The Stable Song

      Gregory Alan Isakov reorded this song on the album titled "Gregory Alan with the Colorado Symphony" in June of 2016. While the album and song is not well known, it drew critical acclaim for its lyrics and music. I also recomend watching the video while listening. A person can draw whatever meaning they want from the song but I felt that it related to stability in my portfolio during turbulent times. It also reminded me of the humble beginnings of many worthwhile endeavors.     

     When looking for investments to add to my portfolio recently, I have found that many well known stocks have appreciated considerably in recent months which explains why the market indexes are at or near all time highs. I am looking for yield and growth with stability over time. The tech sector is known to be volatile so I want to limit my exposure there. CD yields are inching up as inflation fears are increasing, making interest rates rise. While I can now get a taxable 4% on a short term CD, there is no growth there and in 7 months I will need to reinvest the funds in something else. So what is an investor to do?

     There's no easy answers and macro economic factors keep changing with every decision coming out of the White House so I am leaning on the stability of dividend paying stocks. Historically, dividends have accounted for about 33% of total return for stocks over the last 80 years or so. If you go back further, it approaches 80%. When screening for dividends, it pays to avoid traps such as an unusually high yield. That usually is a sign that the company is in trouble and the dividend will be cut or eliminated soon. Sometimes the yield on a blue chip stock seems paltry and is a turn-off to an investor but what is important is the history of dividend growth. When a dividend increases over time, the stated yield that you see published is not your actual yield. A more important measure is your yield to cost. If you divide the annual dividend by YOUR cost then you get an accurate picture of your return. This doesn't happen overnight but we are after stability, right?

     Income investing has taken a turn recently because of the war with Iran. The cost of oil has risen dramatically (the most in history) because of the disruption of supply flow out of the middle east. It seems to me that the inflationary forces of higher fuel will be with us for many months even if the oil starts flowing again in the near future (also unlikely). This in turn makes the decreases in interest rates which has been widely forcast also unlikely. Even  new FOMC chairman Kevin Warsch, which Trump appointed, may have to raise rates to tame inflation. Higher rates decreases the value of an existing bond portfolio. What looked like a winner in January is not so appealing now.

     Stocks in sectors like banking, utilities,pharma, and consumer staples are looking attractive to me now because I see growth, income, stability, and tax effeciency. At this point in my life, capital preservation trumps high current yields and high flying tech plays. The events of this year have shown how quickly things can change but dividend paying stocks are the ballast to stabilize a portfolio. Long term investing is less about making you rich and more about not "Turning diamonds straight into coal".

"Take it Easy"

"Take it Easy" was a song written by Jackson Browne in 1971 intended to be included in his own debut album but he just couldn't get around to finishing the song. Glen Frey, lead singer for the Eagles and a neighbor of Browne offered to finish the lyrics if he could record the song on the Eagles album. The rest is history. The song was released in 1972 as the opening track on the Eagles debut album and reached #12 on the Hot 100 chart in July of 1972. What makes the song unique is the banjo accompaniment played by Bernie Leadon. The song is listed as one of the Rock and Roll Hall of Fame's 500 that shaped Rock and Roll. There's good news and some not so good news going down in the investing world. The good news is that some things are getting easier. Starting with interest rates; Kevin Warsh was named as the new Chairman of the Federal Open Market Committee today. It is widely viewed that he will accomodate President Trump's demand that interest rates should be cut. In the near term that is a positive for the stock market and maybe a tail wind for the bond market. In the long term, cutting interest rates could reignite inflation which is bad for everyone. Easy money could cause the economy to run too hot in a world where supply chains are already thin due to trade tensions. At this time, there is confusion among analysts as to who will win the race to dominate the market for Artificial Intelligence. Recent market action suggests that the software companies such as Microsoft, SAS, Snowflake, Salesforce, and many others will suffer because AI will make coding so easy a kindergardener could do it. I believe the punishment is overdone because Enterprise Management Software is a very complex product and not easily replicated. Having used an Oracle system in a previous life, I was amazed at the amount of data the system held. I don't hold any of these software names and don't intend to buy until the dust settles. What is now easier to recognize is the probable winners in the AI world. Apple has avoided the massive capital spend that the hyperscalers have shelled out to date. Their wait and see approach has allowed them to pick and choose among AI platforms already developed by others. Apple is sitting on the delivery system for consumer artificial intelligence with a 2.5 billion worldwide installed user base. I still own some Apple and may add to my position. Another easy decision for me is to hang on the my stake in Alphabet, formerly known as Google. Unlike Apple, Google has a pretty decent AI offering on the Android phone which is Gemini. Many pundits believe that Gemini will end up on the Iphone. That saves Apple a ton of money and provides more revenue to Alphabet. It's not like Alphabet doesn't have a shortage of revenue streams because they own Youtube, Youtube tv, Google search, Waymo self driving, Calico life sciences, Android, Google Cloud, and many others. Alphabet has made over 260 acquisitions and has a market cap of 4 trillion dollars. I view their diverse holdings as a positive. Anyone who reads and listens to financial news know of the concept of "Universal Basic Income". This is the idea that when AI replaces the need for humans to work, somehow a check arrives every month {or direct deposit} for living expenses. No one has ever explained just who will send me the money, thats just a detail that need to be worked out in the future. Elon Musk has enhanced this notion by calling it "Universal High Income". I like his idea better for obvious reasons. Until this happens, I'll still be looking for bargains in the stock market and other investments but when the U.H.I deposit hits, I plan to "Take it Easy".

