Just a couple random thoughts rattling around my mind this morning.
Is everyone being too sanguine about energy prices coming down so much? Seems to me that that we are now starring into the winter season with massive potential heating costs ahead. Seems to me that Putin holds way to many cards heading into the season. While I am no expert in energy, on the surface, it seems we are thinking about tomorrow when the danger is 3-4 months from now when it is 10 below zero in Minnesota (and elsewhere). As some folks mentioned in the various comment sections yesterday delinquent utility bill are skyrocketing–this is somewhat ominous for the economy ahead and I see full page notices in the local newspapers announcing 10% rate increases by both Xcel and Centerpoint (personally we buy our electricity from a local cooperative and heat the house with propane which we bought a years worth of gas a few months ago).
How much higher do treasury yields have to go before they become a great alternative to other income securities? The 2 year treasury is around 3.80% now–is 4% a good number? Just thinking that a relative short term treasury may be a good hiding spot for now for a small chunk of change. I am going to give it more thought–actually it could be a shorter term issue than 2 years as there are some tasty (relatively speaking) out there.
34 thoughts on “A Few Random Thoughts”
Thought I would jump in here after reading the comments. Today the market seemed to be giving us a reprieve. Some here know I have posted a link before to LME pricing on contracts. This isn’t real life pricing but it gives you an idea how live commodities are doing in a general way.
Also I am still working in the building business and comment about what my suppliers and customers at the distributor level have been saying about business. Concerns about slowing business, recession, competitors lowering prices and margins going lower. Lot more competition for the jobs available.
I think the inflation the feds are fighting has to do with some things out of their control since it really is a world wide economy. Labor force, more and more baby boomers are leaving the job and there doesn’t seem to be any people to fill the jobs. Prices of equities, with so much money injected into the economy I have seen too many people chasing stocks and yields which makes me uneasy. even though I am just as guilty.
Even with the 1,200 point loss on DJI the other day we still didn’t hit some of lows seen with preferred and bonds in June. Doesn’t seem right.
Seemingly always the outlier. My thought process is completely different long term vs short duration. Though I believe that inflation will be around long enough and a recession is unlikely enough through 2023. I can easily see a complete reversal in the opportunity that presents itself now, to lock in 4+% coupons and yields long term without being forced up the risk curve. I want to be almost completely out of the Fixed Income Market between 2023 and 2027 and have as little exposure to possible crashing interest rates again between 2027 and 2032. My scars, anger and memory of 13 years of zero percent interest rates haven’t even begun to heal.
I don’t think the question is how to maximize yield and minimize risk and then pursue that path. I think the question is, what is the number that will allow you to generate the income you need with consistency and predictability without putting your principle at risk. For me that’s 4% and that’s what I’m going to plow into.
Good thoughts Richard. I think all of us know that inflation is different for each of us–we adjust–more hamburger, less steak etc.
I’m in the middle of reading Ben Bernanke’s “21st Century Monetary Policy”. He provides a nice history of major financial events requiring tightening, easing or innovations in monetary policy. While reading it, I’ve become very aware that so many events that occurred in my lifetime seem like ancient history to me, let alone younger folks who did not live through the events. We’ve had a long stretch of low inflation and low rates. I think that naturally leads to a false sense that the same must be true for the future. On Tuesday, I watched Larry Summers and Camilla Cavendish give a presentation at the Harvard Kennedy School on the dwindling global working population. Cavendish began by mentioning Charles Goodhart’s 2019 “The Great Demographic Reversal,” which predicts two decades of inflation because of labor shortages. I’ve posted about that book. It is compelling. They weren’t as pessimistic about how demographics would affect interest rates, but Summers was explicit that he was not confident about his own projection. (If you’re interested, the presentation is on their youtube channel).
On the energy front, it seems to me that a slowing worldwide economy keeps oil prices in check. But Putin does have a lot of leverage over natural gas prices in Europe, where shipping LNG is just not a full solution, and that could be a real crisis in a cold winter. Bernanke’s book reminds me that we live in a global economy where a failure anywhere can lead to a crisis. (I was reminded the Fed had to become active when the Thai Baht and Mexican Peso crashed, and when South Korea revealed that it didn’t have the dollar reserves that it claimed.) And of course, the Chinese have this real estate and lending bubble that everyone has been predicting for years will burst some day, and perhaps that day will actually come.
The only thing I know for sure is that it will all look obvious in hindsight. As Neils Bohr told us, predictions are difficult, especially when they are about the future.
