Corporate Bonds more Attractive than U.S. Treasury

To follow up with our recent post on bond yields, here is another story emphasizing the point.

http://www.bloomberg.com/apps/news?pid=20601010&sid=aYUeBnitz7nU

This Bloomberg story shows several instances where high quality corporations have recently issued debt with yields just a few basis points shy of a similar-duration US Treasury. What does this mean?

It means that investors would much rather put their faith in a high quality company's ability to pay its debts than in the U.S. government (with its endless money-creation and ability to tax).

Rumor has it that the USA is about to lose its AAA credit rating, and get bumped to AA. It's about time, and the "market" for US bonds (i.e. China, India, Japan) is sending a wakeup call to our leaders in the USA to right the ship and become sensible in our financial dealings. If we don't, it is very likely that US bond yields will continue to rise in anticipation of a bond market that requires a higher rate of return for the risk.

Solution to Pension Promises

Here's a link to a great piece from Barron's over the weekend, which addresses the debt albatross hanging around society's neck.

http://online.barrons.com/article/SB126843815871861303.html?mod=BOL_hpp_popview#articleTabs_panel_article%3D1

What to do? What to do?

Why don't we apply the same solution set that can be found at www.cato.org referencing their many-year-old "6.2% Solution" for Social Security. Namely, we need to create a "bridge" from one generation to the next in order to keep the promises we made from two generations ago. Why? Because that "social contract" is completely unsustainable and is literally creating insolvency issues at a local, State, and Federal level.

What would happen? Freeze all pensions today, ideally "earmarking" the frozen portion to each individual. This means that society will honor its social contract in terms of the net-present-value (NPV) of its pension obligations to you (defined benefit plan), but starting tomorrow, like "everyone else", you need to use a 401k-style approach (defined contribution plan). This solution will take 25 years, but it will work. Make it apply to anyone under 50 automatically. If you are 51-55, you can opt "in" or "out". If you opt in, it means you get the NPV of your currently accrued benefits + whatever your 401k-style plan grows to. Anyone over 55 would automatically stay in the current pension system.

How would the bridge work? First off, it is widely known that public sector jobs now either match or exceed private sector jobs in terms of compensation, benefits, etc. This "bridge", besides keeping past social contract promises, also encourages people to buck-up and become entrepreneurs in the American system while simultaneously discouraging people from "getting taken care of by the state". If the perceived benefits from going "public" decline, the benefits of going "private" increase.

Over 25-30 years, the "old" pension system quite literally gets phased out, along with its tremendous debt burden. This additionally creates an additional huge voting bloc that will want investor-friendly rules and regulations, stable money policies, tax incentives and the like. Thus, US politicians will need to answer to this investor class, which simply reinforces the traditions of the American entrepreneurial system, while also backing the USA away from its debt-induced tipping point (toward a welfare state system). A welfare state is simply unsustainable, and not unstoppable (yet).

This whole idea isn't "perfect", but it's a good starting point for a conversation-- a conversation that is long overdue...

Ribbit Mobile is Like TiVo For Business

I usually just discuss some market news item, investment, give policy analysis, or distill some complex issue as it relates to investments. Today, instead, I wanted to advise you with a way to simplify and distill your work life: Ribbit Mobile.

Huh? What? What is Ribbit Mobile?

The best way to describe it is to first tell you why I love it. I get cold-called from different suppliers ALL day (hedge funds, mutual funds, separate account managers, etc.). If I don't recognize a phone number coming in, I let it roll to the Ribbit Mobile phone system, which transcribes the voice message into a readable email and text within a couple of minutes. If I erroneously missed the call, I call right back; but otherwise, the cold call message gets transcribed. Then...I don't have to talk to them, lose my train of thought, waste time with them, try to understand what they're selling...none of it. It goes to voicemail/text message version.

Frankly, sometimes it even helps if I legitimately miss a call, because I can read the gist and call back with a really well-thought-out response, possibly with some research, or answer for somebody. It actually improves my business and my service.

So now that you know WHY I like it, I'll tell you how I think of it: it's like "TiVo for Business". Yes, just as Tivo improves TV-watching productivity, Ribbit Mobile improves my phone-answering productivity. By a ton! You need to check this out:
http://www.ribbit.com/mobile/

If you want to thank me, just call ACC Investment Management, Inc. at 650-344-1600, but don't be surprised if I don't answer.

PIMCO agrees with ACC Investment Management!

The following is from Bill Gross of PIMCO from yesterday. I concur. Gross and I come to the same conclusion through two different analyses. His conclusion is based on the quantitative, showing that sovereign credit spreads are narrowing toward a "unicredit" rating, since governments are printing money, debasing currencies, and their ability to pay will eventually be questioned. My conclusion (June of 2009) is based on qualitiative arguments-- I would rather purchase high grade corporate debt paper relative to sovereign debt, since corporate debt ratios are *finite* and thus more credit-worthy!

Read his piece here, it's quite good.

Investment Outlook
Bill Gross March 2010
Don't Care
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Investment+Outlook+March+2010+Bill+Gross+Dont+Care.htm