At Craven Capital, we’ve been thinking a lot about ions lately.  No…not those negative ions associated with crashing waves on the seashore that make you feel so positive.  The other ions that can make you feel so…well….negative.  You know them…Inflat-ion, Deflat-ion, Stagflat-ion and of course the big kahuna…Hyper-inflat-ion.

These days, it seems like a lot of people are thinking about ions.  When we are asked which ion we think will happen, we politely answer “yes”…because we think that all the ions could very well happen and to a certain extent…happen simultaneously.  Why?  Well…think about it for a moment.

Let’s start with Deflation.  We are definitely in a deflationary environment to some extent.  Wages are stagnant and falling which is deflationary.  Productivity is increasing in some areas (think computers and technology) which helps to bring down prices…which is also deflationary.  And most of all…the developed world is deleveraging from debt.  Baby boomers, of which we are not so proudly part, are wishing and wanting debt out of our lives so fast, it hurts. To any extent that we can, we are getting rid of debt and that means we are not using our money to buy stuff.  We are getting rid of stuff instead and using that money to get rid of debt.  That is definitely deflationary.

But what is deflation anyway?  As you know we like to keep things simple at Craven so we think it’s as simple as Sally telling Harry to keep his paper money in his pocket for now, because that cute IPad thingamajig that he’s wanting to buy today will likely cost less tomorrow.  Like all things economic, it is ultimately a state of mind, a perception of a future reality.   Economics, contrary to popular belief, is not a science…as much as the economists would want it to be…but that’s a topic for another day.

And that’s definitely enough ions (negative or positive) for today…we’ll continue our not so scientific discussion tomorrow.

In the meantime, we couldn’t help but notice the cover of Barrons yesterday morning.  Now, in the interests of full disclosure, let us say that we like Barrons.  We read Barrons and we occasionally enjoy the company of the very smart Barrons guys and gals.  They are good and bright folks and quite sociable.  But their editorial staff have a habit…not as bad as Time Magazine, by a long shot…of seeing their cover stories presaging a coming collapse.

http://www.usatoday.com/money/perfi/stocks/story/2012-04-25/stocks-magazine-cover-curse/54538018/1

So when we saw that this week’s cover was all about the best bond funds, we cringed a little.

http://online.barrons.com/home-page

As stated, we like Barrons and we’ve got nothing against bond funds per se….but we worry that bond funds have become so very popular at a time when interest rates (ergo yields) are so very low and really have not that much further to go.  Such perceived flights to safety can easily become unhinged when the demons of inflation take flight…or those nasty bond vigilantes come after Uncle Sam.  Both potentialities are lurking uncomfortably in the shadows.  At Craven, we prefer to know what we own and when, for example, Coke is paying far more in dividends than interest on its bonds and we have a chance to accumulate additional yields by way of covered call premiums on the Coke stocks we own, why should we rush off with the herd into a bond fund?

The problem with herds is that they tend to be skittish.  If we decide to own a bond, we would prefer to keep it or sell it when we choose and not be forced to liquidate prematurely because all our fellow buffaloes have their furry hides in a flutter.   And we don’t see any advantage to being a creditor of any company like Intel or Altria, with their fortress like balance sheets, fat margins, deep moats and oodles of free cash to pay us our handsome dividends.  So keep a keen eye on bonds and bond funds…and watch out for that shadowy figure in the corner…he might just be a vigilante.