I see that Grid has been the only one talking about acting like the bank and lending himself his own money and rolling it in short term treasuries thru TDirect. That is not a bad scenario for specific term ( two to five years?) of retirement funds. REALLY diminishes risk, esp if one is in the spending (read: annuitization phase) of self funding daily expenses. Maybe now I see the value of the Ibonds and a position for them. Helps negate that short term whip snap of rates. Again, Bonds and int rates are historically MORE volatile than stock prices and this 2021-2022 merry go round with the Fed as ticket taker has just proven that.
I had talked to my wife bout the same scenario a few weeks ago and am surprised I see little yak about that here.
Overall Tim’s comment on energy above has also proven to be a large counter-balance and providing good and rising income. I will be looking to pare gains when everyone starts looking over to circus-energy ring three. There is still small percentage investor investment. There is NO WAY energy can just turn on some spigot to meet demand and global concerns. Still does ALL of the heavy lifting. Companies are living up to spec divs as payouts to share holders: DVN, EOG and many covered elsewhere.
Thanks to ALL of the III community that has helped me move into retirement by sharing and challenging my thoughts.
Ojo Caliente NM, JA
Thanks for you input Joel.
Nice spot to retire there in New Mexico, Joel.
Joel, The interest earned on the IBonds is great, but what is better is I cant get my hands on it, ha. I guess technically I can get some now from last Septembers purchase, but I certainly am not doing it as that money wont start receiving the 9.6% until next month. Like many I have dedicated monies in short duration from 4 month CDs up to 4 year step up notes.
Dont get me wrong, I still am playing the income issues, too. Just with less amounts and tilting towards live adjustables.
I-Bonds are great until you max your purchase out. And I think buying anything on treasury direct is an awful experience and I hate managing anything there. Of course what do you expect from a govt run website?
Treasury bills & notes in the secondary market are yielding more than CDs do. Very easy to purchase with Schwab, Fidelity, etc. Have you looked at simply picking those up with varying durations in the short term for your cash?
I bought my 4 month CDs almost 2 months ago. That day difference between it and secondary Tbills of similar duration was neglible for my huge 20k purchase. I did last month buy some 3 month TBills at auction. Just trying to impound some money to keep out of mischief and maybe catch some end of year selling when it frees up in November.
There was a story that I was once told by a senior broker (mid/late 90’s)…..
An FC was having a seminar and posed the the following question to the audience.
“What was the highest rate you ever received on a CD?”
One man shouted 16.50%. Then another chimed in 17.39%. Finally, a woman in the back said “17.87%!” and the room was aghast.
Then the FC said, “Wow 17.87%. That’s our highest rate in our audience.” “Tell me how long did you lock that rate in?”
The woman replied. “One Year”.
The FC said. “Why only one year?”
The woman replied, “I thought the rates were going higher.”
NW, your story perfectly illustrates the problem, and what I grapple with. Take the allure of the now higher short duration, at potentially the risk of losing out on the long end? And when the short duration matures, have you missed out on longer better yields? Or is the long end still dormant and needing to be dragged along to a higher level now first?
The problem is the long duration fair to almost tolerable credit quality hasnt really moved up much. 8% appears about the top where it has been already, though granted some are at least below par yielding that.
Now there are the higher yielders out there based on Libor rising.
But most run the risk of being called and ultimately just were a de facto short duration issue too…..And of course we havent even covered recession risk, credit spreads widening, “fighting the Fed”, etc. etc.
Grid, Knowing nothing, I’m continuing to add at pre-determined buy intervals (tranches) below last purchase. As long as the price continues to fall/yield continues to rise, they keep hitting. The more out of favor (like high IG/low coupon), the faster they hit.
Rote decision-making as I would otherwise find it impossible/exhausting to re-evaluate every new buy opportunity with equal patience and objectivity.
This process is punctuated with long periods of quiet, but then they start to hit left and right when fresh lows are posting. Overall acquisition prices continues to fall and overall yields continues to rise, while minimizing capital loss and volatility of holdings.
That is a very sound process, Alpha. And your keeping your eye on your long term goals which is excellent. I have been adding in small amounts in a few things you probably like too! I tend to have some issues that are always tied around par, so if I see something, I can usually dump something without a loss. I havent been trading a lot lately. And admittedly being short sighted, Im just trying to protect my gains this year. They have been modest but hard fought for so I want to try and keep them and yet be in the game a bit at the same time.
Great story NWCG. We all remember the early 80’s for sure.
My best investment ever – 30 year treasuries in 1983. If only I’d committed the entire portfolio . . .
Qniform–maybe one of the few times I bouight corporate bonds around $500/each. I had no real money then but did do a double on them.
