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Flight to Quality
By John | November 6, 2011
During periods of financial uncertainty, such as we are experiencing today, investors seek to minimize risk by shifting their investments to low-risk securities. In recent decades, that means U.S. Government debt instruments. As market turmoil increases, the dollar rises relative to other currencies and U.S. Treasury yields decrease, as the prices of debt instruments increase.
Does this make sense?
Some day, historians will look back at this period in history and describe at as the era of debt – a time when debt was accepted as a conservative investment – a time when all types of entities, from individuals to governments utilized debt as a way of spending more than their revenues would support – a time when debt, itself, became accepted as “money.”
Those same historians will characterize debt as a massive bubble. They will wonder how it came about that billions of people simultaneously believed that debt instruments totaling many times the value of all of the assets on the planet could be accepted at face value. They will wonder how people came to believe that the debt obligations of bankrupt entities could be accepted as “safe” investments.
Now, it may very well be that U.S. Government debt will retain its value for some time. However, it can never be paid back, and at some point that will become recognized. At that point, everyone will try to exit Treasuries at once, and the value will sink to zero.
As you seek safety in your investments, don’t abandon common sense. Don’t, in effect, lend money to the insolvent. If you own bonds, income mutual funds, or even money market funds, you are at risk.
A flight to quality should involve investments in precious metals, real estate, or other assets with real value and no counter-party risk.
Topics: Commentary | 1 Comment »
November 7th, 2011 at 2:32 pm
Agree. Looking for quality investment.
I recommend the articles in The Economist issue “Nowhere to hide”.. Actually, you don’t have to read it, the title says everything..In today economic environment, is very difficult to hide/protect..