Here he explains how the recently signed U.S.  government bailout “will make corporate bonds the place to be for a very long time.”

As the stimulus and banking packages unfold, there is one thing that we know for certain, there will be one hell of a lot of money printed and pumped into the system. The success, or degree of success of these programs is still up in the air, but we know for certain that we will have a lot of new money out there.

These bailouts will result in a series of events that will make corporate bonds the place to be for a very long time. In fact, bonds may be the only place you will make money in the next few years.

The first event is already in progress, printing lots of new money to finance the bailouts. Let’s ignore the cost of financing these bailouts and just look at the effect it will have on inflation.

Unavoidably, inflation will be primed to take off.  It’s like pouring gasoline on a fire. You pour enough money on the economy and the flames will get bigger. This is the second event.

As we all know, too much inflation is death for our economy and the stock market. It’s like not being able to get your in-laws to go home. Life is awful. You have to have lived through the late ’70s and early ’80s to appreciate this fact.

Are double-digit interest rates like the early eighties possible? Considering the amount of new money being pumped into the economy, it is more likely than most can imagine right now.

The third event, the Fed will have to raise interest rates to control inflation or hopefully stop it before it can do its damage to the economy and the stock market.

Look back to 1994 and see what multiple interest rate increases did to the stock market in a normal economic environment. The average stock was down at least 30%. I can’t imagine what will happen in the already challenged economic environment we have now.

The fourth event will be for bond prices to drop as the Fed increases rates. How the Fed’s actions affect bond prices is not a complex relationship, but it would require too much space for me to explain here, so you’ll have to take my word for it.

These interest rate increases will create one of the best buying opportunities in bond history. Using a simple strategy, you will be in a position to buy up discounted bonds at higher current yields than they were paying last year.

Discounted bonds not only pay you a higher current yield than the coupon of a bond, it also pays you capital gains at maturity. In the past six months, I have taken capital gains on these same types of bonds as high as 97% in less than two months.

If you are a person that buys long maturity bonds to get the highest interest rate you can, you may want to pay particular attention to the rest of this article. Long maturity bonds will be crushed in what appears to be all but a guaranteed high interest rate, high inflation environment.

Here is a simple and safe method for beating the market for the next five years. Invest in ultra short term, investment grade corporate bonds on an averaged and staggered basis. Here are the particulars.

Investment grade only. Junk bonds have earned their name. Does this mean you can never have a BB bond, investment grade are BBB to AAA, no. There are some exceptions, but staying in investment grade bonds gives you an 80-year documented success ratio of 99%. That means 99% of the time investment grade bonds pay off. Junk bond payouts are significantly lower.

No matter what is happening in the economy, quality is always your safest bet in investments.

Short term, staggered maturities of three years or less. This is the key to the success of this approach. It will sound very foreign to most bond investors, but give it a chance.

Long maturity bond prices are crushed by interest rate increases. Short maturity bonds, in this strategy that means six months to three years, will drop in price but much less. Since they mature sooner they also allow you to buy back into a rising interest rate market and take advantage of the price drops.

In long bonds, you’re stuck. The ultra short maturities give you as much protection as possible from getting stuck in bonds that you will have to take a loss on to get out of in the coming inflation.

There are two more techniques you need to use to add a little more security to this method: staggering and averaging in.

Staggering your maturities will give you an extra edge. It’s accomplished by buying into the market in small amounts, five or ten bonds at a time and plan on having 10 to 25 different bond positions added to your portfolio over a 12 to 18 month period.

This does two things. It averages you into a market over time, which will typically give you a better average cost, and it staggers your maturities so you will have several bonds coming due every year. This gives you fresh money to reinvest as bond yields go up and prices come down with the rate increases. Staggering and averaging in will also give you better diversification, which is always a good thing.

No matter what you choose to do, never load up on a few bonds because the coupons look to be good at the time. This is the oldest trap in the money business for conservative investors. It will end up costing you.

