October 2021 Newsletter

I think the government develops a language as it formulates rules and we are expected to understand the language…or, maybe not.  What do you think?

OCtober 2021 NEWSLETTER

I think the government develops a language as it formulates rules and we are expected to understand the language…or, maybe not.  What do you think? Can you define and use “quantitative easing”, “modern monetary theory, MMT”, or discuss the “government’s credit card”? I can not, but I can speak about money, credit, debt and danger that I think you understand.

“Quantitative easing” means a bond buying program where the Federal Reserve puts money into the system by buying your bond and returning cash to you. What will you do with that money? The Fed has been artificially depressing interest rates and Treasury yields since 2008-2009 expecting you will spend the money and increase economic activity.  

“Depressing interest rates” harms many citizens of receiving a fair return on their savings while it encourages other citizens to increase their debt. The Fed set a target rate of 0.25% which keeps interest rates low but bank excess reserves high. In 2008 a rule change allowed banks to earn interest on reserves left with the Fed. It seems banks felt earning a little on their excess reserves was about as good as setting up or selling low priced loans.  Rules are rarely permanent, but we hear speakers say that the United States is a “nation of laws” as if the laws always hold true.  

Confusion about definitions and controls the government places on fixed income does not inhibit many Americans as they continue to invest more money into fixed income products than into equities.  That is hard to understand since data regularly shows stocks outperforming bonds on the short term (usually) and on the long term (always.)

With manipulation of language and rates in the fixed income market, how can people think they are limiting risk and purchasing safety?  Mitch Daniels, former governor of Indiana and current president of Purdue University recently said, “Certainty is an illusion.  Perfect safety is a mirage.  Zero is always unattainable, except in the case of absolute zero where, as you remember, all motion and life itself stop.”

One quarter of American adults preferred to buy GameStop (GME) or another viral stock in January, 2021 according to a new survey from Yahoo Finance and the Harris Poll.  People say they want to control their risk, but when? Rather than determine how money has been made in many ways, they hope to buy a stock and make it “big.”

There are many types of bonds ranging from 3-month T-Bills and 1,2,3,5, and 10 Yr. T-Notes and 30 Year T-Bonds.  At the moment the highest pays 2.029 % and there are many paying less than 1%.  A GNMA for 4.03 years may pay 3.5% and there are many other bonds issued by the business market. (Rates from First Trust Oct 1, 2021) Since 1926-2020, S&P 500 stocks have averaged 10.3% and corporate bonds (usually the highest earning group) have averaged 6.3%.

Sometimes you own bonds, and you can sell and take a profit. It is frequently wise to do so as the profit on a bond is always limited.  You can calculate and estimate if it is time to sell such a bond.  On the other hand, a stock doing well may double and keep doubling in value for years and years. Plus, it probably has a dividend which may be greater than the original price to buy the stock as the years go by.  None of this is possible with a bond.

If current rates are high in comparison to the rates on another bond one owns, the older bond is probably down in value demonstrating a current loss if you sell. Sometimes, interest rates are coming down rapidly and the owner of those bonds can see the value of the bonds increase at a good pace.  I think I have seen that twice in the last forty years.  It worked very nicely for a few clients in 2008 and for a few following years.  Bonds were considered to be at their highest values in thirty years and we saw it as a unique opportunity.    

We do not believe any age should own an increasing percentage of bonds and certainly one should not increase bond ownership as one ages. That is awful advice. Bonds are not nearly as “safe” as the language allows.   

Let us help you apply these principles, and you will be a happy investor!!

 

Louise Googins, Investment Advisor                                      Lynne Goldsmith, Advisor Assistant

Richard Martin, Investment Advisor                                       Brady Peat, UW-Madison Intern

Michael Googins, Administrator                                             Kyra Meach, UW-Madison Intern

Kim Rankin Accountant

*Below follows Advisor Nick Murray’s September, 2021 ‘Clients Corner’ for further consideration.