Risk/Reward Vol. 313
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The jobs report issued on Friday was pure Goldilocks: large enough to indicate a strengthening economy yet not so large as to threaten an interest rate increase. 287,000 new jobs was just right. As a consequence, both the bond market and the stock market reached new intraday records, an anomaly during normal times because they are usually inversely correlated. But what is "normal" these days? Indeed, this "double counterintuitive" may signal a new "new normal" at least in the United States. The old "new normal", a phrase coined by Mohamed El Erian several years ago, described his prescient prediction that we were in for a prolonged period of low interest rates. This new, new normal arises from domestic investors eschewing U S Treasury securities in favor of higher returning risk assets (equities) at the same time that foreign investors buy those very same US Treasuries. To the latter point, the yield on the US Ten Year Bond fell to 1.36% on Friday but still attracted a surfeit of foreign bond buyers who are facing the harsh reality that one third of all government bonds worldwide are trading at negative interest rates.
The sad news from Baton Rouge, Minneapolis and Dallas paints an ugly picture of race relations in this country. I do not offer any opinions on this subject, but any investor who ignores this fact does so at his/her peril. Lost in the news was a recently released study from the respected Pew Research Center showing that white households have 13 times the wealth of black households and almost that much more than Hispanic households. Combine this fact with another Pew study reporting that the modal age of whites is 55 while that of blacks is 24 and that of Hispanics is 8 and one comes to the following obvious conclusion. Wealth in this country is concentrated in aging white households, and that concentration will become more intense absent a redistribution of wealth. Until that occurs, our consumer driven economy will remain moribund. Why? Because old people simply do not consume. Doubt me? Look at Japan. To reiterate, our economy faces a demographic headwind of historic proportion. I leave to others whether and how to redistribute wealth, but absent that occurring secular stagnation will be the order of the day.
So how does an investor prosper in these times? Here is one strategy. I believe that secular stagnation will persist, that interest rates will stay at historic lows, that Mr. Market has not fully embraced this and that thus there are still pockets of mispriced assets. Top on the list of mispriced assets are preferred stocks. As described in Vol. 207 ( www.riskrewardblog.blogspot.com ) most income securities trade in relation to the yield on the US Ten Year Treasury Bond. Since the 2008 financial crisis, the spread between the yield on the 10Year and the yield on an index of preferred stocks (as measured by the exchange traded fund, PGX) has been 360 basis points. In the wake of the post-Brexit drop in interest rates, that spread has widened to over 430 basis points (yield on PGX 5.7%- yield on US Ten Year 1.4%= 4.3% or 430 basis points). History indicates that if the yield on the 10Year remains low, over time this spread will revert to the norm by the price of PGX increasing to the level that its yield is 5%. (Remember the higher the price the lower the yield). If that occurs one will see capital appreciation as well as receiving a nice monthly dividend. I bought PGX this week. I also added to my collection of preferred stock closed end funds (HPF, HPS, HPI, DFP, JPC, JPS). As a note of caution, due to their use of leverage and the fact that they now trade above net asset value, one must be careful in one's selection of closed end funds.
Enjoy the new, new normal!
No comments:
Post a Comment