Hot, Hot, Hot

Well all the whining about the economy is slowing rapidly and the Fed needs to back off is all meaningless with the release of hot CPI numbers just now.

The rally in markets instantly turned down–so about a 700 Dow point swing (from 300 up to 400 down). Interest rates (10 year treasury) has turned higher and now is at 3.99% and the 2 year is up 15 basis points at 4.44%.

So now we know for 99% certainty–75 basis points on 11/2.

38 thoughts on “Hot, Hot, Hot”

  1. Wow….markets closed but still rollercoaster dizzy-sick.
    At least made some $ with some swaps (e.g. eica-eccc)

    Is this what we should expect these days?
    Will need Dramamine, or simply go on vacation somewhere without internet.

    Anybody not suffering?

  2. I’m buying GE QDI Preferred CUSIP 369604BQ5 @ $95.75.
    Floating now at 6.625% until 12/15/2022 and then it will reset 333 basis points over 3 month LIBOR, currently at 3.95%. That would be 7.28%.

    Decent chance this will get called with the HealthCare spin-off as this would be their highest $5B debt. Seems low risk to me.

  3. Could anyone comment if possible on the PS Business Park Preferreds?

    PSB/X,Y or Z?

    Seems the company was bought out just leaving these preferreds.

    1. We had a lot of discussion about this. Personally bought 200 shares of Z for the high risk bucket. Pays 9% at the price I paid. 13.50. But that is all I want. I will let older posts explain why.

      The best way to find old discussion is to use google before posting. Nothing wrong with posting but it is slower. Then carefully look for each search result for the comments.

      Pop this into google search or use the link below:

      psb site:innovativeincomeinvestor.com

      https://www.google.com/search?q=psb+site%3Ainnovativeincomeinvestor.com&rlz=1C1GCEA_enUS846US846&oq=psb+site%3Ainnovativeincomeinvestor.com&aqs=chrome..69i57.10241j0j4&sourceid=chrome&ie=UTF-8

      1. Thank you – I still have a tough time searching on this website and the link you provided, while I appreciate it, doesnt bring me to an older discussion.

        1. sjc.. the link I provided gives.. says Party on Garth on the 2nd search result which was a topic posted by Tim that has discussion on PSB. By using the search term I showed above you can find “web pages” that mention the key word PSB on this website. From there one has to dig a bit. Like open the page, hit control+F, and search for PSB.

          Did the link or search term not work for you?

  4. Just in ( if any doubt) : “Market is officially bat-crap crazy”
    A 1266 pt swing on bad news- due to Walgreens-Boots & Dow reports.

    Really?

    1. Also- looks like folks are selling what we are buying so they can buy equities.
      Keep it up.

  5. I realistically don’t think inflation will start to trend down until next year. We have a war on our own energy companies raging and oil is still the lifeblood of our economy, despite whatever fantasies are pitched daily.

    I’m preparing my investments and strategy around that general thesis. We could generally conclude interest rates will continue to be raised 75 bps in Nov, then probably smaller raises in Dec, Jan, etc. Maybe we see a peak in March/April 2023? Short term treasuries with end dates laddered between now and April, so that I can slowly enter equities/bonds as yields seem like they’ll only head up for the next 4-6 months. There are some unbelievable deals on high growth, reliable dividend paying equities right now I’m nibbling at too via covered puts (e.g. AMT, CCI). T, VZ, MO, MMM are at yields I could have never even imagined a few years ago.

    1. Hi Wolverine, Loved you in all the X-Men movies, btw! Agree there are some opportunites. I’m also holding VZ and MO, which i think are at great entry points. I’ve been burned by T before so not going there. They slashed their dividend, spent the past few years trying to figure out what kind of company they are with bad purchases. I just don’t have confidence in their management.

    2. >> There are some unbelievable deals on high growth, reliable dividend paying equities right now I’m nibbling at too via covered puts (e.g. AMT, CCI). T, VZ, MO, MMM are at yields I could have never even imagined a few years ago.

      It’s a small detail but a covered put is short the stock and short the put.

      Many quality equities are at prices not seen since the Covid collapse in 2020 and cash secured puts are a great way to acquire equities at a lower cost if price gets there. However, I doubt that we’ve seen the bottom plus I’m risk averse so for the time being, I’m a spread guy.

      Was a good morning today for buying preferreds but a bit tough on the short side because early on, there weren’t many buyers.

