More Warnings from Andy Xie

The entire article is a must read this week.

Andy Xie: Central Banks, Arsonists and Playing with Fire

Every party ends sooner or later, and I see two scenarios for the next bust. First, every trader is borrowing dollars to buy something else. Most traders on Wall Street are Americans, British or Australians. They know the United States well. The Fed is keeping interest rates at zero, and the U.S. government is supporting a weak dollar to boost U.S. exports. You don't need to be a genius to know that the U.S. government is helping you borrow dollars for speculating in something else.

But these traders don't know much about other countries, particularly emerging economies. They go there once or twice a year, chaperoned by U.S. investment banks eager to sell something. They want to think everything other than the U.S. dollar will appreciate; Wall Street banks tell them so. Since there are so many of these traders, their predictions are self-fulfilling in the short-term. For example, since the Australian dollar has appreciated by 35 percent from the bottom, they now feel very smart while sitting on massive paper profits.

When a trade like this one becomes too crowded, a small shock is enough to trigger a hurricane. There must be massive leverage in many positions, but one just never knows where. When something happens, all these traders will run like mad for the exit, and that could lead to another crisis.

Emphasis added.

I once again point out that toilet paper prices are not confirming the "sure things" (be it foreign currencies, high income bond funds, gold, oil, or commodities in general).

I also want to point you to an actual concrete example of the speculation mindset. It's taken from a message board I often frequent (since I own the fund).

Sold TIP

My first reaction to it was that it didn't sound like such a bad plan. TIP is up over 7% YTD which is a pretty darned good return for "super safe". It therefore doesn't surprise me that some would wish to take profits and exit. I'm certainly tempted (especially since posting my stock market topping thoughts last Friday).

However, that was not the thinking. In fact, it was the exact opposite thinking. 7% simply wasn't good enough.

This fund is confusing as it is easy to get spooked with analysts predicting fall in treasury prices that would wipe out TIP gains, CPI controlled by government assuring lower than realistic interest payments, etc... I sold TIP for a $3,000 gain and moved proceeds to Fidelity Floating Rate High Income with 4% yield & 20%+ YTD return. TIPS seem a better option when purchased individually....

I know rationalization when I see it and THAT is it. Would someone who is easily "spooked" knowingly and willingly rush to a fund investing in the following?

Investing in companies in troubled or uncertain financial condition.

It's taken straight from the fund's description on Fidelity's website.

Let's sum up the fund's holdings by credit rating.

US Government: 0%
AAA: 0%
AA: 0%
A: 0%
BBB: 8.6%
BB: 44.6%
B: 26.5%
CCC & Below: 5.2%
Not Rated/Not Available: 6.6%
Cash: 8.5%

Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. Floating rate loans may not be fully collateralized and therefore may decline significantly in value. Fixed income investments entail interest rate risk (as interest rates rise bond prices usually fall), the risk of issuer default, issuer credit risk and inflation risk. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks.

All that risk for just an expected 3.62% nominal return (4.35% 30-Day Yield - 0.73% expenses). Halloween is just a few days away? How's that for spooky?