"Addicted to Love"

           "Addicted to Love" was released by British songwriter Robert Palmer in 1986. It was the third song on Palmer's studio album "Riptide". The song topped the Billboard Hot 100 charts as well as the Billboard Top Rock Tracks in 1986. The song sold 500.000 copies in the U.S. and was made popular with the music video featuring fashion models dressed in black see-through dresses and wearing heavy make-up. The models were intended to look like mannequins and were reportedly served wine during the make-up session, making them tipsy for the video. The video was so popular that Palmer used the models in successive music videos

     Love isn't the only thing investors have become addicted to in recent years, 5% yields on money market funds were also very attractive. Unfortunately those days are over, at least for now. Money market yields are now slightly below 4% and are expected to drop even further in December and the new year. The current Fed Chairman (Jerome Powell) will be replaced next May by Donald Trump's choice for Chairman. It's no secret that the Donald wants lower interest rates and his choice will accommodate him. The reason lower rates are so important to the current administration is the heavy debt load the U.S. must carry ($38 trillion), means interest is $970 billion for 2025 and projected to top $1 trillion for 2026. This is money that could be spent on defense, social programs, tax cuts, or whatever the politicians decide.

     I personally don't like the idea of lowering the national debt on the backs of retired Americans who are living off their savings. Lower interest rates either lowers our standard of living or forces savers into riskier assets like stocks, bonds, REITS, or their proxies. Of coarse the alternative of controlling government spending is almost always out of the question. Lower rates at a time of rising prices for almost every consumer product is an especially cruel outcome. Tariffs are another hidden tax on the American consumer, even if they are reduced, prices seem to have a ratchet effect of staying high.

     So what's the answer to lower rates and lower personal income? In my opinion, its dividends. Unlike interest, dividends are taxed at the favorable capital gain rate if they are qualified (domestic) dividends. One doesn't have to buy individual stocks to generate decent yields, there are many diversified ETF's and mutual funds that will qualify. The main thing to remember is to keep costs low, there is no reason to pay over 1% of assets for an unmanaged dividend fund. For those who like to invest in tax free bonds, there are several ETF's that invest in muni bonds offered by Vanguard and Schwab. 

     We are one year into the new declining rate cycle and it could last for several more years so now is the time to start adjusting to it. An additional benefit to the dividend and muni strategies is that the rate cycle should benefit both asset classes in the form of potential capital gains. Addiction is a difficult thing to overcome so I recommend a  measured approach by not moving too much too fast and remember to always keep several months living expenses liquid. Hopefully these minor adjustments will cure your addiction without any symptoms of withdrawal.

Party like it's 1999

 Prince recorded the song "1999" in 1982 as the title track of an album of the same name. The song was inspired by a TV show which speculated on what could happen after the turn of the century. Prince thought that the planet as a whole would experience a rough time at the turn of the millennia but wanted the song to give people hope. The song, when initially released reached #44 on the Billboard Hot 100 chart and a later release moved up to #27. The song was to become the last top 40 hit for Prince before his death in 2016.

     Many pundits have made a case comparing todays market situation to the year 1999. For anyone who can't remember, the dot-com craze of 1999 resulted in a lot of newly formed companies crashing to earth under the weight of heavy debt and a stock based on little more than dreams. There was clearly a bubble created in the stock market where any company with a dot com in their name was bid up to irrational valuations. Most of these companies had no earnings or sales and could not really be valued by investors. They were initially financed by wealthy investors and off loaded to a naïve investing public at ridiculous prices. People bought the stocks mainly because they feared missing out of the next big thing which was the internet.

     Well, the internet WAS the next big thing but people still lost their money in companies that had a half-baked business plan if there was one at all. So what is the difference this time with the advent of AI and what could go wrong? For one thing, up until recently, most of the companies that are at the forefront of AI are profitable and have been for a long time. Microsoft, Amazon, Meta, Tesla, Alphabet, Nividia, and Broadcom all make money but they are spending massive amounts to build-out data centers. What disturbs me is that recently, many of these "hyperscalers" have committed most of their cash flows on the AI build. But now they are willing to take on debt to continue to out invest each other in what could be a race to the bottom. I appreciate the potential for AI to transform our economy but worry that the spend may not justify the payoff. Even more concerning is the circular financing that is occurring in the industry. It seems that the center of this financial circle is a company called Open AI, founded by Sam Altman. They have great potential but no earnings. Not to be left out of the party, Oracle has bet the farm on AI and raised lots of debt. Any failure in this chain could bring a crash.

     Currently, most of the spend on AI lands on the income statement of Nividia. They have the best GPU and everybody wants the latest iteration. However, AMD is hot on their heels to sell an alternative for the value minded hyperscaler. Other members of the Mag seven are trying to develop their own GPU's for future use. At this time Nividia still has command of the GPU market and will for the foreseeable future. The term "bubble" has been used recently by financial pundits which has caused weakness in the AI stocks but my take is that there is a long way to go in this space. At a PE of 52, I am not adding to my NVDA position but not selling either. In my opinion, they will be the last one to fall.

