Warren Buffett hints at bond bubble

October 5, 2010 by · Leave a Comment
Filed under: Opinion 

Warren Buffet could be right but I think he is discounting the risk in the markets over the long-term.  Another explanation is that we have run too far too quick and their is growing fear (healthy) in the markets.  Investors was to be creditors over equity holders because over history that is a more certain method of principle retention.

Warren is absolutely correct on the point that eventually interest rates will rise and that will crush people locked in bonds at this historic rate.  The real question is if before the “reflation” happens, will we see another market crash where people in stocks at these prices and valuations will be crushed in the decline.  I am of the opinion that keeping your capital safe should be the number one priority until we get a clear sign that we are out of the woods.  We have not seen that sign with central banks are starting to do more quantitative easing (money printing) to keep the economy afloat.  Don’t believe?   Just look at the record gold bullion prices.

Fortune – Buffett, speaking Tuesday at Fortune’s Most Powerful Women Summit in Washington, said it’s “quite clear stocks are cheaper than bonds” now. He added that he “can’t imagine” the rationale for adding bonds to your portfolio at current prices.

The Berkshire Hathaway  chief made the remarks in an interview with Fortune’s Carol Loomis at the 12th annual summit. He said in response to a question by Abby Joseph Cohen of Goldman Sachs that investors will eventually regain confidence in the stock market – but he can’t say when.

Investors holding blue-chip stocks over the past decade have lost money, and funds have flowed out of equity mutual funds every week since the May 6 flash crash. The S&P 500 is trading in line with 1998 prices even though the operating earnings of consitutent companies have roughly doubled, says Ed Cowart of Eagle Asset Management in St. Petersburg, Fla.

The flip side of the lack of confidence in stocks is an overextended bull market in fixed-income securities, Buffett said. The yield on the 10-year Treasury note has tumbled to 2.47% from 4% in the past six months, as investors have begun to accept the notion that economic growth will be weak for years and the Federal Reserve has promised to suppress interest rates to keep a soft recovery moving forward.


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