking the future of BRK on it-again only saved by the guv help.

#60 Matthew on 07.05.11 at 7:46 am

Garth,

I’m not sure if this has been pointed out but there is a slight mathematical error in your post. The yield should be 5/92 = 5.4% not .05/92.

Also, although bonds can be an excellent investment, individual investors often lack access to bond trading as it is still necessary at most brokers, even discount brokers to go through a salesman who takes a commission. Bond funds are often the only really accessible way to go, and there are certainly some that exist that have respectable MERs.

You also failed to mention how a bond’s duration is proportionate to its volatility. A 25 basis point swing in the trading price of a 30 year bond will have a far larger effect on price compared to a 5 year bond which is why many investors scorn bonds with maturities longer than 5-7 years.

Finally, although you harp about it consistently in other posts, bonds are essentially useless to the average Canadian investor due to the fact that 100% of the income is taxed as investment income, making the after-tax return pitiful (which is why, I assume that you like your preferred shares and REITs inside TFSAs).

Just a few words for thought.

(a) Smart investors don’t buy bonds themselves, which should be self-evident. (b) Bond funds should be avoided in general. If you can’t buy bonds outright, get an index, not a bond fund. (c) Re duration, you must have missed this: “Bonds with the greatest volatility in their pricing are the longest ones. That’s because interest rates can bounce around a lot more over 10 or 20 years than they do over two or three years. Also, bonds with lower coupon rates are more volatile than ones with higher rates, since a relatively small change in market interest rates will affect the price of the lower-coupon bond more dramatically.” (c) As for tax strategies, you are partially right and this has been covered previously. Clearly fixed income assets should be in registered vehicles if you hold them for interest income. If you intend to trade for capital gains, then they should not – repeat, not – be sheltered. — Garth

#61 jonni on 07.05.11 at 7:52 am

ooooooooooops …. Defined Benefit Pension Plan. ( do they still have them ??? )

#62 BPOE - Biggest Pyromaniacs On Earth on 07.05.11 at 7:58 am

#48 Beach Girl on 07.05.11 at 2:53 am
What does shorting the market mean? The Readers Digest version please. My ex-husband, I dumped 15 years ago phoned, he is broke. He had considerable funds. I think he fancied himself a Day Trader. I am not brillant with these matters. Have considerable RRSPs with a major bank. Am I glad I am single.

++++++++++++++++++++++++++++++++++++

Lots of RRSP’s and money in the bank? I can take care of that for you. Crack shack in Richman with a million $$$ assumable mortgage (mine).

Yes, I drank the Kool-Aid.

#63 jerry on 07.05.11 at 8:08 am

To take a capital gain or not. I’m generating (hopefully) pretty secure income from good AAA stuff. With the recent rise in bonds I thought about crystalizing a gain but then wondered how long I would have to wait to buy back in at a lower rate (like the original rate on the first purchases).
Should you always capture the gain or sometimes ignore it as values rise and fall.?

Investing is about making money, no? — Garth

#64 45north on 07.05.11 at 8:40 am

Mark: a lot of information in a few short sentences. The conclusion remains that housing will crash.

In fact, once interest rates rise and housing values crash, banks will be able to dramatically accelerate their dividend payouts

I gather that the banks are well prepared and would not try to delay the crash. I think I should go to Greece and see first hand the situation.

#65 steve p on 07.05.11 at 8:45 am

when i compare the houses price and it’s corresponding rental value it seems to me that the prices of houses is based on the variable rate of 2.25% or to the home equity line of credit rate of 3.5%

#66 Steven Rowlandson on 07.05.11 at 8:56 am

Hello Garth.
Five to six percent return on bonds might look good next to GICs but since march 1990 I have made an average capital appreciation of 15.133% PA as of June 22, 2011 by investing in silver. Not too shabby wouldn’t you say? Now if bond yields and GIC rates had to compete with silver ,real estate wouldn’t be worth the match to burn it. Mortgage rates would be very big as would mortgage payments. Imagine 18 to 22 percent mortgage rates. Ouch!

Sure hope you took profits. — Garth

#67 Utopia on 07.05.11 at 8:57 am

#41 Mr. Reality on 07.05.11 at 12:12 am

“I really think the next shoe to drop we be the bond market”.
—————————————————————————-

You are not alone.

It has certainly been interesting these last years watching as one bubble or trend morphs into the next. You often hear about all the money that is sloshing about the system and there is something to that thesis.

A herd mentality is always at play and I don’t think Bonds will be any different in the big picture. Following the Credit Crisis mountains of money were shifted there on the fear trade. Now it is flowing back out. That should indicate something to us.

Big trend shifts are nothing new. We watched as the Dot-Com mania morphed into a housing bubble as an example. At various times investment capital has shifted significantly from real estate to equities to bonds and then finally to commodities. It was carnage for some portfolios if you didn’t get it or lagged the herd.

When one class rises, another typically falls.

But where will it go next? That is what you really need to know if you are going to maximize your investment dollars. There is so much talk of a market crash coming in one form or another and I will admit some of the arguments were so persuasive that even I was getting caught up in it.

I no longer subscribe to that thinking. Even if a stock crash materialized it would not make all other markets insolvent. What I worry about most is a debt crisis now and there are good compelling reasons to be concerned.

Sovereigns in particular (witness Greece, Portugal and now even Italy). It just makes no sense to me anymore to buy bonds as currencies are being devalued everywhere and buying power is withered away. There is a debt sickness that seems to have gripped most of the West and even State and Municipal Governments in the US are teetering, threatening to eventually default.

I just woke up one morning and made the decision to shun debt issues on principle. Not that they don’t make money, I just don’t want them. Maybe it is an emotional thing more than a rational decision but I still smell trouble and I don’t care for it.

That means in other words that I don’t care for some kinds of risk and prefer to take my chances with quality equities, dividends and corporate debt. Not saying it is a brilliant strategy or anything, just a personal choice.

Basically, I want to stick with strong companies that have good track records, proven sales, healthy revenues, defensive aspects and plenty of cash on hand. Why would I really want to buy into problems. All debt is junk now in my mind. That’s just me I guess.

I have offered some of the rationalization for my investing philosophy before but I will repeat here why my decision now is to focus only on profitable enterprises and shun those sellers who are irresponsible and in deeply in debt (and servitude).

It comes directly from the bible, Mathew 25: 29 and 30

“29: For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath. 30: And cast ye the unprofitable servant into outer darkness: there shall be weeping and gnashing of teeth”.

Yeah, baby!

Not all stocks are equal. Not all bonds are equal. Nor, verily I say unto you, all investors. — Garth

#68 If you do not listen to Garth then... on 07.05.11 at 9:05 am

…listen to the media!

“Equifax Study Points to Continued Housing Woes”
http://www.bizjournals.com/atlanta/news/2011/06/30/equifax-study-points-to-continued.html

“Homebuyer Reality Check: It’s a Buyer’s Market”
http://news-herald.com/articles/2011/07/01/news/doc4e0e4a9f91009692970080.txt

“Don’t be Fooled by Higher May Home Sales: Radar Logic”
http://www.housingwire.com/2011/06/30/dont-be-fooled-by-higher-may-home-sales-radar-logic

“CoreLogic: 10.9 Million Borrowers are Underwater”
http://www.mortgagenewsdaily.com/06082011_corelogic_negative_equity.asp

“Big Banks Easing Terms on Loans Deemed as Risks”
http://www.nytimes.com/2011/07/03/business/03loans.html

“No ‘Definitive Signs of Improvement’ in Housing”
http://www.flatheadbeacon.com/articles/article/no_definitive_signs_of_improvement_in_housing/23683/

#69 pessimist on 07.05.11 at 9:36 am

What does shorting the market mean? The Readers Digest version please. My ex-husband, I dumped 15 years ago phoned, he is broke. He had considerable funds. I think he fancied himself a Day Trader. I am not brillant with these matters. Have considerable RRSPs with a major bank. Am I glad I am single.