    3. Wolv, We do NOT have a war raging on Big Oil. As a nation we have decided NOT to have ANY Energy Policy. This goes back to Raygun. Big Oil is private enterprise functioning in a laissez faire, free market environment, globally. I am long Big Oil, Royalties and Pipes. I make my own decisions as does their Boards who have committed their donations to their own ends as I do.
      Please do not confuse the news and policy with the facts of your investment decisions or real needs as a consumer. Other influences impact inflation as well, start with wages, healthcare, and ?,?,?.

      1. Energy is one of the “inputs” into the inflation in other sectors of the economy. Its more expensive to produce everything if energy is expensive. It’s not the only influence on inflation, but I think its a good litmus test on whether inflation in general will start to trend down.

        Free market in energy? When was the last time a refinery was built in the US. Or the record low govt leases? Or why we can’t refine our own, abundant, light sweet crude. And the private enterprises you mention certainly are not allowed to build pipelines. Plus, the windfall profit taxes probably coming soon. I would have loved Pfizer to have had a nice windfall tax during the pandemic but they fall into a protected sector 🙂 If those signs don’t indicate a war on our own soil then best of luck investing.

        1. Actually there was a smaller refinery built just a few years ago. Add ons have occured on some existing ones over the years, but yes trying to cut through red tape and not in my back yard makes anything new not likely.

          1. Totally correct Grid, People Like to blame government but its actually not in my backyard. Example coal trains to Richmond Docks being fought because of coal dust pollution. Same train proposal to ship out of Eureka and Portland. No one except the companies selling it or the investors want it. The squeaky wheel gets the attention. BTY, if your from coal country like I am and saw the polluted streams and the farmland ripped up you wouldn’t want it either

        2. All inputs go up in price, same store sales are just inflation pressures not higher volumes, WE do not build refineries/pipes PRIVATE money does, pipes involve use of eminent domain, govt does not have to lease to desolation to private interest, windfall profit tax is NOT here/subsidy IS, Inflation EXCLUDING energy and food is last running 6.7%, command control governance is seen as a way to trample smaller private interests who now step up instead of down in courts,in the face of corporate history, this includes Indians and polluted sites, it becomes too libelous, etc.
          Time to really THINK and rethink, all the mythical rhetoric before trying to retrench it. That is too easy, waaaay too easy. We ARE much more creative than that. We’re already good at war. Maybe it’s time to change and find ourselves as leaders with new thoughts? Maybe I’ll invest my private funds there, tell me about it.

      2. Sorry but not sure how anyone paying attention can say there is not a war on fossil fuels in this country. There certainly is. But that gets into political stuff so I will just leave it at that.

        Now from an investing perspective, this war on fossil fuels actually helps my investments in oil and gas and pipelines as well as my investments in alternative energy.

        1. From an investment standpoint, you have to make your personal forecast of oil/gas supply/demand going forward. My personal highest probability forecast is that the world is short of required oil/gas for the foreseeable future. How and why we are in this situation is immaterial, since it cannot be redone.

          A few weeks ago we had a discussion on oil/gas royalty trusts. I met with an experienced oil/gas executive last week. His company puts together private oil/gas royalty trusts. A few points:

          1) Many institutional investors CANNOT make any oil/gas investments, REGARDLESS of potential returns. This is due to ESG pressures. Given the choice of a 20% IRR royalty trust or a 4% 30 year bond, they would take the bond every time.

          2) Closely related to the first point is that the US oil/gas industry has had under investment for many years. There is NO instantaneous solution, so even if infinite investment funds WERE available, it would take several years to get incremental production up and running. IF you continue to hold back investments for any reason, it just prolongs shortages and higher prices like the world is seeing.

          3) The Permian Basin is the main future for incremental production in the US. Bidding for mineral rights is super competitive there, much more so than other fields.

          4) One of the royalty trust we discussed was Dorchester Minerals, DMLP. He knows management very well and thinks highly of them. Given that, he said just go buy EOG Resources if you want a public play on the Permian. He said that EOG was the 900 pounder in the room. I did NOT ask for his ranked opinion of all possible oil/gas investments.

          1. Tex – I agree with you when you say

            “From an investment standpoint, you have to make your personal forecast of oil/gas supply/demand going forward. My personal highest probability forecast is that the world is short of required oil/gas for the foreseeable future. ”

            And I stayed away from getting into the why because I wanted to stay away from politics. As you noted, from a short term investment perspective, the why is pretty much irrelevant because it will take time to turn things around

            I used to (maybe 15 or more years ago) invest heavily in the oil and gas sector but as I got closer to retirement moved more to income producing securities. That said I still own some energy.