     The major constraint in the AI build-out is access to reliable electric energy to power these data centers. The electric grid is simply too outdated to meet the new demands of AI. Electric generation also has lagged because of clean energy initiatives. Companies like Corning Glass has stepped-up to build low cost wafers that go into solar panels, Cummins has diesel generators to provide back-up power on site, electric generation investment may best be done by buying an ETF like the XLU which has a basket of different utilities.

     Even though the hyperscalers's stocks have run into a soft patch lately, I believe the party has a long way to go before any major corrections. It is my belief that new money invested in the AI space should be directed to the companies that will be suppliers to support the industry. Anyone who wants to benefit financially should take the time to research just what goes into building an AI data center and who will benefit from the effort. In the words of Prince: "I was dreamin' when I wrote this so sue me if I go too fast but life is just a party and parties weren't meant to last,"  

     

"I Won't Back Down"

      Tom Petty recorded this song in April of 1989 as the lead single on the album "Full Moon Fever". The song,  written and recorded by Petty and Jeff Lynne, included George Harrison and Roy Orbison as vocalists. Petty's musical career was inspired by watching the Beatles perform live on the Ed Sullivan show. The album peaked at #3 on the Billboard Top 200 and was certified 5X platinum in the USA. Sadly, Tom Petty died of an accidental drug overdose in 2017.

     The message I derive from this song is to hold your ground in the face of uncertainty like the period we are now facing. People like me, who like to research and pick their own investments, and even professional investment advisors put a great deal of time and energy into choosing the right investment mix for themselves and clients. Why should we abandon all that work every time something happens in Washington or talk of recession is all over the financial news media? I have lived through many recessions, regime changes, financial crises, hyper-inflation, wars, and even a global pandemic and every time my portfolio recovers and goes on to new highs. The "experts" on TV would love to scare people into selling stock at a market low and convert to a large cash position but that is exactly what NOT to do. The fact is that you should be buying when good companies are being punished by policies beyond their control. 

     Nearly every evening, while I enjoy my favorite beverage, I watch my favorite financial show "Fast Money" on CNBC. The panelists and guests are very knowledgeable about stocks, bonds, trade, and political risks. I will listen and try to learn from them but rarely act on their recommendations because their message is largely geared toward traders, not investors. They are expressing opinions which are often debated and hotly disagreed on. Everyone has an opinion and I have mine. I can be right on my forecasts just as often as the experts and wrong just as often too. I don't need their mistakes added to my own. It is also important to remember that these people must fill one hour of content every night. This results in a lot of rambling talk that really tells you nothing about the direction of markets. Sometime I think that divergent opinions are staged just to spice-up the show and provide minutes of content. I won't make investment decisions based on financial drivel.

     If you make your own financial decisions, stay true to your choices of stocks, bonds, asset allocation, and tax strategies. If you find that your investments are out of favor, just wait and the pundits will love them again for the same reasons that you found them attractive in the first place. Like Tom sang, "Hold your ground, don't back down." Just remember, like the experts, you have the right to be wrong.

The Long Run

           The Eagles released "The Long Run" in 1979 on the Asylum record label. In addition to the song "The Long Run", the album contained two other hits in "I Can't Yell You Why" and "Heartache Tonight". The album was certified 7X platinum by RIAA and sold 8 million copies in the US. This was the sixth and last studio album for the original group and for Asylum records. The album debuted at #2 and hit #1 one week later holding that position for nine weeks.

     During market downturns like the one we are experiencing currently, I have to remind myself that investing (not trading) is a long term endeavor. The tariffs recently announced by the Trump administration is a disruptive force in an already volatile market. Before the tariffs roiled the stock market, a rotation was underway from the mag seven stocks (AI) into the other 493 stocks of the S&P 500 index. The one thing that markets don't like is uncertainty and currently there is plenty of it. CEO's are uncertain of their supply chains, costs of materials, expansion plans, investment in technology, and production levels which involves new hiring. As a result of this chaos, they tend to do nothing to add growth to their business and the economy. If clarity is not provided soon to the business community, then the R word (recession) may become a reality. If the slow-down in business activity is not enough, consider the fact that the stock market has lost 4 trillion dollars in value in the last month due to trade policies. Don't count on the fed to cut interest rates to bail-out the Trump administration's actions because the net effect of tariffs is rising prices and more inflation.The next few months will test Jerome Powell's resolve to resist White House pressure and stick with his dual mandate of price stability and full employment.

     The silver lining to all this is that some former market darlings are now on sale at reasonable valuations considering their growth potential. Take Nvidia, it is trading at 24.4 times earnings and projected to grow 44% in the foreseeable future. Financial stocks like banks and insurance companies are relatively immune to tariffs and pay rich dividends. Money market funds are still paying in the 4% range and bank CD's are paying 4-5% on terms around 1 year. Energy companies and utilities are some of the best dividend plays out there and are reasonably priced. Midstream assets like MLP's are not dependent on the price of oil, they own pipelines and storage facilities and make money getting energy from the wellhead to refineries. REITS (real estate investment trusts) own all kinds of real estate and pay excellent dividends. Both MLP's and REITS have tax advantages that can help lower the tax liability if an increase in taxable income is expected (RMD at age 73). They are also good estate planning tools due to the "Return of Capital" feature.