Imagine this – typically one buys low then sells high. Shorting turns this around and sells high then buys low.

A more detailed description.

You start off owning no stock and no money in your account. You are sure that ABC Corp, now trading at $100 is seriously overvalued and is due a fall.

You execute a short sale – you sell (say) 100 shares at the prevailing rate of $100 per share. You now have $10,000 in your account and MINUS 100 shares in ABC Corp (that is, you are short 100 shares).

Now, everything goes as you expect, and shares of ABC Corp have now fallen to $50, and that is about as far as you believe they will fall. You now “close your short position” by buying 100 shares of ABC Corp at $50. You now have $5,000 left in your account and zero shares of ABC Corp.

Thus, you made a $5,000 profit selling shares that you didn’t own.

Similarly, if the shares actually went up and you closed your short position, you would have lost money.

Now things are actually a bit more complicated than this, as the broker will need some extra collateral just in case things go bad. This, while it is important, just muddies the basic understanding of the mechanics of shorting.

—————–

Sounds like you are better off single. Better to cut your losses than to let them accumulate. I was fortunate myself in the marriage front, but know that I was lucky.

#70 EdmontonJim on 07.05.11 at 9:41 am

I’ve found it helpful to think of bonds as a transferable IOU. It’s a note that says Person A will pay the holder X dollars for Y years, and then give you Z dollars at maturity. This means you can always know exactly what the nominal value of the bond is at all times (unlike stocks). The real value changes with market confidence.

For the farmers out there you could also look at bonds like a chicken you don’t have to feed. The chicken is guaranteed to lay one egg per day for exactly so long, and then you get to eat the chicken.

So say I buy a newy issued bond for $100, with coupon rate of 5% and a maturity of 10 years. The nominal value is $150, and will shed $5 per year until it matures and pays me back $100.

But say I need my $100 back in 2 years. The nominal value is now $140. If the going coupon rate is now only 4% it means my bond has the same nominal value as new bonds, but will mature 2 years earlier. Rationally, I could expect to sell my bond for $125 (same yield). Even if rates go up, the shorter maturity will add some value to the price I can get for the bond.

Of course the market is neither rational nor unlimited. Supply and demand will affect the prices of bonds, so it pays to be contrarian.

#71 disciple on 07.05.11 at 9:47 am

Bonds are a refuge for preserving “wealth”, better than currency, to be held for partial terms while enjoying the coupons, traded up for others meanwhile, bought and sold with calculated risk, the fruit thereof picked from time to time to crystallize gains. Almost like being a full-time farmer, not boring at all, actually quite exciting for people with a conscientious, steady work ethic.

So that eliminates 95% of the population. This is why the bond market is where the real action takes place. This is where debt slavery is bought and sold to the highest bidder, and this is why it is virtually inaccessible to the slaves. Trust me, you do not learn anything useful about bond trading in school, this is guarded knowledge that is handed down from father to son in the innermost sanctums of secret societies.

The reason for secrecy is this: the existence of the bond market arises when corporations and governments do not want to borrow from central banks due to unfavourable restrictions, so they issue bonds because the bond market is more forgiving when issues arise.

But this just underscores the observation that central banks are completely unnecessary. A bond represents a promise by the issuer to pay the holder of the certificate. This is precisely the definition of a central bank note. The difference being that the central bank note has the baggage of restrictive usury upon the general population, while the bond note rather promises a ROI to the holder alone, a proper and true capitalist market. One that has no requirement for a central bank to issue the currency.

Sssshhhhhh! Keep it a secret. A true capitalist market involves ONLY buyers and sellers and excludes the third party central bank that modifies money into a commodity, rather than just a medium of exchange, which it should be.

Do I see any light bulbs out there?

#72 RL on 07.05.11 at 9:50 am

Hi Garth,

The latest from the Greater Victoria Real Estate Board: There are now 5000 homes listed for sale in Victoria (The most in anyone’s memory, or at least the last 10 yrs. according to the Real Estate Board) and it is now a buyers market, the Board went on to predict that the Victoria market will go through a long period of stable growth…

It meant to say, a long period of eroding prices. — Garth

#73 Utopia on 07.05.11 at 10:02 am

“Not all stocks are equal. Not all bonds are equal. Nor, verily I say unto you, all investors.” — Garth
————————————————————-

OK, good crack. Now you are really making me laugh too.

#74 UVZ on 07.05.11 at 10:03 am

#16 Mark

Is there a way I can buy a short-term <5 year CMHC-insured mortgage-based bond?

Sounds like the James Bond of all bonds.

#75 Utopia on 07.05.11 at 10:06 am

So I am done with bonds for today. How about a Bob Marley tribute instead for those who are Bob fans? Bet you never heard this one before.

From Teddy Afro, Ethiopia.
http://www.youtube.com/watch?v=vIvNNgtDpYY&NR=1

#76 UVZ on 07.05.11 at 10:10 am

#72 disciple

[…the existence of the bond market arises when corporations and governments do not want to borrow from central banks due to unfavourable restrictions..]

You’ve got me confused about how the system currently works.

Do you have an example of a Canada-based government (fed or provincial) or a corporation (privately owned) taking out a loan from the Bank of Canada? There must be missing steps in my understanding as I read your post.

#77 Randis on 07.05.11 at 10:11 am

Thanks Garth for the insight, as I am sure many fellow Canadians need more education on different types of investment vehicles out there. Simply put, people should understand aside from stocks and RE, there are still other stuff and BOND is one of those useful vehicles out there.

Funny how I keep hearing people (general public and even some of my colleagues in the financial advising industry) that bonds are not “sexy” and boring and ppl are better off owning stocks … Diversification is an afterthought these days, no kidding.

I just don’t understand how people don’t get the benefits of owning fixed income securities, so I totally agree with Garth when he says people fail when owning stocks and GICs …

Anyhow just want to make a point, fixed income are good stuff. Load them up and diversification + balance are the words to remember.

#78 Soylent Green is People on 07.05.11 at 10:28 am

My idea of an ideal husband would be somebody who had this Bond book memorized and could act on the advice given.

#79 The InvestorsFriend on 07.05.11 at 10:38 am

Garth saiz (again) at 31

“Nobody holds 15-year bonds to maturity.”

Well obviously that is a meaningless generalization and also it is of course totally false. There must be at least one peron who buys a bond and hold to maturity. Not to mention pension and life insurance companies who routinely hold to maturity.

Anyhow if a 15 year bond turns out to be a bad investment due to inflation then someone is going to take that loss. Buying a suspect asset today because you plan to to sell it to a greater fool later is, well, foolish.

Buy 15 years bonds ONLY if you are at least PREPARED hold it to maturity.

If interest rates rise they may do so quickly and the fact that government bonds are highly liquid will only mean you can quickly relaise a loss in the scenario where interest rates rise.

I am not saying don’t buy bonds, I am saying be wary of long-term bonds unless you have no fear of inflation and no fear of higher interest rates.

As for me and grampa Buffett, we believe… in equities.