Don’t let your lack of familiarity with bonds keep you from using this technique. Take a look at the Bond Trader, it does everything I have described here and uses a few additional techniques to give its investors the long-term returns of the stock market without stock market risk. To date it has not had a single loss.

Source: How the Stimulus Will Drive Bond Profits To New Highs

Almost immediately, pension funds and hedge funds from around the world poured money into this BRIC nation. In fact, Brazil sold over $500 million in bonds to these hungry investors. That doesn’t even count the investment assets that poured into Brazil’s stocks, real estate, etc.

Brazil’s tax revenue also jumped 13% last month alone. Household income has increased, unemployment has gone down, and Brazil’s booming real estate market has all added new money to the government’s coffers.

Brazil has made huge strides in recent years. Just 20 years ago, Brazil was an entirely different country.

The largest economy in South America was drowning in debt. The Brazilian currency, the real, was practically worthless. And even in the ’90s, Brazil was still trying to get its act together and dig itself out of years of debt.

Today, it’s a completely different story. For the past decade, Brazilian officials have capitalized on its expanding commodities and completely rebuilt the economy from the inside out.

And now, Brazil is one of the hottest emerging markets on the planet. I believe Brazil will continue to soar for years to come. I say that because Brazil’s economy expanded 6.2% in just the fourth quarter alone (when other economies around the world were slowing). That’s the highest growth rate since 2004.

Brazil’s currency, the real, has now gained 28% against the buck in the last four years. That’s the very best performer of the top 16 currencies of the world.

And right now, things have never been better for Brazil. Petrobras, Brazil’s state-owned oil company, is hiring another 14,000 engineers, geologists, and drillers as it taps into the biggest crude discovery in the Western Hemisphere since 1976.

In fact, this latest “oil find” may allow Brazil to overtake all of OPEC’s output with the exception of Saudi Arabia. So this will be huge. It will provide a huge base going forward for Brazil to divert some of its oil money into other viable investments.

Money just keeps pouring in as the demand for Brazil’s bonds, stocks, and commodities continues to pump money into the economy.

So what will Brazil do with all this newfound money? Brazil’s reserves have already doubled since 2006 to a whopping $195 billion. Not bad for a country that had trouble paying its debts just a few years ago.

Brazil’s policymakers have considered many options lately. Rather than touch the $195 billion in reserves, they have decided to start a $20 billion sovereign wealth fund (SWF). This new SWF would take this newfound wealth and diversify it into many different investments.

What’s the plan now? First, Brazil’s policymakers will use the proceeds from the recent bond sale to pay off more expensive debts. Then they’re planning to build their SWF. They’ve already announced they’re investing at least part of that $20 billion in U.S. dollars.

Brazil’s policymakers are also planning to use part of this money to buy rivals overseas, fixed income assets, and finance companies seeking to invest in their operations.

Brazil is becoming more solid all the time. And as they diversify their income streams, Brazil’s leaders will just create a brighter, more stable future for themselves.

I find it interesting that they feel buying dollars at this point in time is a worthwhile investment. You buy things only because you think they will go up in value…as far as investments are concerned.

Even the epic dollar bear Jim Rogers agrees there could be a short-term dollar rally. He estimates that it may last only about a year. He’s going to use that dollar rally to finally exit his dollar-denominated assets.

He also stated another reason why the U.S. dollar may rally for about a year: America is a huge agriculture producer. The world is in dire need of agricultural commodities, so our American farmers are going to pick up the slack where the economy has fallen.

So, in the near term, you can see that both Brazil and Jim Rogers are betting on the greenback.

In the longer run, Rogers believes the commodity dollars (Australian dollar, New Zealand dollar, and the Canadian dollar) will do better than those that aren’t commodity exporters during this commodities boom. In fact, he especially emphasized his Aussie dollar position (and since Brazil is also a “commodity currency,” I believe it will prosper right along with these others that Rogers has listed).

So don’t get me wrong, over the years, the dollar will have problems. But in the next few months, there’s money to be made by investing in dollars, and Brazil knows it.

Sean Hyman
For International Living

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Source: Brazil Is Hitting the Town and Buying…Dollars?