January 2, 2008


Easily said I’m sure it comes as no surprise to any of my readers, but regardless of my longwinded defense of influential economic and technical trends I’m fairly certain that I’ve never fully explained why. It’s certainly not because of the clear challenges of the asset, namely most people never know what affects them in the same way they know that a CEO’s appearance of embezzlement might undermine the performance of his companies stock. They’re not sexy like IPO’s or interesting like the company that pioneered shrink wrap. Bonds have customarily been attractive to older Americans seeking fixed income over total return. They’re customarily sold by unremarkable characters that often wear glasses and look uncomfortable wearing a tie. They rarely gesticulate loudly, or have long intricate stories to support what they’re trying to sell. Bond people are generally liberal, although they are moving further right as we speak, generally inclined to factual content as opposed to hypothetical due diligence and believe that anything can be explained in mathematical terms, even love.
It’s has to be one of the most privileged aspects of my profession that most of my due diligence is gleaned from the broad characteristics of the socioeconomic stage. The growth of the information age has driven the volumes exponentially higher each year defining and compartmentalizing the data and news to its most accessible user format. Bonds have also been a source of raising capital at the disposal of nations around the world and deeply embedded in cultural history. As Sidney Homer a Professor of Finance at Rutgers and author of the “History of Interest Rates” so eloquently wrote “students of history may see mirrored in the charts and tables of interest rates over long periods the rise and fall of nations and civilizations, the exertion and tragedies of war, and the enjoyments and abuses of peace” Simply put there are at least six periods in history when our fledgling nation faced financial peril and underwrote the generosity of stronger nations (like Italy and France) with US Government Guaranteed Treasury Bonds.

Vs Equities-The umbrella that we call stocks cover a variety of asset types that are by design meant to excite potential investors through hypothetical outcomes. In contrast fixed income assets derive their investment worthiness on the definable characteristics of regulated capital flows and requirements. The influence of economic activity on the direction of interest rates is generally reduced to indicators of inflationary trends which in turn are generally reduced by the ocean of contractual assets (i.e. futures) representing commodities and consumer behavior. All of which is neatly packaged in an easy to follow “internal rate of change” with a smoothing factor referred to as regressive modeling. Is it perfect? Not necessarily, but it’s a whole lot more logical than the projections of what XYZ Company is going to earn in the fourth quarter of 2008? To construct that opinion a stock picker may collate an ocean of information that in of itself disproportionately adheres to reasoning over truth. To asses the worth of an argument concerning a particular company the equity manger needs to consider two aspects, namely the truth of the premise and the validity of the reasoning. Often at odds in a world defined as 'that where we reside, with uncertain origins'. The bond manager needs to reckon no such dilemma, if the country of Italy were to suddenly declare war on the country of France (hey, it’s happened before) US interest rates would almost certainly decline as a torrent of international capital goes prowling for the highest quality (government guaranteed) and deepest liquidity investment. Yes, I admit some might go to gold as well, but even to a jaded bond person like me equities are more interesting than that shiny stuff.

Vs Financial Advisors- Ha! Don’t make me laugh. What the battalion of consultants, not to be confused with other third party hacks out there, doesn’t always appreciate is that there are only a two things that effectively capture the imagination of a high net worth client; they are ‘bigger money’ and ‘bigger risk’. Bigger money generally comes in the form of a person who was either nurtured by wealth and power or is somehow connected to its potential. This would describe some of the best firms that are built by the scions of families of great wealth. Typically, these firms have lots of money under management and a small client roster. Specifically they are small due to the cloistered circumstances of the rich. What can I say? It’s a great gig if you got it. However, most advisor firms don’t got it and have to rely on a variety of other skills. Tax fluency, crucial to building sound estate projections are good, same as the investment advice dispensed by the advisors who act as a spectacular conduit to the drivers and flows of the eminently confusing world of the capital markets.
It is a documented fact that the highest net worth individuals has generally accumulated a healthy amount of fixed income investments. This isn’t due to their desire for wealth building; they (like most people) have their day jobs to take care of that. It has more to do with the idea of “wealth preserving”. Preserving, for what, you ask? Generally as an offset to the risks of earning big money and specifically to mitigate the risks of their other investment muse, hot money. What is hot money? It’s the capital that wealth advisors have discovered fulfills two appetites they can’t deliver on their own, sexy… and risky. Private Equity, namely the investment in ideas at various stages of implementation and Hedge Funds, those investment entities that invest in virtually everything and hedge virtually nothing are two dynamic markets that feed the ever growing appetite of high net worth clients. These products are immensely risky and I’m awestruck by the complexities of the investments when I see them in a portfolio. I especially like even more seeing bonds nestled next to the potential hole that those investments are burning in the client’s monthly custodial statement. Maybe 'hot' is a more appropriate term than we give it credit for? Personally I believe that every $1 dollar spent on a high beta alternative investment should be accompanied by $3 dollars spent on bonds.
Don’t get me wrong, I have my own investments well diversified, because at the very least it would be hypocritical of me not to since most asset classes, though likely to correlate in high volatility will nonetheless nearly never regress to their respective means at the same time. However, despite the Cain and Able relationships of the various asset types', equities of any shape and size and the benefits of experience that drives financial consultation are all resources at the very least equal to bonds, and anchor the marriage of capital to the grounded logic of preparedness.

Happy New Year