You have no clue of which you speak since a 15-year bond constantly reprices. The only loser is the one who holds it to maturity, which is why nobody now does – including pension funds. Sheesh. — Garth

#80 Devore on 07.05.11 at 10:46 am

#50 bullion.bunny

So stock markets moved higher. Money flowed out of the bond market to buy equities.

WRONG, try a massive short squeeze as everyone went to cover short positions.

So… you’re saying money moved out of bonds and stocks went up?

In a short squeeze, investors must liquidate other assets to shore up their position. They sell bonds (demand goes down, price goes down, rates go up) to buy equities. They were likely short the market through derivatives, which is how large positions are established without throwing the stock 20% with every multi-billion dollar transaction. This broadly moved equities up.

Six of one, half dozen of the other.

#81 salonist on 07.05.11 at 11:02 am

garth, at the bunker
http://www.youtube.com/watch?v=Ozljah9glwU

#82 Utopia on 07.05.11 at 11:07 am

#73 RL on 07.05.11 at 9:50 am

“The latest from the Greater Victoria Real Estate Board: There are now 5000 homes listed for sale in Victoria (The most in anyone’s memory)”
———————————————————————————

Holy Macaroni! Are you kidding me? That is a huge increase. Just yesterday Smoking Man was challenging everyone here to apologize for suggesting that supply would rise and threaten prices as we warned would happen.

Claimed he was right and we were wrong. Time for him to re-think.

Victoria is giving us an answer to that challenge already. I suggested the other day that the signal has now been sent to investors to get out of the R/E market. It was sent in no uncertain terms.

It is impossible for me to recall any other time in recent history when we had the Bank of Canada, the Finance Minister, Capital Economics, the Media and CGA all issue releases and warnings on home ownership inside a single week.

If the speckers, builders and flipppers missed those messages they are just plain idiots. Average home owners heard it loud and clear and now we are seeing the results. They are listing to sell. They want out before it is too late.

But it is too late already. Bloody Fools. They were warned long ago.

#83 Dan in Victoria on 07.05.11 at 11:19 am

RL @ 73
I’ve spent a few days out kicking tires on lots and houses in Victoria.
I enquired last week about a lot and am still chuckling about that one.
Enquired about another one yesterday, got told there was “Lots of action and an offer was expected soon”
Had another laugh, that one has been on the market for well over 6 months.
It’s been renewed on mls a couple of times.

Buddy dropped by and told me his uncle has two spec houses sitting right now, would sell one too me right now for what he has into it (bank loan) just pay it off and its mine. No real estate commision, no profit. Nada.
He is in full panic mode.
Wants out yesterday.

#84 Chaos on 07.05.11 at 11:44 am

The next big thing…

The United States helping to inflame the far east as it sides with other interested countries in the unexplored underwater oil wealth that China covets.

We should observe American foreign policy in action as smaller countries square off against the big dog in the yard.

It will be fun to watch the Americans inflame the situation (but not get directly involved), to unbalance China and create unknown(to us) opportunities for themselves and other Eurozone Bilderberg participants.

Of course Big Oil stands to profit from this as the thin edge of the wedge is driven home.

We don’t run or control our destinies any longer, we just pay for the chess game, as the corporatocracy and Bilderberg are the prime movers behind the puppets.

What of real estate?

Well it’s a most convenient way to keep the sheep from understanding what is really going on.

Too late…the fleecing has already happened.

#85 Sunny on 07.05.11 at 11:47 am

“Utopia,
It was a great short article and I agree unequivocally. Quality stocks, those providing a long history of dividends, blue chips and companies with strong balance sheets and good international exposure are the place to be.

I am actually very bullish in this regard. I favour US and Canadian companies including corporate bonds from the best of the pack. They are indeed the least ugly of all the options available.

As I tried to convey yesterday, it is my belief that staying invested in quality defensives and sound producing companies is the right move at this juncture. Income matters. So does security and return of invested capital. It matters a lot.

This is all the more true as certain debt issues become increasingly risky to hold.

Many will disagree but I also believe a debt bomb is threatening to go off and capital return will be unlikely in some cases thus making some debt instruments a gamble.

I do not sense that risk coming from good corporates.”

Agree!
thanks for your posts, always very informative and well thought out.
I’m a big fan of big blue chip Dividend paying companies that have a history of raising dividends every year. Dripping for the last 12 years has definitely paid off for me, and the dividend tax credit in Canada is fab, unlike the taxes you’re charged from income from bonds, GIC’s and rental suites.
Freedom at 35!

#86 Steven Rowlandson on 07.05.11 at 11:56 am

Sure hope you took profits. — Garth
I did not! The reason being that when ever some one advises me to take a profit and I follow that advice the value of the asset I just sold goes up, up and away to the moon. Therefore I have resolved never to take profits on the advice of others. So far there has been no bubble and no strategicly beneficial gain therefore no justification for taking a profit. Silver went from one percent of a penny on the dollar to five percent of a penny on the dollar. Big deal. I want the other 99.95 cents on the dollar at least before even thinking about profits. A 70 trillion dollar global economy divided by a billion ounces of silver is 70 grand an ounce. That is my idea of 100 cents on the dollar and fair market value.

Enjoy your greed. — Garth

#87 Victor on 07.05.11 at 12:00 pm

#37 viTRifY13 on 07.04.11 at 11:58 pm
Fiance sold her house, made a cool 100k. Didn’t know what to do with it. I got her to open a questrade account, purchased a preferred share ETF (HPR) with 10% of her money, and then the last remaining 90% I split it between the preferred shares of CIBC, HSBC, Bank of Nova Scotia, and Bank of Montreal. Preferred share ETF pays 4.75% and the banks pay just shy of 6%.

I think we did okay, not diversified enough, but it is invested in something she understands and feels comfortable with.

All the bank preferreds reset in 2014 at a 1 yr rate + 4.5% (around) but there’s speculation the banks will buy back the preferred shares for face value ($25 whereas she paid $26.xx), giving a yield to maturity of 3.3% – Worst case scenario, still beats the pants off of the orange guys shorts / GIC’s. =)

=================

You should really consider diversifying in future. Quite a few other solid dividend paying stocks out there to consider. Here are a few for example in oil/gas, utilities, insurance:

CPG.TO
EMA.TO
SLF.TO
PGF.TO
MBT.TO
TRI.TO
GWO.TO

#88 disciple on 07.05.11 at 12:09 pm

#77 UVZ…Great question, and one that speaks to the heart of the fraud. I am going to try to post a link authored by Paul Krumm because the question deserves a lengthy answer. But the short and not so sweet version is that commercial banks are the operating fronts for the central bank. They exchange bookkeeping entries or bank treasury notes in exchange for interest-bearing assets from traders such as the government. The treasury notes are backed by NOTHING. It would be the same if you or I printed these worthless pieces of paper in our basement and gave them to the government in exchange for interest-bearing assets such as ownership in tangible businesses. Central banks and their tentacles called commercial banks are given something REAL in exchange for NOTHING. They then have their rules and pecking order amongst themselves on which vulture gets what. My post is already too long…I’m boring myself…

http://www.vantagequest.org/trees/money.htm
http://www.vantagequest.org/trees/money.htm

#89 disciple on 07.05.11 at 12:10 pm

By Paul Krumm:
The way the process works is as follows: A commercial bank, savings and loan, or credit union can, within limits of reserves set by the Federal Reserve Bank, accept assets (goods or property) pledged by a trader as collateral, set up an account which represents a portion of the value of the assets pledged, create a sum in the trader’s account (the wave of the wand, mentioned previously), and give the money so created to the trader or the trader’s payee. This is how the process of converting wealth to assets works in our present money system. The trader pledges assets, and the bank permits the creation of money, which must be returned to the bank (the mediator), with interest, to free the asset pledge. If in the meantime the borrower cannot make payments, the bank takes the assets pledged.

