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There's a sucker born every minute.. and two to take him.

April 29, 2013 | About:
"Let us break their bonds asunder, and cast away their cords from us." Psalms 2:3

Investors would be smart to adhere to this biblical advice. Last week Rwanda, a tiny speck of an African

nation, issued $400 million with an interest rate of 6.625% in U.S. dollar denominated paper. The order book was 8.5 times oversubscribed.

The 10-year bond was sold at a yield of 6.875%. The bonds dropped off slightly early on Friday before finishing up the week near par.

Most Americans would have a hard time locating Rwanda on a map. Here is a visual aid.



Fitch rated the bonds at "B."

What chance does the country have of repaying this principal at maturity? The Wall Street Journal noted that foreign aid accounts for about 38% of the country’s budget. That suggests that 100% of the debt just incurred can be payable only due to gifts from American and European politicians.

Ordinary citizens are thus funding involuntary transfers of their hard-earned money to Rwandan officials. Whatever is left after deductions for graft and corruption will be used, at least temporarily, to pay generous interest to wealthy investors. There is zero probability that Rwanda could pay even the interest, let alone repay the principal a decade hence without this Ponzi-like, foreign aid financing.

It took both unscrupulous salesmen and stupid, yield-hungry buyers to make this bond issue possible. They didn’t learn anything from their Caribbean-based CD experience with now-jailed [url=http://Allen-stanford-gets-110-years-for-orchestrating-7-billion-investment-fraud-scheme ]Allen Stanford[/url] or the promised too-good-to-be-true equity returns from Bernie Madoff.



Con men cannot operate successfully without the confidence of their marks. When you send your money to Stanford, Madoff or Rwanda you have already kissed it goodbye. You just won’t know it right away.

Rating agencies and financial advisers that placed people’s money in these issues all later feign ignorance about the chances of never recouping your money. The Bible knew better thousands of years ago.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.MarketShadows.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 4.4/5 (19 votes)

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Comments

pravchaw
Pravchaw premium member - 11 months ago
Great article Dr. Paul. If people have any doubts that there is no bond bubble then the Rawanda bonds are certainly a great rebuttal. I guess the good folks who lost their shirt on the tech bubble, the real estate bubble and then sold their stocks in a panic in the financial crisis are now clamouring to get fleeced again. The financial advisor community is of course happy to oblige as long as they get a cut.

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