     The good thing about our system of governance is that it can change every four years if the people want it to. This means that bad or misguided policies can be short-lived. While I don't know if the Trump tariffs will level the playing field for world trade, I do know that they can be reversed by the next president. As a long term investor, I intend to stay the course with my investment strategy by not making any bold moves that may turn out to be wrong. Having a diversified portfolio of stocks, fixed income, mutual funds, etf's and cash is still the best strategy for any environment. My focus at this stage of my life is to minimize my tax liability going forward because of the RMD requirement to start draining my IRA. Instead of being in the accumulation phase of life, I am entering the draw-down phase. This requires careful planning and advice from investment professionals. 

     A sound long term investing plan supersedes recessions, Presidential terms, stock market corrections, economic crises, and trade barriers. It requires a minimal amount of maintenance once it's put in place. The income stream from dividends, interest, distributions from mutuals, and MLP's will provide peace of mind if Social Security or pensions get cut or reduced. The long run is a good mindset at any age. Just remember, "You can handle any resistance if you go the distance in the long run".

        

Baby It's Cold Outside

 This song was written by Frank Loesser in 1944 and first performed in his New York apartment at his housewarming party as a way to let his guests know that it was time to leave. It was so popular that he and his wife were invited to all the high society parties so they could end the evening with the duet. In 1949 MGM Studios bought the song and used it in their dud movie "Neptune's Daughter". In 1950 the song won an Academy Award for Best Original Song in a movie. The song has become a seasonal Christmas song but the movie was originally released in June of 1949. There have been so many recordings of this song over the years that it would be impossible to list them here. The version released in 2014 by Idena Menzel and Michael Buble' is the one I listened to for this post.

     Something else that has grown cold recently is the stock market. My portfolio has become a frigid wasteland. Many analysts are forecasting a gloomy 2025 for the stock market, citing the notion that the Federal Reserve Bank will not lower interest rates anymore during the year. There is also concern that the new administration will impose new tariffs on China, Mexico, Canada, and European countries. The magnificent seven, or now called the mag 8 with Broadcom's, entry are also in a funk due to the slowdown in capital spending in the tech sector. Another factor may be that a rotation is occurring out of the growth stocks and into value stocks. Anything with a high multiple (PE ratio) is at risk of profit-taking at this time. Add in the rise in long term interest rates even in the face of the fed funds rate cuts and stock investors are nervous about just what that means.

     Market fluctuations are a normal and necessary function of stocks. Sometimes certain sectors and the  stocks within just get too frothy. The euphoria around AI simply got ahead of itself and needed some time to catch up with reality. In the meantime, some of the left-behind value stocks that have solid earnings and pay good dividends are attracting attention. So is the AI story over? My take is HELL NO! It will take some time for the companies that have invested many billions of dollars in new Data Centers and software to begin to see some return on their investments. In the meantime the valuations of some of the most promising stocks involved in the AI revolution are coming down. Even mighty Nvidia has seen its stock slump lately. I have no intention on selling my stake because even though the growth is slowing, it is still going to grow earnings faster than most other stocks this year.

     My strategy for the new year hasn't really changed much from last year. I still like getting over 4% on my cash and CD's. Money market funds haven't lowered their yields as much as I feared when Powell cut rates last month. I have directed some cash to local banks' CD's because they are not callable like brokerage CD's are. Shopping around for the best local rates still results in over 4% yields. The best rates are short term (one year or less) and that's fine because rates may rise late this year if inflation spikes back up. My holdings include growth, value, cash, and fixed income so I will stand pat until the spring thaw.

THE TIMES THEY ARE A-CHANGIN'

      Bob Dylan wrote this song in the fall of 1963 and recorded it in 1965 as a 45RPM single in Britain where it reached #9 on the UK singles chart that year. The song was later recorded on Columbia records in New York as the title song of his third album. The song's lyrics transcends time because change is always a constant in our lives. Many artists have recorded the song with great success and it was ranked #59 on the top 500 "All Time Greatest Hits" by Rolling Stone magazine.

     I believe the changes seen in 1963 will pale in comparison to what is about to happen in 2024 and beyond. The changes that artificial intelligence will bring will be life changing for nearly everyone. First, business will become far more efficient with fewer people. Unfortunately many will lose their jobs to AI automation. Machine learning has the ability to replace call center agents, clerical workers, accountants, paralegals and many other jobs currently performed by humans. One only has to look at the hundreds of billions of dollars being spent on AI to realize that the payoff for companies is to operate leaner. 

     The fuel that AI runs on is data. I have read that the Internet has nearly been exhausted of its data to feed the large language models being trained to run on Nvidia's GPU processors. So is this AI story about to run out of steam? I don't think so. Just imagine the massive amounts of data stored by research labs of drug companies, universities, governments, technology companies, banks, and many other organizations. Suddenly, all this otherwise useless data now has value. It can be sold, traded, and added to the balance sheet of companies, making them much more valuable. Instead of wasting time and money on duplicate research, a drug company can buy the data already produced and bring products to market faster. AI has the ability to unlock bottlenecks in almost every industry. Maybe this is part of the reason that the S&P index as expressed by the index fund SPY is trading at a very rich PE of 27.8X.