While banks are generally credited with the creation of money, it is still the traders who go to the bank to borrow who are making the commitment to place goods or services on the market to repay their debt. So, as mentioned above, traders are still the functional creators of money, rather than the bank. As these traders place their goods and services on the market, and repay their loans, the money they issued (borrowed) is extinguished.

However as also noted above, when the loan is originated, and the money created, an additional debt, or tax is set up as interest on the loan, which must be paid to the bank mediating the money creation process. Interest creation is a functional glitch in the system, one which must be understood. When money is created in the current loan process, money with which to pay the interest is not created. Interest owed is only set up as a debt to the bank. No money is created to pay it with. As a result of this bookkeeping system the principle put into circulation is insufficient to repay the principal and interest owed. So either the trader uses money that someone else borrowed to pay his interest, or he does not pay all the principal and interest.

#90 spaceman on 07.05.11 at 12:14 pm

phinny on 07.04.11 at 9:06 pmI’ve been thinking about bonds. Don’t own any- so I’ll throw this out there. What about iShare Bond ETFs?

I suggest doing some reading on balanced portfolios, I have not read Money Road, but I am sure there is mention of this. Stocks and bonds, are opposites. Stocks go down, bonds go up. But bonds fluctuate at a much lower rate than stocks, especially short term. that is why people use them as safe haven investments, and why there are 14 times the amount of bonds out there. Low risk.. (but not without risk)

Right now my portfolio is 60% equitys, (mostly dividend and prefered) and 40% bonds.. (T-bills, short and long) But my short term goal is to use 50K for my HBP so it is like a savings account. For me Balance is the key to investing. Read more there is lots of info out there.

#91 Gerardo on 07.05.11 at 12:24 pm

As Garth did point out, the easiest way for self-directed to trade bonds is through indexes or ETFs. In the current situation it is also wise to use a laddered approach, in which bond purchase is made such that they mature at consecutive years. I can suggest two names:

1) Claymore 1-5 Yr Laddered Corporate Bond ETF (CBO), has a Management expense ratio of 0.27%, pays a 4.6 % dividend, distribution is paid monthly and you can opt to reinvest your dividend, thus packing more share every month. This is not a junk bond, the holdings consists of solid corporations.

2) Claymore 1-5 Yr Laddered Government Bond ETF (CLF) with a MER of 0.17%, a 4.5% dividend, monthly distribution and DRIP eligible.

Gerard

#92 The InvestorsFriend on 07.05.11 at 12:30 pm

Garth in an apparent lapse of reasoning today said at 80

You have no clue of which you speak since a 15-year bond constantly reprices. The only loser is the one who holds it to maturity, which is why nobody now does – including pension funds. Sheesh. — Garth

Duh, you got it all 100% backwards.

Since (as you say) a bond constantly reprices, anyone who holds it can lose or gain money in a nano-second. And will expect to lose the bid/ask spread if held for only a short time.

in nominal dollars, the only one who CAN’T lose on a government 15-year bond is one who buys at par and holds to maturity. (They may lose purchasing power but will not lose in dollars).

Anyone who sells prior to maturity may make a gain or loss – Sheesh…

The simple point is, unless you are trying to speculate on interest rates don’t buy a long term bond unless you do intend to hold to maturity in which case you are an investor (not speculator) but you do expose yourself to inflation risk and you tie up your money for a long time at a low rate.

Smart bond investors make money the same way smart equity investors do. Capital gains. This conversation is over since you appear to have a mental block. — Garth

#93 garrulous squirrel on 07.05.11 at 1:30 pm

With real inflation running above ten percent ( thats the rising cost of things you and I actually use and not the phony ‘hedonic calculation from the BOC that tots up dead people and cheap t-shirts) the idea of buying a 5% bond is not an option. For ex…..the ZJG was up 3.5% just this am………………..the ags have dug into their seasonal pattern and issues like VT, POT and AGU are all doing well above 5%.

IMHO a 5% return is negative.

BTW ..heres a bunch of perverted clowns who will never have to worry about inflation due to the outrageous pensions we cough up…..and lookee what they do to ‘earn the money’.

http://www.vancouversun.com/College+Teachers+keeps+some+records+spotless/5049101/story.html

#94 P on 07.05.11 at 1:38 pm

That was a very informative post. Thank you.

#95 mississaugaboy on 07.05.11 at 1:56 pm

Bond buys are not for amateurs. Careful. — Garth

————————————————

So as an amateur, should I just stick with Bond ETFs, Preferred Shares and some “safer” equities or equity ETFs?

#96 Jamaican_Gal on 07.05.11 at 2:18 pm

Big Canadian banks raise mortgage rates

http://ca.finance.yahoo.com/news/Several-big-banks-raising-capress-371856931.html

“TORONTO – Several of Canada’s big banks announced increases in their residential mortgage rates effective Tuesday.

Royal Bank (TSX:RY), TD Bank (TSX:TD) and Laurentian Bank (TSX:LB) all raised the posted rate for a five-year fixed-rate mortgage by 0.15 percentage points to 5.54 per cent.

Royal Bank raised its special offer rate for a five-year mortgage by 0.15 percentage points to 4.39 per cent, while TD and Laurentian raised their special offer rates for a five-year fixed-rate mortgage by 0.15 percentage points to 4.29 per cent.

Most other special and fixed rates at the banks were also going up between 0.10 and 0.15 percentage points.

Fixed rate mortgage rates are affected by the cost of borrowing in the bond market, where banks finance their home loan lending.”

Also, in other (not relevant to this blog) news, Casey Anthony found not guilty in death of 2-year-old daughter.

No need for link, the story is everywhere.

#97 UVZ on 07.05.11 at 2:28 pm

#90 disciple

Quote: “Commercial banks and other financial institutions provide most of the assets used as money through loans made to individuals and businesses. In that sense, financial institutions create, or can create money.”

http://www.bankofcanada.ca/about/backgrounders/canadas-money-supply/

Since I found this information from an official source in two minutes, it is no secret.

All money created and used in the economy is indeed debt.

The system does not by design manufacture “interest money” as such. It is obvious that more “principal” debt needs to be issued in order to furnish the money which becomes “interest” or return-on-investment or — for the sake of staying on topic — “bond coupon rates”.

The design can and does harm people (e.g. an overleveraged middle class) if not carefully controlled and managed.

Most of the common people probably don’t know what they are dealing with.

At the minimum more public education is needed.

#98 Kitchener1 on 07.05.11 at 2:29 pm

Garth, dude, what are you thinking opening the “bond” bombshell??? this will confuse many people.

Without the bond market, life as we know it would cease to exist. All corporations, govt’s etc.. use the bond market to fund their current obligations as well as future R and D. Without it, hiring would stop and so would the economy.

Its were the big money plays, its just a fluid and liquid as the equity markets we all know well.

Holding a bond to maturity is just plain dumb, u trade them for profit the same way u would a stock. Money is on the volume side and betting the spread (whatu paid vs what you can sell it for now), dont beat the spread, u lose, just like sports gambling.

People, stay away from them unless you know what you are doing, the market is very fluid and dynamic, moves on news and events in real time and bond spreads can change in moments (look at Canadian mortgage rates.)

Interesting that they are now at 5.54%– because new CMHC rules mean that people have to qualify at the posted rate even if they go variable. Makes a huge difference the higher up the property latter you go.

