Month: March 2023

I think the single biggest factor governing a winter mountain expedition is the weather, and the biggest weather factor is the wind. A 105 MPH gust will throw a 200 pound climber like a leaf, forcing the humiliating crawl. An 80 MPH wind will cause such exertion staying vertical that exacerbated breathing can freeze the goggles, a potential deathblow. The wind is always a primary concern for mountaineers, not only direction and velocity now, but where these forces may be in an hour, and every attempt to move on the mountain evaluates them. If there is a single comparable governing factor in finance to the mountain wind, it is interest rates. Rates represent the cost of capital, and capital is the lifeblood of every financial entity; your family is a financial entity. Rate assumptions factor into computing the time value of money, so every decision pertaining to any use of capital is impacted by interest rates, at all levels. In a highly indebted society, the impact rates have on finance is even more dynamic. So where are interest rates heading, and what are the primary implications?

Following one of the most aggressive inflation-fighting, rate-hike  campaigns in the Fed’s 110 year history in 2022 and early 2023, the recent failure of Silicon Valley Bank caused a stampede of capital into the largest perceived safe-haven asset on earth, U.S. Treasury Bonds. Frenzied buying caused the rate on the closely watched 2 Year T-Bond, which peaked at 5.07% on March 8, 2023, to crash to below 4% in just three trading days, one of the biggest three day drops on record.¹ I liken the drop, which has occurred only ten times in fifty years, to a sudden calm in the midst of sustained 90 MPH mountain winds! All ten of these occurrences took place in the 1980’s, and consistently indicated a reversal in the direction of rates. Any remaining contagion from recent bank failures likely means additional concentrated demand for T-Bonds, which would further reduce rates. Economic weakness associated with the oncoming recession would apply further downward pressure. These factors, combined with the fact today’s 5% Fed Funds Rate is the highest in 15 years, suggest rates may be reversing and can drop significantly from here.²

We’ll be wise to consider the implications of falling rates:

• The U.S. dollar will likely weaken against foreign currencies, and especially against real assets.

• Recent declines in price inflation may moderate, and inflation may resurge.

• Existing bond values may rise as new bonds offer lower yields, especially those with longer maturities.

• Investors who recently bought 2-3 year T-Bonds look smarter than those who bought 3-12 month T-Bills.

• Gold, which pays no interest, may look more attractive as compared with treasury bonds, and could get an additional “push” from resurging inflation.

• Stocks may come under pressure initially as the capital ‘flight to safety’ plays out, but ultimately lower rates tend to push stock prices higher.

• The Fed is trapped between fighting inflation, which is far higher than its desired 2%, by raising interest rates, and fighting crises instigated by those rate hikes. There is no indication the Fed will escape this trap anytime soon.     

• Given the shortage of homes in America, residential real estate may find a footing and recover with a reduction in interest rates. 

Think about it, Shaun.

“A slack hand causes poverty, but the hand of the diligent makes rich.”~ Proverbs 10:4 ESV

1,2  Daily Wealth, “Market Turmoil Could Signal a Top in Interest Rates”, by Brett Eversole, March 28, 2023

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.  

All investing involves risk including the possible loss of principle. No strategy ensures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

Any economic forecasts set forth in this material may not develop as predicted. 

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Fear is one of the most powerful human emotions, and for this reason, negativity sells. Successful investing, however, involves a consistent, phlegmatic practice of sound principles over time, and in a broad range of investing environments. While ratings-driven news stories can show us where the emotionally-charged herd is stampeding at the moment, in order to grasp the indications that can help us make wise investing decisions for the mid and long-terms, we need to get past (or avoid) the entertainment, and thoughtfully consider primary forces. Here are a few factors I believe are worthy of our consideration.

Systemically important banks are far better capitalized today than in the 2008 financial crisis. Fed-mandated regulations applicable to banks with consolidated assets exceeding $50billion, including stress tests, resolution planning, stricter liquidity and capital requirements, and enhanced oversight,¹ suggests a crisis similar to The Great Recession is unlikely at this time. While mass fear in a highly indebted society (practicing fractional reserve banking) is alone capable of introducing a systemic crisis, both the Treasury Department and the Fed proved during the 2020 Covid19 lockdown they will go to any length necessary to stabilize the economy and financial markets in a time of crisis, and unless and until the U.S. dollar loses global confidence, they have the power to succeed. That said, the move by federal regulators this week to backstop all Silicon Valley Bank deposits² virtually guarantees a more significant banking crisis will emerge down the road, as it no longer makes sense for banks to consider risk when allocating depositor funds.