     Once the training phase of teaching the "Large Language Models" is completed, the next phase will be the inference stage. This where the models actually generate answers to the questions being asked. I have read that this stage may be better handled by some of Nvidia's competitors such as AMD, Intel, or even custom chips by Amazon. Every one of the magnificent seven companies are trying to unseat Nvidia as the supplier of GPU chips to equip their data centers. At this time Intel is the laggard in the development of GPU's. They just fired their CEO in the hope that new leadership will right the ship but most analysts are skeptical that they can catch up. It  seems like all companies are being valued through the lens of their position in the AI race for dominance. At the current time, Nvidia has nothing to worry about because they have a lock on the GPU market for both the training and inference phases. 

     The flurry to build new data centers equipped with Nvidia's GPU's is rapidly draining cash from the seven major tech companies. Nvidia is the beneficiary of most of the spend but not all. Data centers will require lots of electricity, more than is currently available on the grid. This has caused many utility companies' valuation to skyrocket. Backup power is also critical for these new data centers. Diesel generators made by Cummins will give that stock a boost because not only will they supply the hardware but service of the equipment will be a long term revenue stream. Memory storage for data will also be required and Micron and Samsung should benefit from that. GPU's run hot so cooling is necessary for each server. A company called Vertiv sells liquid cooling systems but the stock has run up to nosebleed levels. Another beneficiary of the buildout of data centers is the large engineering companies who are tasked with the design and construction of huge new buildings.

     AI isn't the only transformative investing theme going forward. The development of GLP-1 agonist drugs have the potential to change the landscape of medicine forever. It is estimated that over one billion people worldwide could benefit from them. Currently they are only available in injectable form but a massive effort is under way to market an oral version. The pharma sector is currently out of favor due to the new administration taking office next year, making this an excellent time to pick-up some exposure to the best-in-class. The promise of deregulation over the next four years should benefit financials like banks, insurance companies, credit card issuers and consumer credit companies. 

     People my age don't really like change but it's coming anyway. The only difference between the change Bob wrote about in 1963 and now is the speed that it occurs. If you can't stop it you might as well profit from it. A little time spent researching these themes and acting on them might help you adapt to the changes a-comin'.

  

WHEN THE CHIPS ARE DOWN

     Ricky Nelson recorded this song in 1965 on Geffen Records and it appeared on the album "Mean Old World". Ricky became famous from his role on his parents' TV show "The Adventures of Ozzie and Harriet". His musical career took of due to the fact that on every third show he was allowed a musical performance to end the show. While the song never made it to the Hot 100 chart, his most famous hits included "Poor Little Fool", "Travelin' Man" and "Garden Party". Ricky became a teen idol in the 1950's and went on to act in motion pictures with top actors of the time. Sadly Ricky died in a plane crash on 12/31/1985. During his career he recorded 94 singles and 24 studio albums.

     After a huge run-up in price this year, the chip stocks are being sold off. Apparently, the valuations just got too high to handle so profit taking is happening now. Money is flowing into areas like drugs, realestate, utilities, defense contractors, and consumer staples. Companies like Nvidia, Microsoft, Apple, Amd, Tesla, Amazon, and Alphabet are giving back some of their gains for the year. The granddaddy of them all is Nvidia because they make the chips that drive the AI revolution.With a current trailing PE ratio of 51X Nvidia on the surface is priced to perfection. However, it is estimated that over $300B will be spent on AI over the next few years and most of that goes to Nvidia.

     Unfortunately, I don't own Nvidia but I think I will get my chance soon. Today alone it lost 10% of its value and that trend will probably continue because some investors have made so much money they will lighten-up on tech and redeploy assets to safer, more value oriented stocks. Over the last 5 years, early investors in Nvidia have increased their principle over 30X so it only makes sense to take some profits. Also September is historically a volatile month for stocks and the set-up with a stressed consumer, disappointing earnings forecasts, and a Fed that is late to cut rates could add to the volatility.

     While others are redeploying cash to other areas of the market (which have run-up in price) I will wait for a chance to enter the AI theme which I believe is only still in the first inning. With a stock market that is not expected to perform well for the rest of the year, it is important to stick with the best companies in each sector. I think Nvidia fits that narrative. I have never done well chasing a high flying stock so I'm watching for when the chips are down.

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 that's the point of this blog. The bullet is higher rates that the government has to pay on its debt. We have come off record low rates that allowed the government 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 government 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 safety 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.