#99 rangergord on 07.05.11 at 2:34 pm

Canadian Bonds may be among the best but the world is embroiled in a debt crisis that is not over. Too soon to tell how this will end. Not to mention that I have no interest in lending the New Government of Canada money. The sooner these corrupt governments fall the better.

#100 Lizard on 07.05.11 at 2:51 pm

The Why:
Including Garth, there has been about 100 people so far weighing in about whether or not owning bonds is a good idea. And for those interested in the Why, I’ll vouch that ‘Money Road’ has some good information.

The What:
Using bonds as basic investment to earn interest makes sense. Using bonds for capital gains, also makes sense, but only if you understand the business cycles and markets well enough to know your timings.

The How:
For those interested in further looking into owning bonds, how does one go about buying them?
My CIBC Investment Service account (afaik to date) only lets me buy bonds in packages of $5000 at a time. Is this common, do smaller packaging’s exist, are the packaging’s necessary?

I feel that disciple (#72) articulated my goals of investing perfectly in their first paragraph. I’m just a bit lost about how to sow and reaper my crops.

I know Bobby (#22) mentioned a bond fund (PHN Bond fund)

To Mathew (#60) Garth mentions not personally buying bonds, and that bond indexes should be preferred over bond funds.

The Who:
I am an amateur in these matters (net worth >$30,000, renter, driving a beater), and I’d like to learn more about the how. My current understanding is aligned to thinking of bonds along the lines as being (mostly) unlisted equities: you buy and trade them as ‘pieces of paper’ that represent a corporate debt, you take your interest (coupons), the market determines the value of the piece of paper, but every time the paper changes hands the ‘croupier ‘ takes their cut.

cheers

#101 Al on 07.05.11 at 2:51 pm

Markham Real Estate Lawyer next door tells me that he is too busy closing deals to take time off this Summer !

#102 Mark on 07.05.11 at 3:05 pm

#75, “Is there a way I can buy a short-term <5 year CMHC-insured mortgage-based bond?"

Absolutely, any Canadian broker/dealer of bonds should be able to set you up. I think there is better money in owning the equity of Canadian banks though, as, instead of collecting just 1 spread against the ‘risk-free’ rate — you will be collecting 10X spread due to the leverage inherent in the banks’ position in such bonds. Minus the banks’ administrative costs, of course.

BTW #94, VT is total crap.

#103 Thetruth on 07.05.11 at 3:22 pm

Canada accepting illegal US immigrants.

What a farce.

http://www.livepunjab.com/articles/canada-offering-pr-undocumented-workers-20615.html

#104 SayWhat? on 07.05.11 at 3:35 pm

Nice try Garth, but you are essentially wasting your time attempting to educate the masses about investment concepts that they do not understand and more importantly, don’t care about.

House porn is what they understand and it’s what they want. Four-bedroom homes with stainless steel appliances, hardwood floors and granite countertops make them swoon.

Equities, bonds, ETF’s and preferred shares puts them to sleep.

#105 vyw on 07.05.11 at 3:39 pm

Tuesday, July 5, 2011

VANCOUVER, BC – Home sellers outpaced buyers on Greater Vancouver’s Multiple Listings Service® (MLS®) in June, drawing the market back toward balance this summer.

The Real Estate Board of Greater Vancouver (REBGV) reports that residential property sales of detached, attached and apartment properties reached 3,262 in June, a 9.8 per cent increase compared to the 2,972 sales in June 2010 and a 3.4 per cent decline compared to the 3,377 sales in May 2011.

New listings for detached, attached and apartment properties in Greater Vancouver totalled 5,793 in June. This represents a 4.5 per cent increase compared to June 2010 when 5,544 properties were listed for sale on the MLS® and a 2.3 per cent decline compared to the 5,931 new listings reported in May 2011.

Last month’s new listing total was 9.8 per cent higher than the 10-year average for June, while residential sales were 7.3 per cent below the ten-year average for sales in June.

“With sales below the 10-year average and home listings above what’s typical for the month, activity in June brought closer alignment between supply and demand in our marketplace,” Rosario Setticasi, REBGV president said. “With a sales-to-active-listings ratio of nearly 22 per cent, it looks like we’re in the upper end of a balanced market.”

At 15,106, the total number of residential property listings on the MLS® increased 3.1 per cent in June compared to last month and declined 14 per cent from this time last year.

The MLSLink® Housing Price Index (HPI) benchmark price for all residential properties in Greater Vancouver over the last 12 months has increased 8.7 per cent to $630,921 in June 2011 from $580,237 in June 2010.

“The largest price increases continue to be in the detached home market on the westside of Vancouver and in West Vancouver,” Setticasi said. “Since the end of May, the benchmark price of a detached home rose more than $147,000 on the westside of Vancouver and over $80,000 in West Vancouver. Detached home prices in Richmond, however, levelled off slightly, declining $25,000 in June.”

Sales of detached properties on the MLS® in June 2011 reached 1,471, an increase of 29.1 per cent from the 1,139 detached sales recorded in June 2010, and an 11.8 per cent decrease from the 1,667 units sold in June 2009. The benchmark price for detached properties increased 13.4 per cent from June 2010 to $901,680.

Sales of apartment properties reached 1,266 in June 2011, a 0.6 per cent increase compared to the 1,258 sales in June 2010, and a decrease of 29.3 per cent compared to the 1,790 sales in June 2009. The benchmark price of an apartment property increased 3.5 per cent from June 2010 to $405,200.

Attached property sales in June 2011 totalled 525, an 8.7 per cent decrease compared to the 575 sales in June 2010, and a 34.5 per cent decrease from the 802 attached properties sold in June 2009. The benchmark price of an attached unit increased 6 per cent between June 2010 and 2011 to $522,424.

The real estate industry is a key economic driver in British Columbia. In 2010, 30,595 homes changed ownership in the Board’s area, generating $1.28 billion in spin-off activity and 8,567 jobs. The total dollar value of residential sales transacted through the MLS® system in Greater Vancouver totalled $21 billion in 2010. The Real Estate Board of Greater Vancouver is an association representing more than 10,400 REALTORS® and their companies. The Board provides a variety of member services, including the Multiple Listing Service®. For more information on real estate, statistics, and buying or selling a home, contact a local REALTOR®.

For more information please contact:
Craig Munn, Assistant Manager of Communication
Real Estate Board of Greater Vancouver
Phone: (604) 730-3146
[email protected]

#106 Winston1984 on 07.05.11 at 3:47 pm

You seem like a mean, little man driven by avarice. You must have sold your soul a long time ago.

#107 The InvestorsFriend on 07.05.11 at 3:57 pm

Winston1984 at 107, said, unhelpfully:

You seem like a mean, little man driven by avarice. You must have sold your soul a long time ago.

Yeah, Winnie well I don’t know who that is directed to but if it’s Garth or me, we ain’t that little…

#108 Daisy Mae on 07.05.11 at 3:58 pm

“Still with me?”

I think I’ll have to read the article 20 times…

#109 SmarterThankYouLook on 07.05.11 at 4:12 pm

5 year fixed rates still dirt low. No need to get hot and heavy about a non-event in the bond market.

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/06/5-year-yield-touches-2.html

#110 Utopia on 07.05.11 at 4:28 pm

You know, Victoria really is a very unusual market.

There is a saying in that town that it is populated by “newlyweds and nearly dead’s”. There used to be something to those words as the city has long had a reputation as a retirement destination.

