Why Stocks Are Safer Than Treasuries

Anthony Mirhaydari MSN Money September 29, 2011

9/28/2011 5:14 PM ET

By Anthony Mirhaydari, MSN Money

A lot of shellshocked investors are shunning stocks for government bonds or cash. Understandable as it is, it's the wrong move. Here are 3 better ideas for nervous investors.

Anthony Mirhaydari

Our faith in stocks is fading.

Investors are fed up. We're tired of the volatility, the scares, the panics and the feeling that the deck is stacked against us. We worry about the economy, the financial system, the eurozone, the dollar and President Barack Obama or the Tea Party, depending on our political bent. We think the social fabric that binds us together is beginning to rip and fray.

No surprise, then, that after two painful bubble-and-bust cycles, people vow to never again be sucker-punched by the Wall Street fat cats.

The solution? For many, it is to run into the arms of Uncle Sam and the safety of Treasury bonds. Or, more recently, to keep their cash in the bank. According to new fund-flow data from research firm EPFR Global, investors have pulled nearly $153 billion out of U.S. large-cap equity funds since the bear market ended in March 2009, while sinking more than $55 billion into U.S. government bonds.

But that is the wrong strategy. Investors could be playing right into another bubble -- a bubble in fear and pessimism -- and setting themselves up for big losses as economic growth and inflation rebound, eating away at the value of their cash and bonds. Simply put, stocks are a safer bet right now than Uncle Sam's debt.

I'll explain why below, then offer a few low-risk recommendations to help people get back into the stock game.

Government is a mess; businesses are fine

Yes, there are real, structural problems with the economy, as I discussed last week in "The real recession never ended." But the fact is that stocks are now, by virtue of low valuations, underlying corporate strength and underappreciated inflation protection, are much more attractive long-term investments than are U.S. Treasury bonds.

Moreover, as I discussed earlier this month (in "This is not a 'Max Max' economy"), while the outlook has weakened, a new recession is still not likely.

That's because while the situation stinks for the average American worker and the government, it's been great for the average corporation. Just take a look at the graph above, which shows after-tax profits.

Profits are at record highs. Cash flows are surging. And balance sheets resemble Fort Knox, with debt levels falling and assets rising.

The reasons things stink for the average worker -- mainly, increased automation and competition from cheap foreign labor -- are the very reasons corporations are doing so well. Labor costs are the main expense for most businesses. Lower wages and smaller payrolls drop straight to the bottom line via wider profit margins. In addition, corporate revenue growth benefits from the ability to sell to fast-growing emerging-market economies, something the typical U.S. worker can't do.

On the other hand, the government is now the major source of weakness in the economy, with a deadlocked political system, out-of-control budget deficits, unfunded entitlements and rising debt burdens. Take a look at the chart above, which tracks the nation's debt as a percent of gross domestic product.

How to invest in bonds

To put it another way, in the context of risk and debt, it's like this: The Office of Management and Budget estimates that the federal debt will grow from $14.7 trillion now to $20.8 trillion in 2016. That's up from around $9 trillion in 2008. At the same time, businesses and households continue to shed debt at an impressive pace. Deutsche Bank notes that household debt stands at the lowest level since 2005, while financial-sector debt has dropped back to 2002 levels.

(Households are essentially treading water, repaying debt burdens and enjoying some added spending power via ultralow interest rates, low debt service costs, and minor job gains. But that's a topic for another day.)

Put simply: The one area of the economy piling on risks and new debt -- the government -- is the area investors are flocking to for safety. I think that's a terrible idea.

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Old-school investment advice that no longer applies. Wall Street has burned us one time too many. If I want to lose my money gambling, I'll go to the casino, at least I get some free drinks served to me by a scantily clad cocktail waitress.

Shame on you Anthony Mirhyadari!

4 1ReportSpambobby991 hour agoStocks and printed money will only have value when backed by gold. The clowns at fed and their pal little timmy plan to screw over America and the worthless paper stock market. 4 1ReportSpamGinny AZ1 hour ago

The Stock market is nothing but a gambling casino, where you must pay the dealer before you play, then the house takes your money, now you must pay the dealer to leave the table.

Buy T bonds, put you money ( If you still have two dimes to rub together) under the mattress, the banks, traders, investment houses, have proved beyond any reasonable doubt, you cannot trust them.

Fool me once shame on you!

Fool me twice shame on me!

A fool and his money is soon parted!

He who fools himself, is the biggest fool of all!

4 0ReportSpamSomeone1 hour agoDont invest in the stock market, invest in gold instead! They dont give us any return, but they give us guarantee of safety from a deteriorating dollar.You know, the fed will keep pumping money into the market when they start to see inflation falling, they are scared of deflation!Dollar will keep deteriorating its value, start buying gold guys. Although you might not believe it, gold will become the world major currency. 1 0ReportSpamgklipfel3 hours agoI can appreciate the argument, but aren't I-bonds and TIPS paying about 4.9% right now? I think the stock market would collapse long before the U.S. government would. 5 0ReportSpamBrad Moss3 hours ago

One word--BULL ! You may not get good interest, but a stock can go to zero and be a total loss. That cannot happen with a government bond, it has never happened, and never will. If government bonds ever are not payable, then the stock market will fully crash. Remember, only part of the market deals in equities, the largest amount of cash is in fixed income - bonds, including those from Uncle Sam. That is a fact, no matter what the politicians say or the shills for market say.

Stocks are not reacting to basic economic fundamentals, due to the lax laws now in effect, all a good trader needs is movement up or down, you can make money either way. Remember, brokers make money when you buy or sell, it does not matter if you make money or not. Investment houses make money from commissions and fee's attached to all stocks and funds.

