A Cautionary Note

Many money managers feel that, at this juncture, there is an anomaly-- "investment grade" corporate bonds are more attractive than stocks. At the long end of the maturity spectrum, these bonds may have 8% yields to maturity. While I prefer my strategy of 40% in stocks and 60% in treasury securities (at this time, 90-day treasury bills), I can understand the attraction of corporate bonds SO LONG AS THEY ARE COUNTED AS PART OF THE EQUITY EXPOSURE AND NOT PART OF THE FIXED INCOME EXPOSURE!

The U.S. economy is currently in what will turn out to be the worst recession since the depression of the Thirties. While I believe that efforts to stimulate the economy will gain traction in late 2009, there is more than a de minimus probablity that monetary and fiscal policy will prove ineffective in offsetting the secular deleveraging effects, with a deflationary spiral ensuing. Under this most dire circumstance, many corporate bonds, currently "investment grade", could fall into default, and, even worse, eventually be worthless. An investor with a portfolio of 40% stocks and 60% corporate bonds could be wiped out!