As you can see, the 2008 bailout tab thus far is more than all the above items combined. On an inflation-adjusted basis, we have spent as much treasure fighting the credit crisis as we did fighting World War I.

And the costs are still mounting – not just in the States but around the globe.All in all, that makes it a pretty lousy time to have a big slug of your net worth in paper currency.

Bonds No Good

So how about U.S. treasury bonds then, long one of the safest, deepest, most liquid markets in the world? Will the boomers all just pile into bonds and content themselves with yields below the true cost of inflation?

Only if they’re foolish. Treasury bonds are literally the worst deal ever right now. The yield on 10-year U.S. treasuries has fallen below 3%, a record low, as the Fed openly manipulates the bond markets.

Remember that a bond’s yield is an inverse function of its price. Savers who put their money into government bonds now are going long at record high prices. By any rational assessment, they are loading up on bonds at a screaming top.

This course of action could only make sense for two reasons:

You think we are headed for economic armageddon, Dr. Peter Venkman style – “Human sacrifice, dogs and cats living together, mass hysteria!” – and that the nosebleed price of treasuries will climb even higher (sending yields yet lower as they asymptote above zero).

You intend to hold your treasuries to maturity, and actually believe that 3% a year ballpark is a good deal. (Which in turn would imply that the stock market is toast for the next decade or so, and furthermore that real-world inflation will stay well below 3% until your bonds mature. Good luck with that.)

Where Does that Leave Us?

Sherlock Holmes pointed out that when you eliminate all competing options, it’s the remaining option you have to go with – regardless of how improbable it may seem.

We’ve seen that the long cycle of consumer savings decline is over, and a new cycle of saving is set to begin. We’ve furthermore seen that 78 million baby boomers are preparing to make their way across the retirement bridge – and the vast majority have a huge savings job ahead of them.

Last not but least, we’ve seen that out of the five options available – stocks, bonds, commodities, cash and real estate – four of them are either deeply unattractive (cash, bonds, real estate) or unfeasible as a full solution (commodities markets too small to handle the flows).

Believe it or not, that leaves equities as the only real long-term option left. The Fed and Treasury know this too.

Justice Litle is Editorial Director, Taipan Publishing Group
Courtesy: www.taipanpublishinggroup.com

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