3 0ReportSpamDanny3363 hours agoI disagree with the premise of the article, maily because at least for long term positions you can reinvest dividends from a bond or security and not have to endure the 30-40% losses and gains that the volitile stocks are throwing at us. Likewise, if you are the owner of the debt, the government has the legal responsibility to honor that debt, making it a safer investment for sure. Thats probably why people are "flocking" as you suggest, because losing alot of money investing in stocks isn't a great strategy, now is it Anthony? I would rather realize moderate gains in dividend producing bonds than lose it all hoping for the market to be like it once was, which seems like a fairy tale these days. 3 0ReportSpamanother Indignado3 hours agoWS lure people to invest their life saving in stocks , for the only benefit of CEO and their close staff .....everyone else is at risk at risk . CEO's are getting used to commit fraud , and they are always fine . 4 0ReportSpamfritz vonsnickle5 hours agoWall Street listened to much to Martin Gecco. Greed is not good. People have lost faith and tons of money to the Wall Street investment houses. Pareto analysis says that it is ok for 80% of the world money be held by 20% of individuals. Last I heard is that 93% of the world money is held by 3% of world individuals. History told us what happened to the big investors 90 years ago. To refresh your memory they were taking a flying leap off the tops of their Wall Street towers and it was the government who took 20 years and a World War to pull us out of the mess those guys put is in. Americans should have enough sense to stay away from you guys and buckle up for another round of hard times. By the way didn't Obama bail out Wall Street to the tune of 1.5 Trillion a few years ago. Wall Street will take money from anyone crazy enough to give it to them. 13 3ReportSpamasoyusaa5 hours ago

Where as you can lose all your money in the stock market while your broker still make a profit with your loss, it is hardly likely that the US govt will default on their obligations no matter what imo.

If stocks are so safer than Uncle Sam, why did Uncle Sam ie the American citizens have to bail out wall street etc?

14 2ReportSpammk465 hours agothey'll say anything to get your money in before they pull the plug on the markets the only thing keeping it up is the investment banks pumping it up with tarp and bailout money. 10 6ReportSpamcricsus5 hours agoPerma-bull Anthony... don't let the facts get in the way of your delusions, just don't take people down with you. So as if Europe imploding isn't bad enough, along with ALL international banks interconnected (yes, it most certainly will affect us), the strengthening dollar will mean LESS earnings power for large US multinational corporations as exports will decrease. Strong dollar, less people overseas buying our stuff, and vice-versa. So with 65% of earnings power of the S&P coming from overseas, what do you think that will do to corporate earnings? Now is the time for preservation of capital, and preparation for rough times. You think it can't happen to you, until it does. 18 2ReportSpamaprilfoolish5 hours agoThe short term is unpredictable, the long term is inevitable. You speculate short term, invest long term. 6 3ReportSpamspotmefive5 hours agoAs if anyone has a clue about what might happen next.......Anything can happen. But it might not be too good for the average Joe no matter how he invests. 10 0ReportSpamSomeone (Treyax) 6 hours ago

In my opinion the people have it right Invest in your government instead of big money's pockets. They keep telling you it's the wrong move because they Know with out you they can't live high off the hog, So to speak, No more wsall street I've said it since 2000, They dont want to loose their money and if we give them back wall street it won't crash, Just like big business, took our jobs over seas to save money for who?? Not for YOU. Didn't they just report how business is now wanting to come back because of the monetary unrest in China?? In otherwords they are soon to have to pay the high rates of Pay they would here so bring it back here to us, Now that they got rid of us expecting insurance, retirement, and raises with full time. LoL I say pass laws allowing new business's to start up here as competition to them. It used to be made here it can again. But give it to the ones who stayed here.

16 3ReportSpamPointless16 hours agoIf you don't like the ups and downs get off the ride... Your best bet overall to make any real money over a long term is still stocks and will be stocks. 9 13ReportSpamsam (jesse78) 6 hours ago

you should consult a financial counselor or talk with your banker.

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In this area - these are the dishonest financial advisors who talked customers into buying into financial investments that were doomed to failure. Most often they were directed by CD bank employees to these people when the customer learned if the one percent interest rate on new CDs.

These "advisors" got their profit - the investors got "screwed".

Either accept that one percent CD interest rate or put your money in a savings account. UNLESS - you know (yourself) how to invest that money safely.

13 2ReportSpamhavasu466 hours agoS&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government's budget deficit and rising debt burden. The action is likely to eventually raise borrowing costs for the American government, companies and consumers. Anthony, the problem is the US is already defaulting on their debt and entitlement obligations and people know there is more to come. Although you are right about good stocks, if the markets continue to melt down then who knows which ones are really good. It's all turning into a Ponzi scheme and even cash might not be good enough and that's why gold's gone up so far. Oh well, let the printing press roll in the EU and US and lets see who can get the most cash before the public revolts. 10 2ReportSpamWilliam (scalingup74) 6 hours ago

the stock market is down 300 points, the stock market is up 400 points. the stockmarket is dow 500 points.

Somebody is making a lot of money with these huge swings. And it is not you or I. How much money is being made by the HUGE COMPUTER TRADES of the brokerage houses. Their silence is golden. Thier money comes from trolls like this guy that puts out advice to the masses on websites lite this. "Give you gold to me and I will make you rich." DO NOT TRUST THE TROLLS. DROP A ROCK ON THEM!

24 3ReportSpamaprilfoolish6 hours ago

From 84 to 2004 the average, middle of the road, vanilla tasting mutual fund did 10.7%. The average investor during the same time did 3.9%. They didn't fail because of poor investment performance or greedy fund managerrs or failed government monitary policies.They failed because of their investment behavior. You all can follow the herd if you want, but I'd listen to Anthony. The market has had a lot of the risk beaten out of it. Market p/e ratios are well below thier average. A down market is simply a period of time when stocks return to their rightful owners.

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