Twilight Zone

The Dutch band Golden Earring released the song "Twilight Zone" in 1982 on their album "Cut". The song was the group's only top 10 hit on the Billboard Hot 100 list. The album fared better by reaching #1 on the Billboard Top Album Track chart in 1982. The song was written by guitarist George Koormans and was inspired by the spy movie "The Bourne Identity" and not the TV show "The Twilight Zone". I recommend my readers to listen to the song before reading this blog so as to "get" the analogy. As I write this blog, the chairman of the FOMC rate setting committee is announcing his intentions for interest rates for the rest of the year. It is also that time of year to plan your asset allocation for the rest of the year. It seems like we are in the twilight zone when it comes to just what interest rates will do for the last 6 months of 2024. Chair Powell left rates unchanged today {6/12/24) and indicated that he might lower rates one time later this year. The stock market took this news in stride and sent several indices and large cap stocks to new highs. This is surprising because most market analysts expected up to six rate cuts earlier this year. Any rate cut is good for stock prices and also for bond prices. A spike in inflation could torpedo any rate cuts this year because the Fed is looking for a 2% inflation rate which may be unattainable given the stickiness of nondiscretionary inflation in items like insurance and home prices. In the song, the lyrics talk about "When the bullet hits the bone" and thats the point of this blog. The bullet is higher rates that the goverment has to pay on its debt. We have come off record low rates that allowed the goverment to easily service their debt but much of that debt is going to be refinanced with much higher current rates. The fact is that the U.S. cannot afford to pay interest on an increasing deficit at these higher rates. Unlike a personal household budget when a person finds themselves up to their ears in debt, the goverment has an ace in the hole- they simply print a bunch of money to bail themselves out. Ordinary people just declare bankruptcy and start over. What's the result of running the printing presses nonstop? Inflation and lots of it. What's the fed fighting? Inflation. It's like chugging magnesium citrate and chasing it with a shot of Pepto Bismol. My plan for the rest of the year is largely unchanged from last January. Some of the CDs I hold are maturing and I am happy to replace them with CDs at higher rates and longer maturities. If rates do fall, I want to enjoy the higher interest payments longer. I am also only buying CDs from larger banks for saftey and I avoid any callable securities. It also pays to look at how often interest is paid because interest payments can be directed to high interest money market accounts for an extra boost to overall yields.The stocks and mutual funds in my portfolio continue to perform well, especially the large cap tech names like Apple, Microsoft and Lam Research. I still like the AI story but will invest indirectly in AI through things like utilities, renewable power plays and energy. In conclusion, the Fed has set its path for interest rates. I have planned to profit from rate hikes and stocks are poised to continue their long term rise. Artificial Intelligence will transform businesses for years to come, making them more efficient and profitable. The Goblin in the room that only a few analysts are talking about is the national debt which will lead to either tax increases, inflation, or recession. The market climbs a wall of worry, so enjoy the zone while it lasts.