Mutual funds

Is inflation the only way out?

At the end of a busy day of study and action, I’m looking at overall debt loads and interest rates. I’m wondering if, perhaps, the US government might seek to “accidentally” create runaway inflation for a short period to reduce the real cost of their soaring debt load. Otherwise, when interest rates go up, it’s going to be very difficult to repay. It worked for Germany in the 1920’s. No, wait, it didn’t work, did it? Still, it will be tempting when the bills come due.

Explore German hyper-inflation here.

Out of energy, into financial stocks.

We have largely exited our energy holdings. Most of these were profitable. We have cut our gold exposure in half after a very successful run. Our overall holdings in technology and health care remain in place. Now we are newly invested in bank stocks, both foreign and domestic. The challenge of financial stocks currently is that they are a very uncertain and high-risk position, dependent upon both interest rates rising and economies not stalling. We can’t really guess what will happen. For example European bank stocks…of which we own a dollop…were hammered today with bad Euro-economic news (Is there any other kind?) I’m thinking that patience and humility may help us produce outsized gains in this unloved, ignored sector. Meanwhile billionaire bond trader Jeff Gundlach says sell everything, even the kids. I’m inclined to keep the kids. Stay patient.

Read this article simply to see what billionaires think is happening…and it’s not pretty. 

Singapore’s Sovereign Fund is expecting what the bond markets are already predicting

That would be at least a decade of slow growth. The article is attached. As I read this, I’m struck by how fortunate we are that we didn’t go to cash back when it seemed that cash was best. I’m interpreting this article as a prediction (and you know how well those work) that index funds won’t uniformly perform optimally. (That’s investment-speak for “They might lag.”). There will still be very attractive sectors, if we have the wisdom to see them and the courage to invest in them.

Read the article here.

Taking profits in energy

Today we exited our relatively high-risk energy holdings, after a very profitable short term run. I tried to hold on to get as many clients as possible long term rather than short term capital gains. However since we’ve been going sideways for a couple of weeks I thought it would be wise to take gather our profits and depart. The easy money from the days of grotesque overvaluation last year appears to have been made. Also I’m hoping that our diversified value stock mutual funds have a toehold in energy. Now we’re on to other bargains.
 
In the bigger picture, we could see either the stock or the bond markets move dramatically based on news. Both are overvalued. Our energy adventure was a bit of sideshow, compared to the bigger challenges of asset allocation and diversification. That’s where our greater attention must focus. Go slow and stay cautious.

Watch out!!!

I’m rejoicing at the recent all time highs in the stock markets. The money gained is real. But I’m also cautious. Let’s stay diversified and careful. We don’t really know what will happen. We need to be emotionally prepared for a downturn, even if it’s slight. Remember, for us, downturns are when investments go on sale. In my professional life, every decline in the stock markets has been a opportunity to create greater long term gains.

Read the article here.

What the 30 year Treasury bond is telling us.

On Wednesday, the government auctioned off $12 billion in U.S. Treasury 30 year bonds for the astoundingly low interest rate of 2.172%. These are taxable bonds. This means that the investors in these bonds expect essentially no economic growth in the U.S. in the next thirty years.

Consider what 30 years of “steady state” economic growth would mean.

It would mean that the stock market indexes should stall where they are or rise until the average dividend is lower than bonds, although individual issues should do well. Index funds gonna suck.
It means that we should all save much much more because average investment returns will be small.
It means that they don’t expect interest rates to rise ever. Cash and C.D’s will have zero return for the next thirty years.
It means the American Middle Class will stagnate or fade. Upward mobility will require either luck, educational prowess, or unique skills in wealth creation.
This suggests, that, should this interest rate be an accurate indicator, there will be substantial social unrest, perhaps even revolutionary movements, as the American economy withers and American frustration grows. All the central bank interventions and sweeping economic policies haven’t worked.
It seems to me that this is the biggest news of all. After all, there can’t be economic justice for any economic or ethnic group if the entire economy is fading.
Or investors are wrong, and this bond market is simply overpriced, and in a bubble.
We will only know by living through this. Eat your veggies.

The Great Capitulation?

The Great Capitulation. That’s a great description of what appears to be happening. Low interest rates are now being accepted as the inevitable environment for the near and distant future. It feels like the stock markets of the world will benefit from central bank support now and forever.

Capitulation is what market bottoms and tops feel like. The contrarian in me is creating an urge to go out and short the bond market. Had I done that in the past seven years I’d be totally wrong. But now…I’m wondering. And watching.

Read article here.

The fading middle class is the dominant social issue of our era, and will somehow affect our investment choices.

This article is by a leading economist. My thought is that the fading middle class is the dominant social issue of our era, regardless of politics. It is CERTAIN to have an effect on the financial markets, but what that effect will be, we cannot know.

Read the article here.