My Guy

Mary Wells recorded the song "My Guy" in 1964 on the Motown label. It was written by Smokey Robinson of the Miracles and quickly rose to the top of the Billboard hot 100 singles by May of 1964. Wells became Motowns first female recording star but she never again reached the success that "My Guy" achieved. During the recording session, the studio musicians were having trouble getting the intro right and they decided to cobble together some rythms from other songs like "Canadian Sunset" to get the job done. They finished "My Guy" within their allotted studio time and the rest is history. The song returned to the Hot 100 list three more times: by Petula Clark in 1970, Amii Stewart & Johny Bristol in 1980, and Sister Sledge in 1982. As the end of tax season approaches, I am reminded of this song because I see a lot of brokerage statements from clients that I serve. Most of the clients that I serve are widows who lost their husbands many years ago and have a "guy" who manages their investment portfolio for them. This guy is usually an employee of a large national chain of wealth managers who simply executes a computerized program of trades during the year. Most of the investments are mutual funds with high management fees and a sales charge around 5%. After I input the dividends, interest, and capital gains into their tax return, I make it a point to ask if they have read their 1099 statement. The answer I usually get is "no, I wouldn't understand it anyway". I then proceed to show them the management fees they are charged and the "performance" those fees have generated. In almost every case the net result of all the excess trading done during the year is a net loss to the customer. Clients are also usually suprised when I show them how much they paid for such lousy investment returns. As an IRS certified tax counselor, I am not supposed to give clients investment advise, but I can point-out how badly they are getting screwed by their "guy". I understand that these wealth managers must make a living but I wonder why an actively managed mutual fund has to also be managed by some local guy who is just generating trades in the name of rebalancing. An actively managed mutual fund, as opposed to an index fund, is already being managed by a professional money manager. Why not just hold these mutual funds in a discount brokerage firm like Charles Schwab or Fidelity and save thousands in locally generated fees? Sometimes, clients consider these wealth managers their friends and are reluctant to confront them because they might be offended. Maybe the client is afraid to be left without someone to watch over their assets if they transferred their account. Having the fox protecting the hen house is never a good idea. Mutual funds are supposed to be a buy and hold investment and don't need to be constantly manipulated. Are all wealth managers just greedy opportunists sitting around waiting to steal your money? The answer is no. Just last week I had a client who had a very impressive portfolio and some nice gains for the year. I pointed out the fees he had paid and his reply was yes, he knew about them but the performance was worth it. I agreed and congratulated him for choosing a qualified money manager. The lesson here is that there are actually some good "guys" out there, you just have to find them. Don't be afraid to ask questions, ask for their qualifications, years of experience, performance history, education level and any certifications earned. If your not comfortable with their answers, look elsewhere. Any time you must hire someone to perform a task for you there is a cost. Car repairs, home repairs, yard maintenance, and money management. All are costly if you must hire it out. My point is simple, hire the best and monitor their performance to get the best "guy" for your money.

Stuck in the Middle with You

This song was recorded in 1972 by a Scottish group named Stealers Wheel. It reached #50 on the Billboard Album chart that year. The song was written by Gerry Rafferty and Joe Eagan and released by A&M records. It was a parody describing how the musicians felt at a cocktail party surrounded by recording studio executives (clowns to the left, jokers the the right). The band was formed in 1972 and broke-up in 1975 but unsuccessfully tried to reform in 2008. The song is a little strange but the video is said to be downright weird. I also feel like I'm stuck in the middle in my investing activities. The recession so many analyists predicted for 2023 never did arrive, is it coming or not? Interest rates have peaked (so they say) so here we are waiting for a rate cut. The greatest thing since the PC is here in the form of AI (Artificial Intelligence) and I'm still waiting to see how it will change my life-what's left of it anyway. The electric vehicle revolution is upon us but here in Indiana I almost never see a Tesla or any charging stations. So what is an investor to do to make money this year? My take on the situation is that: 1. Interest rates have peaked at least for now; 2. AI is going to be a huge benefit to most if not all industries; 3. The much anticipated recession is on hold for now. Since the market believes rates will decline this year, banks and financial stocks rallied over 30% in the fourth quarter of 2023. Since the market believes that AI will transform the way we use computers, Nivedia, Intel, AMD, and other chip makers have skyrocketed, not to mention software companies like Salesforce, Microsoft and Meta. And since the market does not buy into the imminent recession story, the market rallied 11% in the fourth quarter of 2023. Because I feel like a tween (caught between child and teenager), I am struggling with my next move. Should I buy stocks that will benefit from lower rates and new technology or bide my time to see what plays out? Should I take some profits in tech stocks that have been strong lately or let them ride? Should I buy long duration bonds that will generate current income and possible capital gains if rates do come down as expected? I really don't know the answers to these questions so I will have to take my clues from recent market behavior. First of all, there's no hurry. With money market funds paying 5% on liquid cash, it's OK to just sit and enjoy a risk free return for a while. Secondly, the market needs a little time to cool off and settle into its valuation. There is a lot of cash on the sidelines just waiting for an entry point and earning a decent return too. When the time is right I plan to buy stocks that benefit from lower rates, new technology, and a strong economy. As long as CD's pay more than the rate of inflation, I will also maintain a healthy position there also. A cautious balanced approach is best in times like this. I will always have a portion of my assets in stocks but buying at market highs and not taking some money off the table will make me look like a clown down the road.

