Should You Buy Farmland? Or Bonds? Or Oil? No!

This story appears in the June 24, 2013 issue of Forbes. Two areas investors should pare back on are bonds and farmland. And regarding energy, be extremely careful. Bonds have been overpriced since 2008, but that doesn’t mean the bubble won’t eventually burst. Debt instruments have already taken a hit as the Federal Reserve hints that it will be scaling back its vacuuming of Treasurys and mortgage-backed bonds. Unless you have to do the bond dance (the only buyers, other than speculators, of long-term government paper are financial institutions that must have such securities for regulatory reasons)–don’t! Municipal bonds are in a different universe from corporates and Treasurys. Here the big risk is solvency. Unless you are an expert or have an advisor who is, go for well-diversified muni-bond funds with durations of under five years. Undermining the integrity of the dollar is similar to introducing a virus into your computer: It corrupts the information. In the economy an unstable dollar undermines the integrity of prices. Hard assets go up when the dollar is weakened, as people seek to preserve what they have. Traditional, productive investments are hurt. In the inflationary 1970s the price of farmland boomed. Same with agricultural commodities. Farmers leveraged to get more and more land. When inflation was conquered in the early 1980s, this Fed-created boom collapsed. Agricultural America went into a depression. A couple of years ago in Nebraska I warned against the rapid rise in the price of farmland since the early 2000s. I was assured that farmers had vivid memories of what had happened in the 1970s and would not overborrow to make purchases. I’m not so sure this is the case today. It certainly isn’t with Wall Street , where institutions and individual investors are treating farmland as a great asset class, and many are borrowing to purchase it. Caveat emptor! Energy also has been given an artificial boost by the shaky dollar for the past decade. Commodity inflation, including oil, has for the moment sharply subsided because the Fed has been sterilizing most of the money it’s been printing by borrowing it back from banks. There’s no way to know how much more of a downside there is, but unless you are farsighted and nimble, you should be extremely cautious with energy investments. If you’re overweighted in energy, cut back for now.    To repeat, the Fed may give commodities, bonds and farmland a new round of bubble life, but if you’re a long-term investor, don’t get sucked in. Taylor Scott International