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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: tekgk who wrote (13419)	1/25/1998 6:54:00 PM
From: Investor2	Read Replies (1) \| Respond to of 18056

RE: "I think the average investor is assessing the risk as being extremely low or even non-existent since they are willing to get the same interest rate of return on long term as short term debt securities." I understand your point. Let me present a new but related point. We at SI (including me) like to think that we are so much smarter than the average investor. Let's assume that, contrary to my egotistical beliefs, I am the average investor. I, Mr. Average Joe, believe that the risk of loosing prinipal or interest (for my US government bonds) is essentially zero. The government will simply print more dollars to cover the principal. Thus, the only risk will be the risk associated with inflation. Right now, the "Market" is telling me that interest rates will be declining. The Market is trying to "lock in" an interest rate of 5.8%, because the Market thinks that short term rates (and inflation)will be dropping. As Mr. "Average Joe," I am suspicious about what the Market is telling me. I'm not sure if the Market knows what it is talking about. As a matter of fact, I will have to see proof (in the form of no inflation, deflation, or Fed easing) before I admit that the Market is not full of #$%^&. Only then will I buy a 30-year bond for 5.8% coupon. Until then, I will keep my money in short term bonds, intermediate term GNMA's, or stocks. So, as Mr. Average Joe, I can state that the average investor doesn't buy in to the 4.5% to 5% long term bond scenario. In fact, the average investor doesn't want to buy 30-year bonds at 5.8%. Mr. Market, however, is happy to buy bonds at 5.8%. Mr. Market surely isn't representative of the average investor. He must either be the "smart money," big business, or foreign investors. What do you think about that scenario? Best wishes, I2