I did not see this comment until I read all the short term treasury talk below the comment above and this is exactly what was going through my head as I was reading. Now we are not back in the 15% 1 year CD zaniness of the past but even locking in a long term 8% would have been considered successful as time went on.
I just cannot imagine rates being high for any true length of time at this stage. I think it would be wise to lock in high quality above 6% if at all possible. We are basically at that stage now with savvy shopping around getting more. We were struggling, just 16 months ago, to find anything decent and now we are finally getting better options to consider. One does not have to go all in. Just start nibbling. Those tbills paying 3.5% could be a safe 6%+. One should at least consider buying some at this stage if their goals allow it.
Yes things could get worse. Your purchases could lose value. But they hopefully keep paying and you can buy some more as the deals become better.
I’ve put a a good amount of cash in us treasuries for the next several months too
Ray–I’m late in studying them–between the website and my real job I certainly have much less time than I would like.
I too have moved money into US Treasuries – moving some money that I had in online money markets and scaling in starting a month or so ago into 3 to 6 month Treasuries
I buy mine on the secondary market at Fidelity – where today 3 months are available around 3.46% (1 year are at 3.92%)
Not going to get rich on it but better than where it was
Same here. I’ve been buying ibonds for the last half-decade, but this is the first time in my life I’ve purchased plain vanilla Treasurys.
I’ve been temporarily holding cash in 3-month treasuries with the strategy that interest rates will continue increasing thru the end of this year. Once everyone admits we’re in a recession (we are now of course, but the media won’t call it one till after the midterms), I’ll switch to either longer term debt since the returns will be acceptable.
JoeL, are you using regular treasuries or TIPS?
I buy them from the secondary market, mostly on Schwab. 3-month treasury bills and notes are yielding around 3+%. You can pick and choose the duration you’d like by the date they mature. No transaction costs, safe as a CD, with higher rates. I’ve been capping the maturity dates to around late December of 2022. I suspect by then we’ll know if the fed are gonna keep raising rates or if that’ll be the best time to lock in long term debt / preferreds / dividend paying stocks.
The economy is what it is no matter what label they slap on it, Invest accordingly. Those arguing over the term recession are playing polltics with it they’re not analyzing investments.
I started a 13-week T-Bill ladder. First maturity is Nov then Dec, Jan. Will wait for Feb to auction and so on.. It’s my cash stash which has piled up..
Rich–am pondering a similar ladder of relatively short duration issues with my dry powder.
Back in the 1995 – 2000 time frame when fed fund rates were between 5 – 7% I did the T-Bill ladder. I had a good chunk of cash that I was able to build a ladder that paid every month until it was time not to. The income might not seem much to some but I was pleased with the outcome with idle cash since I’m already overweight in just about every thing else. I stuck with the 13 week T-bill over the 4 week due to higher rate plus I was still able to roll every month to capture the next higher rate if it went up. U.S. government guarantee payout, zero default.. Worked out well for my cash. plus no state tax on the income. although, the feds want their cut.. Back then I solely used Treasury Direct. But this time I’m buying from my broker online. No fees since they want to be competitive with T-Direct.
Tim, Back in the 1995 – 2000 time frame when fed fund rates were between 5 – 7% I did the T-Bill ladder. I had a good chunk of cash that I was able to build a ladder that paid every month until it was time not to. The income might not seem much to some but I was pleased with the outcome with idle cash since I’m already overweight in just about every thing else. I stuck with the 13 week T-bill over the 4 week due to higher rate plus I was still able to roll every month to capture the next higher rate if it went up. U.S. government guarantee payout, zero default.. Worked out well for my cash. plus no state tax on the income. although, the feds want their cut.. Back then I solely used Treasury Direct. But this time I’m buying from my broker online. No fees since they want to be competitive with T-Direct.
Tim, fantastic site, thank you for all that you do. I’ve learned a lot from you and the folks who comment here.
The ladder on Schwab or Fidelity of treasury bills/notes is very simple to assemble. I’ve moved ALL of my cash — even cash we had in bank accounts over to treasury bills. Why accept 1% for short term cash in a high yield bank, when you can get ultra safe returns from T-Bills. I’m prepping for changing my strategy around this December when we’ll have a better idea of where rates are going.
Putin may be falling out of a window before too long while holding that deck of cards….
The sanctions are really hitting hard, and can be still be ratcheted up much further where it hits the upper middle class Russians, who have been spared so far
And the lack of spare parts from the west is going to start hitting industries harder and harder.
This is the biggest game of chicken in history.
Sorry for not knowing where to post properly.
FYI, OXLCN is accidentally listed with the parent of OXLN instead of OXLC.
Not sure how to get it adjusted.
Thanks Michael–will get it corrected. Thanks for the heads up.