Outside of Government though, the jobs picture is dismal. This may in fact be why there are so many listings now and so few sales. How can you attract fresh blood into a city when employment prospects are poor and prices sky high?

The retirement community there meanwhile is already starting to cash out and move to condos, old age homes, care facilities, the kids basement in the Kootenays….

So what we are seeing there is really a microcosm of a retirement trend in a single city that will reflect how a changing demographic is going to upend home prices across the country for the next couple of decades.

It is kind of coal mine Canary in some respects so it will be worth watching how that market unfolds. It is quite clear that property owners there will have to start lowering prices if they want to start attracting bids.

Will the seniors unable to sell start taking out reverse mortgages en-mass or will they relent on price demands and cash out for what it’s worth in the current market?

What a miserable place to be a Realtor though. Business is dead.

#111 jess on 07.05.11 at 4:38 pm

In business aren’t estimates have to come within 10%?
U.S. government collected $2.16 trillion in tax revenue in fiscal year 2010.

Rumsfeld on eve of Iraq war: “My friend,” Mr. Rumsfeld replied, “if you think we’re going to spend a billion dollars of our money over there, you are sadly mistaken.”
thinkprogress.org/politics/2008/12/13/33680/sigir-rumsfeld/ – Cached13 Dec 2008 –

According to the Eisenhower Research Project based at Brown University’s Watson Institute for International Studies. This expense, which factors in medical care and disability expenses for current and future war veterans, could increase by another $450 billion in spending by 2020.

Estimated cost of post-9/11 wars: 225000 lives, up to $4 trillion …
news.brown.edu/pressreleases/2011/06/warcosts – Cached29 Jun 2011 –
The wars will cost Americans between $3.2 and $4 trillion, including medical care and disability for current and future war veterans, according to a new report by the Eisenhower Research Project based at Brown University’s Watson Institute for International Studies. …
======================
washington Mutual and countrywide option arms
Big Banks Easing Terms on Loans Deemed as Risks
By DAVID STREITFELD
Published: July 2, 2011
cutting principal in half while raising interest rate to about 5 percent.
==================================
ABSENT MINDED PROFESSORS
So do high credentials = acceptance = more cited works = more drugs prescribed prescriptions/diagnoses of bi polar went up 40x’s

“Three US psychiatrists, responsible for trailblazing the use of antipsychotic drugs in children, are facing sanctions for their failure to declare their acceptance of millions of dollars from pharmaceutical companies between 2000 and 2007. ”

Three years ago in an investigation led by Iowa Republican Senator Charles Grassley as failing to disclose potential conflicts of interests that could have arisen due to large consultancy fees from pharmaceutical companies.

Physician Payment Sunshine Act -which would require organisations to report all cumulative payments over $100,000 to physicians to the government. Each violation of the law would warrant a fine between 10,000 – 100,000 dollars – a punishment somewhat more severe than that faced by Biederman and his colleagues.
http://blogs.nature.com/news/2011/07/harvard_scientists_disciplined.html#comments
=====
mud mining for the rare stuff
Metal-rich mud
Deep-sea mud beneath the Pacific Ocean is a highly promising giant resource for rare-earth elements, reports Nature Geoscience.

#112 jess on 07.05.11 at 4:40 pm

along my walking path the houses are selling however, they are people who are moving in from rural areas looking for work.

#113 T.O. Bubble Boy on 07.05.11 at 4:45 pm

#110 SmarterThankYouLook:

Apparently you missed the follow-up post from Canadian Mortgage Trends on July 4th? (where RBC & others raised rates)

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/07/rbc-boosts-fixed-mortgage-rates.html

#114 Bobby on 07.05.11 at 4:54 pm

For #90 The InvestorFriend,

Your simple approach makes me believe you are a financial adviser with more sales experience than investing knowledge. Probably one who sells mutual funds with extremely high commissions.
You are not an adviser but a commissioned salesman. Makes one chuckle, much like the term Real Estate professional.

#115 Victor on 07.05.11 at 5:11 pm

Toronto woman suing real-estate agents over her housing woes

http://www.theglobeandmail.com/news/national/toronto/toronto-woman-suing-real-estate-agents-over-her-housing-woes/article2082916/

#116 WINNERPEGER on 07.05.11 at 5:14 pm

http://www.theglobeandmail.com/report-on-business/economy/housing/vancouver-home-sales-dip-in-june/article2087441/

Also—- GO JETS GO !

#117 garrulous squirrel on 07.05.11 at 5:26 pm

Global warming scam debunked again.

http://news.google.ca/news?lr=&tab=nn&ie=UTF-8&ned=ca

But here is BC the ‘carbon tax’ just hit consumers again. When will voters turf the tax happy Liberal ensconced goons who introduced this scheme only to ‘redistribute wealth’ and use ‘global warming’ as an excuse to raise taxes ‘on the rich’.

#118 Bottoms_Up on 07.05.11 at 6:03 pm

#116 Victor on 07.05.11 at 5:11 pm
——————————————
Wow, thanks for posting. It’s nice to know real estate agents can be held accountable for their incompetency and/or maliciousness/non-disclosures:

“A Sudbury judge recently found in favour of Zoriana Krawchuk, awarding her $110,000 because the agent should have known that there were foundation issues at the house she sold to Ms. Krawchuk. Ms. Krawchuk didn’t have the house inspected prior to moving in, but that didn’t move the judge.

“The [sellers] knew that the foundation of the house was seriously compromised and that there were ongoing plumbing problems,” the judge wrote in a summary of the case. “They made incomplete disclosures. [The agent] took no steps to verify the accuracy of the information supplied by the seller or to otherwise protect Ms. Krawchuk from the adverse consequences of this inaccurate information.””

#119 VICTORIA TEA PARTY on 07.05.11 at 6:08 pm

GOOD MOODY OR BAD MOODY? THOSE BINDING BONDS!

Moody’s, the bond ratings agency, drove another nail into the still-being-built Euro-coffin, this date, in downgrading Portugal’s debts to junkyard status (no insult to junkyards meant!).

Greasing further the skids, upon which all of Europe is now beginning to slide (and aided by Greece that other bond junkyard of broken dreams), is now attracting much more attention across financial markets.

Worry is starting to bubble up now, after last week’s Greek bailout “resolution”; the warm and fuzzies are cooling quickly as represented by the Dow’s negative finish today. Other “worry-beads” should be trotted out in the next days.

GARTH IS RIGHT…FEAR IS GOOD!

Garth is right about the power of bond markets. They are the primary capitalist money-raising engine. That is why finance ministers always come bearing “gifts” (accepting any old interest rate imposition) as opposed to lugging brickbats (negotiating those rates) when they go to those markets seeking moolah.

The bond vigilanties can do more damage to Greece, for example, in about 10 milli-seconds of heavy bond trading than can broken windows be caused by all the vandals you can shake a stick at for months.

So, when Moody’s speaks, ministers listen, then they quietly try to discount the bond folks for the sake of local consumption. Then the “phone call” comes reminding the finance miscreant who’s the REAL boss here and to shut the hell up.

HOWEVER, THE BOND GUYS ARE NOT GODS

Therefore, returning to a chastened “official” Greece, Portugal, and so on, there IS still life left in those vandals, inspite of the bond goliaths.

Thus, a grudge match is the next step in this faltering European economic process: bond vigilantes vs rabble. Who will win?

The rabble.

Why? Look back at history and at a certain rabble that shunned bond dealers who had just made loans to Russia only to be deep-sixed by…the rabble! The Bolsheviks in 1917! Talk about rabble!