While a recession appears imminent (or already here), the U.S. economy is not unraveling in a disorderly manner. Unemployment remains low at 3.6%,³ job openings are robust, and layoffs outside the tech sector are unmentionable. Nothing systemically significant is broken in the U.S. economy at this time, but do not forget inflation remains three times the 2% desired by the Fed!

A Fed policy shift is probably much closer than most investors understand in their present fearful state. For many months the Fed has been aggressively raising interest rates to combat 40 year high inflation, and Jerome Powell has been clear that only a drop in inflation near the desired 2% range, or a crisis, will cause a change in the direction of rates. The Fed’s goal was to raise rates until something big broke, and big things are starting to break.  

These are the relevant factors, and I believe they suggest the following:

• The Fed will likely pivot to easy money policies near term.

• The U.S. dollar will likely weaken against foreign currencies, and gold and other chaos hedges will likely outperform, in this process.

• Investors should favor established, capital-efficient businesses, and build a watch list for the Fed pivot.

• High inflation continues to place a premium on present streams of income, and discount future streams of income.

• The credit market is tightening, which may induce further casualties before regulators take policy action. Look for great businesses to get “thrown out with the bathwater”, and buy them!

• Cash is required to capitalize on these dynamic opportunities.

Think about it, Shaun.

“Only when the tide goes out do you find out who has been swimming naked” ~Warren Buffet

“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” ~Ecclesiastes 11:2

1 McKinsey & Company, “A decade after the global financial crisis: What has (and hasn’t) changed?”, August 29, 2018 https://www.mckinsey.com/industries/financial-services/our-insights/a-decade-after-the-global-financial-crisis-what-has-and-hasnt-changed

2 NBC News, “US moves to protect all deposits at Silicon Valley Bank in a bid to stem a wider fallout”, March 12, 2023 https://www.nbcnews.com/business/business-news/treasury-says-will-back-silicon-valley-bank-deposits-rcna74570

3 U.S. Bureau of Labor Statistics, March 10, 2023 https://www.bls.gov/news.release/empsit.nr0.htm

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Vegetable gardening fascinates me in both its simplicity and productivity. Mix dirt with nutrition, balance the PH, add sunshine and water, and you can grow anything! And as you encounter problems, there are only four conditions to investigate. Compounding the dividends of great businesses over time is one of the simplest, and historically one of the most effective ways to build wealth. Many of the greatest investors America ever produced would attest to this, and this strategy may be most responsible for the great Warren Buffet’s investing success. What makes the compounding of wealth a wonder, and why don’t more people do it? What are the critical dynamics of this investing strategy?

Albert Einstein declared compounding returns to be the 8’th wonder of the world, and he was smart enough that, when placing something on that scale, we should find out what it is. Reinvested dividends buy additional shares of a stock, which increases next quarter’s dividend, which will buy more shares over time, and so on. This process also compels dividends to buy fewer shares at higher prices, and more shares at lower prices, a key component of long-term returns. Apply this process to a business that increases its dividend annually, and dollar cost average into the position each month, and you have started the engine of a wealth production machine. Einstein discovered the chart on this process mirrors the bottom right quarter of a standard circle, consisting of three stages: 1) share accumulation with slow, methodical growth, 2) lift-off, as returns on investment escalate, and 3) parabolic growth of the value of the position with expanding returns.

The two likely reasons why investors don’t more often apply this incredible strategy, at least as part of their overall investment approach, are ignorance and impatience. Either they don’t know about it, and Wall Street has no vested interest in sharing it with them, or they are too impatient to consistently apply it over sufficient time to experience the wonder. Don’t let that be you! The three associative conditions to this investing strategy are as follows:

• Invest only in businesses of such high quality that, short of a fundamental change in the company or industry, you’ll never sell. This means capital efficiency, industry domination, large and increasing free cash flow, a moat against competition, dividend payment, and ideally, annual dividend increases.

• Exercise disciplined buying. Have strict parameters for when to buy with a lump sum. Never buy unless those parameters are met, but when they are met, always buy. Keep individual positions to 5% or less of the total account value.

• Understand the time component. Your timeframe is your lifespan. Do not delay unnecessarily. Make sure dividends are reinvesting (without cost), and try to never stop dollar cost averaging into the position, either with dividends, or new dollars, or both, but remember the 5% rule mentioned above!

Three issues, that’s it! It’s even simpler than vegetable gardening, and far more productive, at least financially. May God bless the allocation of your hard-earned capital. Think about it, Shaun.

“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” ~Warren Buffet

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” ~Warren Buffet

“You should have invested my money with the bankers, and at my coming I should have received what was my own with interest.” ~Matthew 25:27

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. Investors should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not insure a profit and does not protect against loss in declining markets. 

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.