            My favored oil / gas investments have primarily been the pipeline companies (EPD and OKE) and with smaller amounts in a couple big oil (CVX and SU) although I do have a few others on an even lesser scale. I also own some preferreds of DCP, ET, NSS. The one thing I have not invested in in some time (at least 10 years) is royalty trusts. I have seen some recent mentions of them here but given that most are just depleting assets, I have shied away from them. Nothing I have seen has made a compelling case for a specific royalty trust, although admittedly I have not looked to hard)

            1. Maverick, KRP , DMLP, and VNOM are not fixed asset trusts to name a few.
              KRP and DMLP are not limited and can expand acreage. VNOM gets drop downs from its parent company FANG There are probably a few more that I haven’t checked out. But the vast majority are fixed assets or they have an end date where they get dissolved or turned back over to the parent company.
              What the trick is with trusts is watch the price of oil for the prior 3 months to get a feel for the profits to be paid out. Right now, going into the next pay period the price of crude has went from slightly above 90 to below 85. I expect the next payments for a lot of these trusts to be slightly lower than the last 6 months.

  6. I saw a report that monthly interest on the federal debt increased from about $35B in January to about $65B in August. So interest on debt should be around $90-100B by January if the Fed goes to 4.5% in December? For control, the US defense budget is about $70B per month.

    I saw a separate report that the Federal Reserve, a perennial source of budget surpluses, is now “losing money” and will require a budget allocation henceforth.

    So our country is rapidly approaching the financial position of typical third world countries that have to borrow money to pay the interest on debt they can’t repay. We are now caught between fighting inflation and watching rates jump in the short term or pivoting on tightening, accepting inflation of 3-4%, and therefore accepting much higher long term rates and magnifying the long term structural budget deficit. Yet no one in Washington, not even Rand Paul, is talking about this.

    1. The fed is not given money. They just wait it out until the deficit reverses. Once gone any surplus is once again handed over.

      1. FC said: “They just wait it out until the deficit reverses.”

        FC, I posted about this exact point last week. Lacy Hunt was very explicit in saying that when the Fed has operational losses they must get Congress to approve funding to make them whole. You are correct that they turn over any surpluses to the Treasury, but they are current losing money every single day. And it will continue for months to years. Lacy said he is confident that Congress will approve the funding, but they MIGHT include other conditions like forcing a change from QT to QE.

        Link to Lacy Hunt-Danielle DiMartino Booth interview where he explains this.
        https://www.youtube.com/watch?v=J5jn6qgbgQw

        1. Please see the bottom of page 245. 2.1.5 “Deferred Asset”.
          https://www.ijcb.org/journal/ijcb15q2a7.pdf

          “If earnings are
          insufficient to cover these costs—that is, there is an operating loss
          in some period—then no remittance is made until earnings, through
          time, have been sufficient to cover that loss. The value of the earnings that need to be retained to cover this loss is called a “deferred
          asset” and is booked as a negative liability on the Federal Reserve’s
          balance sheet under the line item “Interest on Federal Reserve notes
          due to U.S. Treasury.” A deferred asset is an asset in the sense that
          it reflects a reduction of future liabilities to the U.S. Treasury.”

          ….

          “More generally, it has never been the case that the Federal Reserve System as a
          whole has suspended remittances to the Treasury for a meaningful
          period of time because of operating losses.
          Because there has never been a deferred asset of any significant size, there is little guidance as to the whether or not there
          is a limit to the potential size of the asset.”

          I am pretty sure Lacy is wrong or the video implies something he did not mean. It is possible it could happen but it never has. Only foreign governments have done it. As of today it is not necessary. more info

          https://www.brookings.edu/blog/up-front/2022/06/01/what-if-the-federal-reserve-books-losses-because-of-its-quantitative-easing/#:~:text=What%20would%20happen%20if%20the,equal%20to%20its%20cumulative%20losses.

          1. Basically what I am saying is that it could theoretically happen but in no way shape or form do we know when, why, or how it would actually take place. So was Lacy getting into that realm of possibilities? Because based on the past, fed docs, etc.. it is definitely not set in stone. So saying Lacy is wrong is not the best way to say that… It is a possibility. That is all at this stage. No hard rules have been defined.

