The early 1990s was a good time to be a bond trader. Equities hadn't yet taken on the mantle of a sure-fire thing and interest rates across Europe (but more particularly in Ireland) were tumbling, which meant bonds were a good buy.
On the basis that rates would keep falling, I bought them and kept buying them (which was by and large a good move, though the occasional currency crisis gave us a few nervous moments on the shorter-dated maturities). But come the later part of the decade it was all equities and bond traders turned from A-list to C-list celebs - still turning up at the party but being ignored by the paparazzi.
Bond traders may never reach their former heights (after all there's a lot of money to be made in interest rates moving from 10 per cent to 4 per cent, not quite so much when the moves are a mere 100 basis points here or there), but bonds have had a little more time in the sun in the last few months.
Now Bill Goss, the managing director of Pimco, which manages America's largest bond fund, has put pen to paper in favour of bonds. You would pretty much expect that from a company that has $274.4 billion under management in a variety of bond issues, but Bill has a self-deprecating manner that makes you more inclined to listen when he speaks.
Anyway, and sadly for those of us who hope that equities may yet come out of the trough, Mr Goss thinks that "stocks stink and will continue to do so until they're priced appropriately". His appropriate levels? The Dow around 5,000. Which is hardly good news for anyone who's pinning their faith on the fact that it saw its low at abut 7,500.
His rationale - and one that is hard to argue with given the torrent of corporate and financial mismanagement and criminality that has emerged from Wall Street over the past few months - is that earnings have been bolstered incorrectly for years and the market is still selling at high multiples of totally unrealistic earnings.
Furthermore, shareholders' equity has been consistently diluted by corporations awarding ludicrous stock options to management on the basis that they need to be rewarded in case they go somewhere else. Not, you'll notice, that they need to be rewarded for doing a good job. Just that the board doesn't want anyone to think that they're not being paid enough simply for turning up. A particular chicken-and-egg noodle that's fleeced shareholders for years.
Maybe it's because of our mutual bond background that Bill and I also agree on the fact that huge disservice has been done to shareholders by the amount of insider information that somehow gets disseminated to the discerning few. When you're trading bonds, the insider information is pretty hard to come by - though our old friends Salomons were in the firing line over their hoovering up of US long-bonds before the government announced they weren't going to issue any more, and 30-year maturities became hot property in the bond community. But by and large, anything you need to know about bonds you find out at the same time as the next guy.
People buy equities instead of safer bonds because they expect to get a risk premium for holding them. This is the extra return that you expect over government bonds to compensate you for the increased risk of owning stocks.
You want this premium because all sorts of things can happen to jolt the market and we've seen some of them in the past year alone - terrorism, wars, depressions - actually name it and it's been there! Bill Goss's 5,000 Dow prediction is based on the fact that you need a real return higher than the 2.7 per cent you're getting on the safest investment of all - 30-year US Treasury Inflation-Indexed Securities (TIPS) - to compensate you for holding stocks. And if you think that additional return should be in the region of 22.5 per cent, then you're looking at a market that has to scare the life out of us again before it's "fairly" valued.
Of course - and here Goss's bond credentials shine through - if bonds rally even more in the next few months then the whole scenario is a classic bond no-brainer and you'd be a fool to hold anything else.
Some of the assumptions that Goss makes may not necessarily hold fast - how much risk premium do people really want? Is it reasonable to want one at all? If not, then it doesn't matter what TIPS are yielding.
And (sorry for mentioning it again but it's about the most important thing when building up any kind of portfolio) timing is everything. Because if equities start to move up, whether or not they may appear expensive compared to bonds or on any kind of dividend yield you care to mention, it really doesn't matter. You'll make money anyway - at least you will if you then get the timing right on the other side too and sell them in time - something so many of us spectacularly fail to do.
If you're running a bond fund then you want to sell bonds and that's Bill Goss's job. He makes some powerful arguments to bolster his case and I guess he's hoping to add to the Pimco Total Return Fund which is America's largest at $58.2 billion, by convincing investors that Bonds are Best.
Certainly, if you want a good night's sleep there's a lot to be said for them. But unless you're someone that's been involved in the cut and thrust of the bond market (and believe me bond dealers can cut and thrust with the best of them), then the whole notion of dealing in government, state-backed or mortgage paper can leave you a bit cold. None of it has the glamour of an Amazon or an Autonomy. Or even the white-knuckle-ride and bloody nose of being a Marconi shareholder. But there's the thing - with bonds you don't lose all your money!
Bill Goss's Investment Outlook can be read at: [http://www.pimco.com/ca/bonds_commentary_investmentoutlook_recent_index_bot tom_archive.htm ]
