MB Fund Podcast 2020 – Why you should own bonds in 2021 with Kate Samranvedhya

Government bonds have long been a mainstay in a properly balanced portfolio but need to be employed with caution. As we have seen over the last few years, the cratering of central bank interest rates has seen some remarkable opportunity for those with a well constructed portfolio.
To share her thoughts on the topics, today on the show we have the Deputy Chief Investment Officer of Jamieson Coote Bonds, and veteran fixed income portfolio manager, Kate Samranvedhya.
You can find out more about Kate and Jamieson Coote at https://www.jamiesoncootebonds.com.au/

 

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Tim Fuller is Head of Advice at the MacroBusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Tim Fuller is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.

Tim Fuller

Comments

  1. I really enjoy how MB opens up topics to make us all think about things.

    I think… the Australian Government has massive Baby Boomer Liablities tied to themselves. I’ve also noticed that over this Christmas break, Covid hasnt been going according to plan. I’ve been laughing my head off that Queensland ( and other States ) have been throwing borders up on New South Wales again. What a shame that is. Morale of the story, Covids out of control again.

    If Australia was a House, then like any House, it has a Household Income. Australia has roughly pulled in about $600 billion in Revenues per previous years ( give or take ). You could argue, that is Australias Governments Income. In 2020, for the first time, not only is our Income starting to shrink, our Debts starting to rise but we are printing massive amounts of money ( $280 bill or more ) just to stay solvent. Now, take the time to think about that for a second. Australia is printing HALF its yearly Revenue just to stay solvent. Australia is literally printing money out of thin to stay afloat while saying, ” Things have never been better “.

    I think the argument to Bonds is… do you think the Australian Government is actually Solvent? Personally, I do not. I think Australias Liabilities are now higher then its Income. We are printing just to stay afloat. Budgets own estimates say this covid hit from 2020 is going to drive us further into debt till at least 2024 ( assuming covid doesnt flare up again which seems to be happening already ).

    Furthermore, and this is the big whammy for me, we are ignoring the Aging Population. By 2024, the Aging Population will be becoming gradually worse. 4 years is a long time to those who can remember how good our economy was back in 2018. Do people remember 2018? That was ONLY 2 years ago and now look at where Australia is today. How do you think its going to be in the next 2 years? How about 4? Things went downhill very quickly as I expect they will continue to. This will mean Australias Income will be even less then today and our Debts are only going to end up worse. I think this is going to really bite. With Big Debts and Small Income and only Money Printing to survive, the Australian Government is effectively insolvent. In my opinion, that situation gets worse, not better.

    So people say, ” Government Bonds are safe because the Government will be guaranteed to pay you back “. I suspect it might for a few years while we can continue pumping out all this money. That also assumes America doesnt go tits up into huge falls ( stockmarket crash ) which turns into an external shock on Australias Stockmarket. I think roughly, 70% of Wall Street is tied to Debt. They are trading Stocks on Money they owe to the Bank in the hopes they can get rich quick. Leveraging against the Bank. A lot of Americans have also put money into Australian Stockmarket. A US stockmarket crash would see money flight out of Australia so fast that the ASX would have a very bad day.

    The idea of holding Bonds in a time of falling interest rates is very attractive. You’d be forgiven for thinking, ” They will only get more valuable in the future “. However, once Australias Interest Rates go below zero, your Currency is virtually cactus. When Banks start to charge depositors for money in the bank, they’ll be withdrawing money from the bank so fast that the Banks wont know what hit them ( which is why I think Australia will go the QE route and try to avoid this catastrophe ). A currency with a Negative Interest Rate is practically worthless and I wouldnt be surprised if people abandon it for something else in due course. In my honest opinion, I think the AUDUSD is dead. I dont think the Government is safe and I dont think Bonds are safe.

    In the future, I see Risk… Risk… and more Risk… and people may have realised already that as each day passes, that Risk is getting worse. Its certainly not getting better. I think “scared money don’t make money” is a stupid analogy and its the fastest way to lose everything you’ve got. If people want to be stupid then be my guest, but I wont be gambling with my money.

    I think the future is going to get worse. I think the Australian Government is already Insolvent. I think the Currency and Bonds are tied to so much risk that they arent seeing what could go wrong. I think in the search for yield, People are becoming the guinea pigs for taking on all that risk and when that risk doesnt go according to plan, we all know what losing money looks like. I think Governments are going to struggle to pay all this back at some point in the future. I think Risk is more important then Yield. Earning 5% is nice but if I lose 90% of all my life savings then none of that was worth it.

    I like learning about new things… but on the whole… I think Im happy to keep my money in Gold.

    I dont think Australias dead yet. Most likely, Australia is about to unleash the printing press over the these next few years and its going to get even more extreme. The amount of money printing is just going to continue going up.

    The other factor which I havent mentioned is a collapsing US. US is sitting on a Wall Street Bubble which practically holds half the Countrys Pension System. A Wall Street Collapse is the end of the US Pension System. In 2020, the Fed basically gave a speech that ” We believe Monetary Policy has reached its limits for saving the economy “. Chairmen Powell essentially said, ” Money printing doesnt seem to be working anymore “. If US goes down and sends the AUDUSD skyrocketing, that’ll be the death of many Business’s in Australia. Again, that will further feed into Australias Insolvency as its Debts Rise and its Income Falls. That makes Bonds even more unstable.

    So apparently, Australias Credit Rating is AAA . I find that to be truly laughable.

    Upon reflection, I dont trust Bonds because I think Australias Practically Insolvent. With the amount of Risk I see coming up in the next few years, I dont trust Australian Governments ability to pay. Bonds are a wonderful option but for me, the Risk is too great and I think I’ll be sticking to Gold. Gold holds its value. I think soon, the Aussie Dollar will be worthless.

  2. Im beginning to think that if you live in Australia and you work for a living then your doing it wrong.

    With all this future stimulus about to be thrown around and wages at there lowest point in history, I think the best Financial Advice would simply be to tell everyone how to get on a pension.

    Pensions have literally no risk in Australia and you can sit on your ass doing absolutely nothing while having the Government pay your house off.

    Maybe that was my problem in life. I was never a good liar. I suspect its what Boomers and Foreigners are basically doing in Australia. Just sitting on there ass and whining that the Young arent paying down there mortgages fast enough.

    I think I feel a back injury coming on.