The Bonds of Money

Keenan Hauke, CEO of Samex Capital Advisors, LLC.

We all know our government likes to spend money like a drunken sailor, but a lot of us don’t like to think about how dangerous that can be. We read about $trillions here and read about $trillions there and our gut tells us this is going to be hell for our kids and grandkids, but it doesn’t feel like a tangible problem today. Here is a snap shot of the situation and why it can represent a problem for your portfolio right now.

In 2008, after the housing market slow down caught up with the banks, the US government decided it was smart to throw an unprecedented amount of money into the system in order to save us from ourselves. They borrowed some of this money from people and governments through the sale of bonds. The rest they just printed in the basement. If you bought a US government bond in the last two years then you helped support some of this crazy spending. A simple economic law states that the more you borrow, the higher your borrowing costs will be. In other words, if you already have a lot of debt, then you will pay a higher interest rate to borrow more money. That is our government today.

OK, so we know our government is going to pay higher rates because we know it needs to borrow a lot more money in the next few years. As interest rates go higher, the value of the bonds they sold before (the stuff we own now) drops. US government bonds generally control the direction of bond prices across the board except for junk and some corporate. The bottom line is that investors are going to start to lose a lot of money in the bond market and it is because of the massive debt load of the US government.

Keenan Hauke is the CEO of Samex Capital Advisors, 317-203-3365.