Will there be a similar revolution, or concerted effort, fomented by today’s vandals, in Europe, to break the yolk of the “capitalist hordes?”

Likely not.

Why?

There’s not enough privation and too little local organization; too many well-read, lazy folks, while in Czarist Russia it was illiterate peasants who provided the muscle to help Lenin & Co. create its own oppressive “marketplace” of blood-soaked socialist clap-trap.

What the world prefers to see are orderly sovereign bond defaults across the European periphery followed by some “deal” to staunch the fiscal wounds of what’s left of the Euro-experiment, salvaging some legitimacy. Europe really is on the edge.

Back in the USA, meanwhile, the debt ceiling talks are taking on a special urgency. A deal will be reached, I figure, but it won’t change a thing. The American Empire continues to bleed, uncontrollably. The US economy is in desperate condition.

What sort of clout do the bond vigilantes have against a raging bull of a sick empire? None.

In time, they could get clocked!

#120 Roial1 on 07.05.11 at 6:10 pm

A love story.
sent to me by my 70 yr. old aunt.

Once upon a time, a guy asked a beautiful girl “Will you marry me?” The girl said, “No!”

The guy lived happily ever after.

He rode motorcycles, went fishing & hunting, played golf a lot, drank beer & Scotch, had tons of money in the bank, left the toilet seat up, and farted whenever he wanted.

The End

#121 Ben on 07.05.11 at 6:16 pm

I want to be trailer trash. They did not cause any of the problems that our country faces today. They did not get mortgages they couldn’t afford. They did not run banks to the ground with greed. They did not use investors for their personal benefit. They don’t even belong to the unions that ask too much of their companies.

I’m tired of paying mortgage bills,
utility bills, property taxes.

I want to live more simply, pack up
the dogs and move into a travel-trailer.

I don’t mind being called ‘trailer trash’,
but I wanted to get your opinion.

http://video.search.yahoo.com/search/video?p=i+want+to+be+trailer+trash

#122 disciple on 07.05.11 at 6:28 pm

Mr. UVZ…I did not say that the secret is that banks create money. I said that the secret is that so do bond issuers, thereby making the central banks unnecessary.

You make a good point about bond coupon rates, but what you don’t yet realize is that the “interest” paid on these has been earned honestly through the labour and technology of the capitalist ideal, increasing the REAL economy free of technically unpayable debt.

The “interest” paid to central banks in exchange for NOTHING is the crux of the difference in the two market models which you are not recognizing. Interest charged in lieu of labour or technological gains is monetized slavery, and is a false economy. I see that you have not read the link. It would have explained to you that the interest entering the system via central banks is MASKED by the growth of the REAL economy. This is not coincidental.

Anyways, it is understandable if this is too confusing, because most people still believe that money exists, while in fact, it is nothing but an abstract accounting concept, like the base ten numerical system, or proper verb conjugation. It is a system we use out of necessity in communicating with each other, but the language is outdated and archaic, like hierarchical command or feudal social organization which we still practice under the colonial monarchistic dominion-ship here in Canada.

Money itself as a technology will be phased out just as soon as people realize it has been abused and manipulated by a couple hundred families on this planet to the detriment of the millions of others.

#123 disciple on 07.05.11 at 6:33 pm

Hey Utopia,
Thanks, that was a great link to Teddy Afro. I’m a big fan of King Marley. Very catchy tune!

#124 Nostradamus Le Mad Vlad on 07.05.11 at 6:48 pm


“Handy summary: bonds and houses go in opposite directions. Now you know you need some.”

Now housing is being flushed down the crapper as we speak, it may be a prudent move to tie oneself up in bondages, drop back 10 and view the carnage from a better viewpoint.
*
Fukushima #2 Another domino effect — Fort Calhoun nuke plant flooded, and Los Alamos — Fukushima #3? Icelandic FM on Palestinian visit. Iceland will be able to pass their knowledge on to Palestinians about standing up for themselves! Courage Good on Cdns.!

4:45 clip Seems like the Eurozone may be toast. Denmark voted to bring back security checkpoints; US #1? “21 The USA with six active wars is at war with more nations than any other.”; Cold Fusion is becoming a reality;

Barter Economy Avoid GST, PST and or HST — barter instead! Russia and China bank bailouts. Think Greece is the only toad-in-the-hole? Think again; 2:12 clip California Public Bank? Better than the US Fed; Whose on first? Greece or US.

Argentinian’s lessons lost on Greeks; Free Iceland and US dictatorship; USAF Cost-cutting; NIA Hyperbole or truth? Ireland Can anyone say an IMF-induced Greek-Euro collapse? 2:39 clip Unemployed middle class may never work again.

Katrina “This completes the process of transferring the National Guard, which was created to be the states’ armies under control of the state Governor, to the control of the Pentagon, leaving the states unprotected against military invasion by the Federals. This is most assuredly not what was intended by the Founding Fathers, who created a nation of separate states aligned for purposes of economy and common defense only.” wrh.com’ Colder Winters “The projection was based on research that identified how low solar activity affected winter weather patterns.” As pointed out, sun spots are all but gone for the time being.

#125 TurnerNation on 07.05.11 at 7:27 pm

The Globe and Mail attempts to identify the best stocks for profit growth in Canada in its Tuesday, July 5, edition. The Globe’s Scott Adams writes in the Number Cruncher column that he considered only stocks that have grown earnings per share every year in the past five years. Mr. Carrick says this investing strategy is beautiful in its simplicity. Out of about 680 of the largest stocks in Canada and only 13 stocks qualify in Mr. Adams’s screen. CPMS consultant Jamie Hynes says: “This is remarkable given the volatility of overall TSX earnings over this period. From November, 2006, to January, 2010, S&P/TSX composite earnings fell 48 per cent.” Mr. Adams says it is important to note that his screening methodology uses adjusted earnings, which remove all unusual and non-recurring items. Mr. Adams notes that his surprisingly short list of stocks have consistently grown their earnings together with boosting the bank accounts of their investors. Stocks on the list are Home Capital Group, CGI Group, Open Text, Shaw Communications, Descartes Systems, Stantec, Enbridge, Equitable Group, Atco, Shoppers Drug Mart, Astral Media, High Liner Foods and National Bank of Canada.

© 2011 Canjex Publishing Ltd.

#126 Macrath on 07.05.11 at 7:43 pm

“Anybody investing less than $1-million in bonds should do it through ETFs,” Mr. Hymas said. “If you have more than $1-million, then you can talk about buying individual issues, but if you have less than $1-million you’re either going to have poor diversification or poor pricing, perhaps both.”

http://www.theglobeandmail.com/globe-investor/investor-education/investor-clinic/exchange-traded-funds-nothing-to-be-scared-of/article2087595/
—————————————————————-

Looks like the rabble is stuck with Canada Savings Bonds at 1.10% and phony inflation stats at 3%. Gee thanks Mark !

#127 Bill Gable on 07.05.11 at 7:48 pm

Fair question – why the heck was there not a high school course that even boneheads like me would have to take called MONEY.
Algebra.

Mr. Turner just gave you a life lesson. Free. On this very blog. Why didn’t we get this info about REAL LIFE FINANCE in the education pipeline…?

Just clueless about money because so many people can’t even understand interest payments, much less, BONDS.

But if we had things explained like today’s post and we are told that life goes by at blinding speed and you have to understand the basics of the coin of the realm – life would be so much, ahem, richer, for the experience.

Just incredibly illuminating. Bravo Zulu.

