Risk/Reward Vol 358
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The headline in Thursday's Investor Business Daily read " Yellen Triggers Stock Rally." What? Did I not praise her in the last edition for her newly adopted low profile and her desire to make Fed watching as exciting as paint drying? It seems that central bankers worldwide just can't resist meddling. Talk about the hubris of the elite. So what did she say and why the reaction? In testimony before Congress, Yellen admitted that the current, paltry 1.4% rate of inflation (2% inflation now being the Fed's Holy Grail) may be the result of something other than transitory low prices in commodities and that as a consequence future rate hikes may be more gradual. Mr. Market and Mrs. Bond interpreted this to mean that the Fed's balance sheet reduction anticipated to begin in September and/or its anticipated December rate hike may not occur. In other words, the easy money punch bowl may continue. This sent bond yields lower and stock prices higher.
The problem with the Fed, as I see it, is that it is populated by academic economists who, despite giving lip service to "following the data, slavishly follow models they developed decades ago. If one truly "follows the data", how can one not conclude that a decade of easy money has not spurred the economy? And who says inflation necessarily equates to economic growth? Look at the period 1850 to 1900, the sweet spot of the industrial revolution and one of, if not the greatest, period of economic growth in US history. The annual rate of inflation was 0.17%. In other words $1 in 1850 was worth $1.09 in 1900. Inflation had little to do with economic growth. What did? The population of the US more than TRIPLED. As I have written again and again, no matter how much money or credit one has, one does not buy houses, cribs, diapers or mini vans if one does not have children. And old people and recent immigrants are not big buyers of anything. Simply put, we are a consumer driven economy, and we do not have enough consumers. We need policies that incent those in the upper and middle classes of child bearing age to propagate. The Fed's stated belief that easy money will spur growth is insane given Einstein's definition. ("Insanity is doing the same thing over and over again expecting different results.") The only result that I see is pushing investors out of interest bearing instruments (bond, cd's and savings accounts) and into equities. No wonder the stock market is trading (read: bubbling) at record price/earnings ratios with no end in sight.
And speaking of insane, I re-entered the oil patch this week. Here's the backstory. As loyal readers know, no petro stock has taken a beating like Kinder Morgan. Once the darling of the pipeline companies, its ill fated reorganization and 75% dividend cut in 2015 put KMI at the back of the pack. That said it remains the largest player in the field, and slowly but surely it has been regaining credibility. That is until last month when its much touted TransMountain, Alberta to British Columbia, construction project ran into a series of environmental roadblocks. This news caused its stock to plummet. That said, I was attracted to its preferred, KMIpA, which trades well below par and is currently yielding over 11%. A quick look at KMI's financials led me to conclude that the preferred is not at risk no matter what happens in Canada. Thus I bought. I also continue to pick up municipal bond closed end funds on dips.
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