Risk/Reward Vol. 364
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
The content of the Federal Reserve's press release and follow-on conference on Wednesday should have surprised no one. Chair Yellen has done much over the past several months to prepare the markets for what was announced. First, the reduction of the Fed's bloated, $4.5 trillion balance sheet now begins, albeit ever so slowly. Second, there is no immediate increase in the Fed funds rate. And third, one should expect another rate increase in December Yet, both the stock and the bond markets reacted negatively to the announcement with the yield on the US Ten Year Bond spiking from 2.24 to 2.28. (Remember, higher yields mean lower prices.) The combination of the Fed presser and Hurricane Maria's impact on Puerto Rico also caused several of my muni closed end funds to plummet. This occurred despite the fact that the ones I hold have limited to no exposure to PR bonds. Given Yellen's forewarning, the fact that the Fed also lowered its normalized rate goal and my double check that PR was not a concern, I decided to buy. I added to several positons and bought back into PGX which is trading at a favorable 332 basis point yield spread at present. (See Vol. 343 www.riskrewardblog.blogspot.com). We will see how this gambit develops.
Although visibility on the Fed's actions for the remainder of 2017 became clearer this week, 2018 is still very much in doubt. Due to resignations and normal rotation, several key Federal Reserve positions will be filled in the coming months. Will Trump nominate "easy money" doves? Will he re-nominate Janet Yellen as Chair? Some say his penchant for low rates will lead him this way. That said, the leading candidates for Chair mentioned by the press ( Warsh and Taylor) are both decidedly more hawkish on rates than Yellen. No matter who is named, however, I don't see rates approaching historic norms. Why? Because no central banker in the world has been able to spur economic growth sufficient to cause inflation. Indeed, despite several years of "recovery", the economy is still not "recovered" enough to register 2% annual inflation, a number deemed ideal by economists. And lest we forget, economists dominate central banks. Until that magical (albeit arbitrary) number is met or exceeded, easy money (translate low interest rates) will prevail.
So why do I care so much about rates and monetary policy? Because, Dear Reader, I am 66 years old. According to classic portfolio theory, I should be 66% invested in Triple A rated bonds of various maturities yielding an income of 6% per year. This carefree existence is what we were all raised to believe would be the reward for saving and maximizing 401k contributions. Guess what. It ain't here now, and it looks like it will never return. So those of us who look to investments as a source of income need to develop a strategy to produce income without the benefit of traditional income producing assets such as bonds, cd's , money market accounts, savings accounts or any other debt instruments. Moreover, given the paltry returns available via common stock dividends we need to develop a SELLING strategy. I have one. It is based upon the yield on the 10Year US Treasury Bond. (See Vol. 343 Riskrewardblog) Do you have one? If so, kindly share it with me.
Barb and I arrived in Cassis yesterday. Cassis is a lovely fishing village turned tourist destination in Provence. Since this trip was planned by Barb it has as its theme water and nature, weather permitting. Google "Cassis Calanques" and you will see some of the hikes we plan to take. Roman ruins? Not so much this time. Although we are at the end of the season, last night saw a lively crowd at the twenty or so restaurants along the docks. The fish they serve are literally 20 paces from the boats that net them. And what I like most is that in the twelve hours we have been here we have not heard or read one word of English. Pas un mot!
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