Fishin'

Elvin Bishop wrote and recorded this song in 1974 on the album "Let it Flow". Although it wasn't a huge commercial success, it's one of my all time favorite albums. I especially like the song "Fishin'" because it refers to my favorite activities: catching fish, eating fish, and drinking good whiskey. Even though the song is "tongue in cheek" it features some amazingly talented musicians such as Charley Daniels on fiddle, Dickey Betts on electric guitar, and Sly Stone on the organ. The album peaked at #100 on the Billboard 200 chart. Rolling Stone magazine described the album as "Too laid back for its own good". I never liked Rolling Stone magazine anyway. They are too arrogant for their own good. When fishing for stocks to add to my portfolio, I take a bottom fishing approach. I like to find out of favor stocks that yield a respectable dividend and trade at attractive valuations (P/E). So how do I find these potential buys? Almost every online brokerage has a stock screener feature. All you have to do is set your parameters and a list pops up of stocks that fit. I recently ran a screen of stocks with above four percent yields and under 10X P/E ratios. The results showed 169 stocks with these attributes. Not suprisingly, most stocks in the list were banks and financials. This sector has been declared as uninvestible by many analysts but I think there is opportunity there. One benefit of a high dividend yield is current income from an equity investment. Another benefit is that the dividends are tax advantaged when compared with interest income from bonds and CD's. I like the notion that I get paid to hold a stock until it returns to its historical valuation. The high interest rate environment has hammered regional and community banks hard. They have investment and loan portfolios that are yielding below current interest rates. To compound the problem, deposits are flying out the door in search of a higher yield. Banks also have to pay more for their deposits to halt the exodus. It's a difficult time for bankers. They need to make some tough decisions like selling assets at a loss and borrowing money from goverment agencies at a high interest rate. Why would I buy a stock in such a troubled industry? First, cheap valuation, second, high dividend yield, third, likelyhood of takeover activity, fourth, our goverment generally acts to prevent failures, and lastly, interest rates are at or near a peak. Lower rates will give most banks some breathing room and will stimulate loan demand. Banks aren't the only stocks I'm fishing for either. Disney is an interesting story also. The parks part of the company is going gangbusters but the media business is a drag on earnings. With the stock in the low 80's. I will be watching it to buy more. I believe Robert Iger will eventually get it right. If he can't do it nobody can. They currently don't pay a dividend so I will just nibble on this one. My stock screener list also included some energy stocks like Diamondback Energy and Northern Oil and Gas. There was also a pharmacuetical company in the mix which was surprising because of the buzz around weightloss drugs. Sometimes when a new product or technology is introduced to the market, some great companies suffer because they don't offer the latest like AI or GLP-1 agonists. This can result in some great fishing for under valued investments. By using a stock screener tool, investors can identify some great bargains lurking on the bottom of the pond. Value investing has always been a better style than Momentum investing for me. I look for long term stocks with great businesses and good dividends. Investing, just like fishing, is a laid back activity for me.

I Can See Clearly Now

Recorded and released by Johnny Nash in 1972 on the album of the same name, the song "I can see clearly now" reached #1 on the Billboard Hot 100 and Cash Box charts. Johnny was heavily influenced by Bob Marley and his reggae style. The song only took two weeks to vault from #20 to #1 and stayed there for four weeks. After a long career in the music industry, Johnny died in October of 2020. I am also beginning to see more clearly the path forward for my investing future. The dark clouds of the pandemic and rapid increases in interest rates are largely behind us. There are definitely some obstacles to worry about like: the ongoing war in Ukraine, the alliances of Russia with China and North Korea, a trade war with China, and more bank failures. With that being said, there are some positives things going on also, like: the coming end to current interest rate hikes, broadening breadth in stocks, slowing inflation, record low unemployment, wage gains for working people, and nice risk-free returns on cash. I believe the positives outweigh the negatives and puts investors on a more secure footing. Back when Johnny recorded this song, most investors adhered to the maxim of the 60/40 portfolio. This means that 60% of your money was in stocks and 40 was in bonds. This is called a balanced approach to investing. When stocks are going down or sideways, the bond component of your portfolio would still yield steady returns. After the financial crisis of 2008, interest rates started on a path very close to zero in the U.S., making bond investments unwise from a yield perspective. But now it starts to make sense again with 5% plus risk-free returns on treasuries and some CD's. Plus if bonds make-up a part of the portfolio, there may be some capital gains in bonds due to declining interest rates. Over the past few months, stocks have been sluggish except for a handful of technology stocks which had an offering in the AI (Artificial Intelligence} space. These few stocks were tagged as the "Magnificent Seven". More recently, money has flowed out of these seven and into the broader market like industrials, energy, old tech, and leisure and travel. The valuations of the AI related issues just got too crazy for most investors so they cashed-out near the top and went bargain hunting for more reasonable P/E's like you find in small caps. Since I missed the AI mania in stocks like Nvidia and Taiwan Semi, I will be watching these highflyers drop and try to get some at lower prices. I believe the real long term benefit from Artificial Intelligence will come from increased effeciency and higher productivity in many businesses. The AI story is still in the first or second inning so there is no need to rush into it. Another reason to be optimistic is the current mission to on-shore more manufacturing due to supply chain issues with China. Many billions of dollars are being spent to bring high tech jobs to the U.S. in the name of national security. Just the build-out of these chip foundries will add to our GNP. The conversion to Electric Vehicles will also bring jobs and cleaner air to our cities. Clean energy like solar and wind are also in the build-out stage and will goose our economy. Infrastructure spending is also in full swing, I can't help but notice all the road construction everywhere I go. Material suppliers like Vulcan Materials and equipment makers and leasors will benefit from these trends. In conclusion, things are looking up. Even the IPO market is starting to come alive with several new issues just this week. In his lyrics, Johnny Nash sings "It's gonna be a bright, bright sunshiny day". I will second that notion.

