One of my favourite Mott the Hoople songs is “I’m a Cadillac”. It has a catchy guitar riff opening and was the only song where Mick Ralphs sang the vocals – which he did by sort of imitating Ian Hunter, hence many people cannot tell it isn’t Hunter singing.
The song has a line “...but don’t push your luck; I don’t always play my part...” So true. During the winter I have moved solidly into government bond investments as I no longer have any confidence in the share markets of the world. A lot of funny business is being undertaken – I will elaborate in a future essay – and I don’t intend to be splashed with molten steel when it all turns to custard, as it inevitably will once the money runs out – and it’s your money being used, as your friendly fund manager will confirm.
A government needs to borrow money: they issue bonds and those bonds carry a particular interest rate (say, four per cent), which is paid every six months. They are guaranteed by the government and for 30 years (or whatever) you pocket the interest and then get your money back. Straightforward, predictable and safe. It is also possible to sell those bonds quite easily, which is where things get interesting.
My advice to anybody at the moment is to simply purchase NZ government bonds, reinvest the interest payments, wait out the coming storm and play golf all afternoon. Set and forget. I’d rather bet on Nicola Willis making a six-monthly vig payment than foolishly buying a million dollar rental property (greatly enriching the fellow who bought it for $200,000 20 years ago) and betting on a $1500 weekly rent actually being paid. But what do I know?
Unfortunately in the days of the internet and with an inability of New Zealanders to engage in logical thought, I find various friends and acquaintances asking me incredibly stupid questions about government bonds. It always goes something like this, ‘I did a Google search and found government bonds in Turkey are paying 28 per cent and in Zambia it’s 26 per cent. Should I invest in those?’
Apart from it being tempting, purely for my own amusement, to ask them where Zambia is located; this is the downside of government bond investing: there are some countries you may want to avoid. The Zambian Government issued bonds with an interest rate back in the day. Let’s say it was eight per cent. Then various owners of those bonds decided to sell them. Instead of getting 100 cents in the dollar, they found out what they didn’t seem to realise: Zambia is full of, well, (you-know-who) and run by (you-know-who). Instead of 100 cents in the dollar, the bonds are trading at, say, 32 cents in the dollar, which is where the 26 per cent comes from (i.e., eight as a percentage of 32).
Then there is the matter of the exchange rate; the Zambian Government pays interest in Kwacha (the name of their currency) and you have to change that into Kiwi dollars. You get the general idea; you’re making life difficult for yourself if you undertake this. Government bonds are designed to be ‘safe’, not complicated, but stick to places run by people like us.