#128 Daisy Mae on 07.05.11 at 8:02 pm

Not all stocks are equal. Not all bonds are equal. Nor, verily I say unto you, all investors. — Garth”

Priceless! LOL

Utopia, please don’t bring religion into it.

#129 Daisy Mae on 07.05.11 at 8:10 pm

Utopia on 07.05.11 at 10:02 am“Not all stocks are equal. Not all bonds are equal. Nor, verily I say unto you, all investors.” — Garth
————————————————————-

“OK, good crack. Now you are really making me laugh too.”

***********************************

Thanks, Utopia. I do respect your comments as a general rule…

#130 Daisy Mae on 07.05.11 at 8:15 pm

“Winston1984 on 07.05.11 at 3:47 pmYou seem like a mean, little man driven by avarice. You must have sold your soul a long time ago.”

Are you talking about Garth? Get a grip and give your head a shake.

#131 Utopia on 07.05.11 at 8:20 pm

Hey Disciple, glad you liked the tune. It is catchy isn’t it? Terrible video though but lets keep in mind it has come from a pretty poor country and they are far behind development-wise. But the music is terrific. Here is one of my favourites. The Ethiopian gals are drop dead gorgeous by the way, tall, slim and good dancers to boot. They really have their own style over there. Never seen anything like it in my life until I went.

Teddy Afro -Lambadina

http://www.youtube.com/watch?v=wxV-n9iSkEs

#132 salonist on 07.05.11 at 8:25 pm

“Who defaults first: Greece or the US? ”

http://www.bbc.co.uk/news/business-14025485

#133 Utopia on 07.05.11 at 8:29 pm

#130 Daisy Mae said…

“Thanks, Utopia. I do respect your comments as a general rule…”
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No problem Daisy. Happy to be helpful. Garth was giving me a good natured shot in the ribs today though because I expressed a little negativity to bonds. He is right though, they are an important part of a balanced portfolio and admittedly I do like the corporates so the truth is I am in (in my own peculiar biased way).

Like he says “not all bonds are created equal”. That is why it pays to get good advice from the pros and those who know the business and can keep you out of harms way.

#134 BBQ on 07.05.11 at 8:38 pm

http://www.realtor.ca/PropertyDetails.aspx?PropertyID=10856475&PidKey=384557047
This house in a so-so area, not close to anything but did have a nice, big lot sold for $771,000-a whopping $92,000 over asking.
As a soon to close, soon to rent my own house back seller I find this quite unsettling-in fact almost frightening. I see the writing on the wall but but it seems to make no difference to what is ahppening in Vancouver. Are we going to be priced out? This is beyond silly but I HAVE to live in Vancouver or what used to be an affordable, family suburb of it. FYI-this house is about an hour from downtown Vancouver, no where near the shops, services etc. What do I do?????

#135 salonist on 07.05.11 at 8:40 pm

CANADA DAY
“With only twelve Members of Parliament present, eight less than a quorum,[17] the private member’s bill that proposed to change the name to Canada Day was passed in the House of Commons in five minutes, without debate”

#136 Sick_Of_waiting_to_buy on 07.05.11 at 8:51 pm

Great Tutorial! You do better job when you are not predicting timing for real estate corection.

#137 Sick_Of_waiting_to_buy on 07.05.11 at 8:58 pm

Garth,

Do banks issue their own bonds to raise money for fixed term mortgages?

No. That’s what GICs are for – to take your money and lend it out for twice what you’re paid. — Garth

#138 terces on 07.05.11 at 9:02 pm

Mark – first comment on this thread. Banks by and large act as mortgage originators. They package their mortgages and sell them as mortgage backed securities. Your argument is still intact that Canadian Banks are quite solid at this time. But it is not because of CMHC. These loans are continually off-loaded to the market.

#139 Killer Chicken or Imploding Boomer? on 07.05.11 at 9:19 pm

123 disciple

“most people still believe that money exists, while in
fact, it is nothing but an abstract accounting concept”

yep.

#140 disciple on 07.05.11 at 9:47 pm

#132 Utopia…
Thanks for introducing me to Ethiopian/Eritrean music. You’ve surprised me…didn’t see that coming…It’s similar to Persian in some ways. But the pure reggae is my favourite because you can feel the sense of struggle with each laborious beat and deep bass. And it’s more edgy, not as happily melodic as the Eastern stuff. You could say it’s more Americanized, that’s the way I like it. But I enjoy all types from Native American to AC/DC, from classical Chinese to Trance. There’s good and bad in every style. Variety is the key.

Here’s a Cherokee song:
http://www.youtube.com/watch?v=1VqoxOcEqpk&feature=youtu.be

#141 Mark on 07.05.11 at 10:10 pm

#139, offloaded to the market, hardly. What do you think makes up most of the balance sheet of Canadian banks? That’s right — mortgages.

Now what the banks have been offloading lately has been unsecured credit risk. Through CMHC-backed HELOC securitizations, and securitizations of credit card receivables.

#142 Utopia on 07.05.11 at 10:14 pm

Peace to you to brother, that song was beautiful. I really enjoyed it.

#143 disciple on 07.05.11 at 10:20 pm

#140 Killer Chicken…

A few hundred years ago in England, money used to be notches on a stick, for crying out loud. I’m not kidding.

I firmly believe, and this is way beyond the reach of most minds’ capability to grasp at this present time, is that eventually everything will be free…of money. Every human soul will do what they want to do, contribute to the collective economy without the formation of an arbitrary socioeconomic strata. If one can get their mind around their western education (sadly this has dominated eastern education as well since Gandhi) and see the other side of the coin, one may eventually understand what I’m saying.

Wealth is not the medium of exchange, i.e. money. Wealth is not even the storage of the medium of exchange (think credit squeeze). Wealth is the application of labour and technology. Wealth is living for today. Wealth is health, wealth is being alive.

See how I did that? It’s all in the mind. What you believe to be true, becomes your reality. Don’t let any other mind deceive you into believing what they want you to believe. But in order to accomplish this state of self-knowing, you must know thyself. You look inward to understand outwardly the universe. You are the universe.

#144 Beach Girl on 07.06.11 at 12:34 am

Thanks for the information regarding shorting the market. I think I get the general idea. It sounds quite dangerous, though. As for Pina Coladas, there is a bad joke in there. Dry white wine is my drug of choice. I appreciate this site, have more time in my life to start educating myself.

#145 Chris from New Zealand on 07.06.11 at 3:54 am

Thanks a lot for the informative post. Bonds have never been so well explained.

#146 albertaguy on 07.06.11 at 7:46 am

Garth, in your book 2015 you talke alot about government strip bonds. Dont see any mention of that here.

Sixteen years ago, when rates were far higher. Not so sexy today. — Garth

#147 X on 07.06.11 at 8:13 am

http://www.theglobeandmail.com/globe-investor/investor-education/investor-clinic/why-only-millionaires-should-invest-in-bonds-directly/article2087595/

#148 disciple on 07.06.11 at 11:39 am

Like a true nature’s child,
We were born, born to be wild,
We can fly so high,
I neverrrr want to diiiiiie.
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Lonely feeling, deep inside,
Find a corner, where I can hide,
Silent footsteps, crowding me,
Sudden darkness, but I can see-eee-eee.
No sugar tonight, in my coffee,
No sugar tonight, in my tea.
————————————
And when the night is cloudy,
There is still a light that shines on me,
Shine on until tomorrow, let it be.
————————————-
You ask me if there’ll come a time
When I grow tired of you
Never my love
Never my love
You wonder if this heart of mine
Will lose its desire for you
Never my love
Never my love
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