About a year ago, my father asked if the Merrill Lynch bond he was thinking of investing in was okay. I looked it over … noted its high rating … and said sure. A little less than a year ago, I was speaking to a vice president of Bank of Nova Scotia. I was asking him about the bank’s exposure to the subprime crisis. He said it was negligible. I then asked him about the GMAC loans it had recently bought. He said they’re fine … the defaults were lower than they had projected. So I added the bank to one of my portfolios.

It’s one year later. From what I hear from my dad, after plunging the Merrill Lynch bond is back up. And the Bank of Nova Scotia’s shares are exactly where they were a year ago. That’s much better than most North American banks have done over the past year.

No harm, no foul?

I’d be the stupidest guy on the planet if I thought that there were no lessons to be learned just because these investments didn’t turn to mush.

Fact is, my assumptions have changed. If my dad showed me the same Merrill Lynch bond today, I would’ve told him not to touch it.

And I wouldn’t have cared if a high-ranking official from an American bank swore to me they weren’t exposed to the subprime mortgage market. I wouldn’t have believed him. I would definitely have put off investing.

The housing bust, subprime mess, credit crunch and resulting financial crisis have done more than just bring the market down.

They’ve led to a stunning collapse of confidence that has infected the entire investment world. Banks don’t want to lend to each other … institutional investors don’t know what’s safe anymore … and retail investors don’t believe anything anymore.

How can they? The rating agencies have proved beyond a shadow of a doubt that they do not understand derivatives. Their ratings are worthless.

And the brokers and analysts who follow every twist and turn the market makes? It must have made them so dizzy that they can’t see the forest for the trees. They’ve been making one bad call after another.

Just a couple of weeks ago, for example, Buckingham Research estimated that Bear Stearns had $35 billion in liquid assets and borrowing capacity, enough to operate for 20 months. Turns out it had enough for three days. This is one of dozens of examples I could cite.

There’s so much uncertainty in the investment world that we can no longer fall back on our long-held ideas of what makes a safe investment.

Munis? Sorry, thanks to the shaky status of the monoline insurance companies (which insure munis), they’re no longer the safe investments they used to be.

Money market funds? They’ve been hit too. Some brokerages are covering losses with their own money rather than pass it on to those who invested in these supposed safe havens.

Good move. I don’t blame them.

Corporate bonds? The spread on what you can earn from them is tempting, but along with falling employment there is increasing evidence that Wall Street’s problems have become Main Street’s. By no means can these be considered rock-solid safe investments.

What’s left? Oh, yes, how could I forget. U.S. government bonds. Okay, they’re still safe but are they really investments? I mean, can anything you get a negative return on be considered an “investment?”

I don’t think so, and that’s exactly what you’re getting with them. A ten-year note would give you 3.6 percent yield.

Inflation is running at 4.1 percent, and that excludes food and energy prices. The real rate of inflation (as my colleague Rusty McDougal would attest) would be much higher.

U.S. bonds are worse than giving the government a free loan. Instead of the government paying you extra money for the loan, you pay the government for the privilege of loaning it money.

Do you feel honored? Or cheated?

Well, I can’t speak for you. But this is the kind of honor that could land me in the poor house. I’d say cheated.

Well, is there any investment that is truly safe?

There sure is. Australian government bonds have never looked better than they do right now. And it’s the perfect time to jump into them…

Not only because Australia has one of the strongest economies in the world. Unemployment is at a 33-year low. And prices of its two big exports – coal and iron ore – are at historical highs. It doesn’t hurt that around 66 percent of Australia’s exports are commodities.

And not only because Australia is effectively shielded from the problems we’re having in the U.S. They trade mostly with fast-growing Asia. In fact, 60 percent of its exports go to Asia.

The biggest reason the timing couldn’t be better is because the Aussie government has been raising its key interest rate to stave off inflation. They’ve raised it all the way to 7.25 percent.

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