“Do I have a great deal for you?”  I have an investment to buy today, and in five years from now, you are guaranteed to lose money if you hold to maturity.  Don’t worry though; you will make money in the short run.  How, you ask?  You will be able to sell it to someone for a higher price in a few months by selling it to someone that is willing to take an even bigger loss!  How many people in their right mind would be willing to buy this investment?  Apparently, quite a few.

The above investment is exactly what we are seeing with German bonds.  Germany just sold 5-year bonds that have yields of -.08%.  Yes, you saw that correctly.  If you buy the bond today, you actually get less money back 5 years from now – you are paying Germany to hold your money.  Obviously, this might seem reasonable for a Greek citizen to buy as a store of value in anticipation of Greece getting kicked out of the Eurozone; however, why on earth would anyone else buy these bonds?   One possible thesis is there is talk of the European Central Bank (ECB) starting a new round of quantitative easing (QE) by buying government bonds throughout Europe.  Hence, the ECB will pay a higher amount, or a lower yield, for these money losing bonds in order to buy their set “quota” of German bonds in the future.

At THOR we would not consider investing in something you would be guaranteed a loss over the next 3-5 years.  Yes, those buying it might be able to sell for a higher price in the next few months, but that is more of a gamble than an investment.  Why?  We see a lot of possible scenarios that could disrupt Europe and cause problems in the future.

–         Greece received an extension for 4 months, but a Grexit is still very possible.

–         If Ukraine doesn’t pre-pay for natural gas, Russia has once again threatened to cut off supplies to Ukraine as well as the    European Union.

–         Europe is having a hard time restructuring Greece’s debt.   Recently, Russia had no problem restructuring the bail out loan to Cyprus.  As part of that agreement, some Russian naval ships can now make port stops in Cyprus.  More Russian influence?

–         The European Union just demanded more austerity in France.

–         The far-left party (Podemos) in Spain, which has ties to former Venezuela dictator Hugo Chavez, now leads in polls with less than a year to national elections

–         Etc.

What does this mean for portfolios?

We at THOR invest with a time horizon over 3-5 years.  Making shorter term investments in something like a German 5-year bond is more of a gamble to us than an investment.  By having a longer term focus, there are times when in the short-term it may look like a bad investment, but longer term, you make money.  We just had that experience with buying a short position on the Euro (EUO) that initially traded down over the first year or so.  However, we bought it with the intention that over the next 3-5 years, the Euro would have to devalue versus the dollar so that Europe could stay competitive in the world markets.  Over the last 6 months, the move in the Euro has been swift (falling from 1.40 to 1.12 vs. the dollar) and dramatic and has turned out to be a great investment.  With investing, sometimes being patient is part of the job.  Patience is important, but reconfirming your thesis when things are not working out can also be just as important.

Book of the Month – “the smartest kids in the world and how they got that way” – Amanda Ripley

Education is the most important gift that a society can give to children.  As most of us are aware, America doesn’t rank well versus other countries.  This book looks at what other countries are doing and why they are more successful than the United States.  Even though South Korea ranks near the top, we would not want our children to have the pressures that those students have and be in classes until 10:00 pm each night.  Finland and Poland have done a great job in restructuring their education system to move towards the top in world rankings.  The discussions we have about education (and the problems with it) are the same in every country around the globe.  The great thing about America is that new ideas, concepts and dreams can hopefully improve the education of all children in the country.  Jim recently became a board member of “The Days of Wonder” school in Batavia that is a new concept in educating children.  It was a dream by the founder Cynthia Day that was started in her basement to offer an alternative to a better education.  The school is only three days a week with the parents’ homeschooling the other two days.    

Sincerely,

Your THOR Team