Mutual funds

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.

Salinas Californian Article from last Saturday

I continue to find lessons and indicators in the Brexit experience.

  1. In general, economically and culturally, Asia is rising. Europe is in decline.
  2. Immigration is a big issue globally. Britons feel swamped by unfettered immigration from Europe. That strongly affected their votes. I’m perceiving that the immigration issue was bigger by far than economic questions.
  3. Social anger is increasing. Many people feel they have lost ownership of government and are at risk of losing their cultural identity. Results: anger, alienation, separation, and fear. This was apparent in the “Brexit” vote. It is also apparent in the current angry American presidential campaign.
  4. Low and lower interest rates. Brexit demonstrates yet again that any crisis is a giant gift to the Federal Reserve. At this point the Federal Reserve can keep interest rates as low as it wishes for as long as it wishes, and blame Brexit.

Here’s my article in the Salinas Californian, to discuss this further.

Read here.


As we prepare the 2nd quarter’s reports and I study the financial markets, I’m reminded yet again that intelligent persistence is a core virtue of successful investing. My son Eric, who is on our board of directors, recently sent me this link, and I think it’s very relevant. Press on regardless.

Read article

Brexit? What Brexit?

Early thoughts on BREXIT: first, the vote last week was a non-binding referendum, which means that it was simply an opinion poll. Second, everybody seems intent on stalling any implementation. Third, the central banks are lining up to throw money supply at the problem. So this could be a big deal…or not. What happens next is literally unpredictable but probably we’ll all muddle by as we so often manage to do. Despite the rhetoric, we may discover that this was a good event, a bad event, or a non-event. Nobody really knows. So far it’s essentially been a non-event. Stay diversified. We are following this closely.

The Sequoia Blowout

Read article

As the attached article explains, Sequoia Fund (symbol SEQUX) has always been an investment we have been proud to own. Over the decades it has delivered above-market results which have been unusually durable. The management of this mutual fund has delivered superb, consistent, even admirable management.

That may not entirely be the case now, as documented by the attached article. A few months ago, this mutual fund began to fade as its over-allocation to one failing stock, Valeant, dragged it down to a very unusual underperformance. At this point, we are analyzing this mutual fund to determine whether or not to stay, to sell, or even to buy more. Meanwhile, it’s a classic story of how a great mutual fund can go wrong.

There are several conclusions to be drawn from this.

  1. Even the great mutual fund managers occasionally step on a land mine. This situation, however, is a self-inflicted wound because it resulted from violating the basic rules of investing. They owned too much Valeant, and at too high a valuation. Even the financial wizards need to pay attention to the rules.
  2. The stock which laid them low was morally questionable anyway. Good investing, long term, is ethical investing.
  3. Thank goodness we keep our allocations close to 5% for each fund. We haven’t been badly damaged by this because we are diversified.
  4. Morningstar now ranks this mutual fund as three stars, which means “OK”. All Morningstar rankings are look-back numbers.
  5. Good investing is painful investing. The truly outsized returns are garnered by people who are willing to set fear aside.
  6. The two members of the board of directors who resigned performed their jobs superbly. Independent members of the board of directors are supposed to think independently, and that’s what they did.

This is an ongoing story. I’m harvesting all the information before making a decision.

Market Decline

Global stock markets in steep decline

If our portfolios are diversified, then today’s declining stock prices represent the beginning of an opportunity. We will take advantage of the coming days to examine the performance of our mutual funds and “weed the garden” of mutual funds which appear to be faltering. If the market decline continues, we’ll begin buying. Patience…we’ve been waiting for this.


What NOT to own

Quote from a mutual fund manager speaking today; “A large part of investment management is the act of omission: the decision to NOT own the 90% of available investments which aren’t going to succeed.”


I’m watching the China exchange traded fund, symbol PEK, which is up about 16% in one day, having fallen close to 40% in one month. I’m also looking at valuation statistics for the United States stock markets. The Value Line P/E is 19.1%, which is historically modestly overvalued. The median yield is 2.1%, again modestly overvalued. The Value Line Median Appreciation Potential is 35%, which is historically profoundly overvalued. These statistics can stay in the “overvalued” zone for years. My perception is that they have stayed high for so long due to artificially low interest rates. They continue to suggest, however, that the possibility of an eventual downturn, perhaps years in the future, is out there. Most of our portfolios are diversified and relatively cautious. At the moment, we’ll continue to stay conservative. We don’t know what will really happen in the short run. Eventually, if and when bargains emerge, we’ll do some buying.