            1. FC, I read the Fed research paper you highlighted and then I went back and listened to Lacy’s interview again. He talks about Fed operating deficits starting at 41:30. I left out one major point when I quoted him as saying Congress would have to approve of any Fed operating losses. Lacy’s point is that any loss ADDS to the whole US annual budget deficit. And as we all know Congress has regular votes to raise the debt limit. Congress will have to add the Fed deficit amount to regular Congressional driven spending. It is not clear to me if Congress will have to add the Fed shortage to an appropriations bill or not because of this. I agree with the Fed research paper that the Fed can carry the operating loss as a booked loss on their ledger, but I suspect Lacy is right on this one. We all know that when the Fed remits profits to the Treasury it reduces the annual budget deficit, so seems reasonable the converse would be true. My apologies for not being more concise in my original comment.

              Link to Lacy interview, go to the 41:30 mark:

              https://www.youtube.com/watch?v=J5jn6qgbgQw

              1. That remains to be seen. Now I could dig up the cbo report but it appears we just don’t know until we cross that bridge. New territory here.

                “In 2023, the Fed will likely report tens of billions of dollars in operating losses as it raises interest rates to combat raging inflation. Will Fed losses increase the budget deficit as logic dictates they should, or will they be treated as an off-budget expenditure? Given the “transparency” of federal budgetary accounting standards, it is not surprising that a recent Congressional Budget Office (CBO) report suggests Federal Reserve operating losses will be excluded when tallying the official federal budget deficit.”

                https://www.aei.org/articles/federal-reserve-operating-losses-and-the-federal-budget-deficit%EF%BF%BC/

                1. FC, this would be a pretty good trick. We count surpluses towards deficit reduction, but we ignore losses! I seem to recall a few money managers getting into trouble for accounting like this. But if Washington can get by calling losses as “off-budget,” you have to think that is the path they will take. Question would be if anyone has legal standing and desire to challenge it in court. .
                  Quote from the AEI paper:

                  “The economic reality, of course, is that Fed losses increase the government’s deficit.”

                2. Tex, frankly I prefer your way of thinking. I prefer common sense accounting. I just think that somehow that will be weaseled out of in the case of the fed thus I stick with it as a possibility. We will soon learn the truth though!

                  This is what I found that should not be included in the limit:

                  ” Approximately 0.5% of total debt is excluded from debt limit coverage. The Treasury defines “Total Public Debt
                  Subject to Limit” as “the Total Public Debt Outstanding less Unamortized Discount on Treasury Bills and ZeroCoupon Treasury Bonds, old debt issued prior to 1917, and old currency called United States Notes, as well as Debt
                  held by the Federal Financing Bank and Guaranteed Debt.” For details, see http://www.treasurydirect.gov. The debt
                  limit is codified as 31 U.S.C. §3101.”

                  https://sgp.fas.org/crs/misc/RL31967.pdf

                  So who knows anymore…

        2. Tex, Thank you for the link. Watched the interview in it’s entirety. Good stuff!

          I really do not know much about anything, though key take-aways I thought were:

          1) Lacy is a pillar of integrity, historical knowledge, a truth-arbiter of consequences of prior/future monetary v. fiscal actions, and retains a full grasp of what should be done going forward – as well as the pitfalls of not following that script.

          2) Lacking someone of Lacy’s caliber and obvious common-sense intellect able to call the shots on both sides of the monetary/fiscal equation, we are destined to have policy outcomes that are unexpected and bewildering, leading to all manners of unintended consequnces.

          I mean, as an example, the trash collector could have understood the fed should not have been buying truckloads of MBS through one of the greatest run-ups in real estate ever – yet they did, inexplicably, and for years.

          And (for all those tempted, this is NOT a political message to jump on) an administration that worked feverishly to plow yet another massive “stimulus (so-called inflation-reduction)” bill into existence, while simultaneously bragging it was going to create jobs – when employers cannot fill the openings they now have. Not to mention states that are sending out their own “inflation compensation checks”, that guarantee further inflationary pressure. Sheer lunacy.

          Unless “Lacys” are appointed and elected, seems we have only a foggy view what or when will ultimately happen with rates or policy. Though I think we can all agree it won’t be what we think should happen, nor what makes total sense – and that along the way, there’s a good chance a few things are going to break when we least expect it.

    2. How old fashioned of you, P…. Don’t you realize that under Modern Monetary Theory, none of this matters???? ha hah.

      1. Under MM, fiscal policy is supposed to be the brake? That must be why they just passed a new huge spending bill called the Inflation Reduction Act. Ha ha

  7. > So now we know for 99% certainty–75 basis points on 11/2.

    It’s actually kind of interesting… at current futures prices the market is implying a 96% chance of a 75bps hike… and a 4% chance of 100bps!

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