Don't Stop Believin'

In 1981 the American rock band Journey released this song on it's seventh album "Escape". The title of the song emanated from the band's keyboardist, Jonathon Cain's struggle to make it in the music industry. His father would often remind him to never stop believing in himself. The song lyrics refer to a young couple from different backgrounds who break away from their roots to start a new life together in a different setting. The song is noted for it's piano intro, strong vocals from Steve Perry and powerful rock chorus. Many sports teams have adopted the song as an anthem for their struggle to win fans and championships. "Don't Stop Believin'" reached number 8 on Billboard's Mainstream Rock Chart and number 9 on Billboard Hot 100 Chart. It also was the number one paid digital download song released in the twentieth century. Even though I have focused on fixed income for the first half of 2023, I have never given-up on stocks. A review of my monthly brokerage statements reveals that stocks also haven't given-up on me. Many individual stocks yield in the neighborhood of 5% just like the fixed income part of my portfolio, but the similairity ends there. With stocks, there is the potential for capital gains, the dividends are tax advantaged, and any gains can be held indefinitely without tax consequences until sold. With the fixed income, taxes are due in the year interest is paid without any chance of deferral. Its important to keep track of the annual income and make tax payments quarterly to avoid a nasty suprise next year at tax time. I believe a balanced approach to investing in the current interest rate cycle is the best strategy because of the attractive rates available in Treasuries and CDs. Since the highest interest rates have been on the shortest end of the rate curve (inverted yield curve) there will soon be a lot of capital looking for a new home as maturities come due. Some of the treasuries, certificates and bonds will be reinvested in fixed but I believe some will also find its way into the market. Many analysts are calling for two additional one quarter point rate hikes by the fed this year, so the party isn't over for fixed income just yet. When the fed feels like inflation is under control and the economy needs a little stimulus, rates will be cut to avoid a deep recession. Once rates decline, more money will flood into stocks, giving the market the fuel it needs to resume its bull run. The important thing to remember is that stocks tend to react about 6 months before any actual event so buying early will allow you to enjoy the first leg of any new bull market. The S&P 500 index has performed reasonably well so far in 2023 and the NASDAQ has done even better with 14.5% and 30% respective returns. The back story to both indices is that the best returns were in a relative few stocks in the technology space with AI (artificial intelligence) offerings, like Nvidia, Microsoft, Facebook (Meta) and Taiwan Semi. When the money starts to flow again I believe the breadth of the market will improve, allowing the laggards in other sectors to benefit. Some of the areas I like are banks, industrials, home builders, energy exploration and production, and drillers. I recently bought an offshore driller after sitting out the stock for 20 yrs. My thought is that the largest and cheapest sources of oil lay under the seabed and it will be exploited. I am also looking for companies that can use AI to increase productivity and profits. I think banks and industrials could benefit from this technology. Interest rates will go up and down over time and it is wise to take advantage of the higher rates at this time. I see this spike in rates as a gift to those who are hungry for yield with little risk. I do not see buying short term CD's as a long term strategy for wealth creation, just a chance to earn a little on my idle cash. Stocks are the place to be in the long run for yield and appreciation. This year is half over already so it's time to develop a list and find your entry point. Don"t stop believing in stocks.

NEV

Net Economic Value refers to the current market value of a bond portfolio. Virtually all banks and credit unions closely monitor this calculation as part of their risk management program. NEV is important because it reveals how much cash their retained earnings (capital) can generate in case of the need to raise money for necessary expenses. I am familiar with this because of my volunteer gig on the Board of Directors at a local credit union over the last 8 years. Banks and credit unions are deep in the red on their investment portfolio because of the recent unprecedented increase in interest rates over the last year. The implication is that if deposits decrease dramatically (and they have) then investments must be sold at a loss to raise money. Most fixed income investments held by banks are intended to be held to maturity, therefore, they were not overly worried about the NEV until deposits dried-up. To compound the problem, the banks' loan portfolio also holds lower yielding loans on the books which would also have to be sold at a loss. Bankers just hate to lose money but economic conditions have made life hard for CFO's recently. So where has all the money gone? As I've been saying for over a year now, investors are hungry for yield on their money. Local banks and other financial institutions have not satisfied the need for a return that compensates for inflation. Money has flowed into treasury bills like the inflation hedged I bond and the 2 year T bill. Some banks with low overhead have offered high yields on CD's to raise their deposits. Money has also flowed into money market funds that offer a better yield than the average bank savings account. The money left over from the stimulus payments has been withdrawn to fund living expenses which have increased due to inflation. All these factors have created a liquidity crunch for banks at a time when suprisingly, loan demand remains strong. Some banks have borrowed money to satisify new loan demand because deposits just won't keep up. Along with borrowings come future interest payments which increases costs for banks. There is currently a lot of blame being focused on banks, the fed, crypto currencies, the Biden administration, venture capital, and lenders in Silicon Valley. I think they are all to blame. The failure of Silicon Valley Bank has just revealed the dirty little secret that banks have known all along, their balance sheets are extremely stressed. The Fed has declared that it will raise interest rates until something breaks. Well, I think that has happened. The Biden administration's answer to this banking crisis is to increase regulation on banks even though insiders know that is part of the cause of the problem. Banks should not be invested in crypto currencies, at least with any of my money. Diversification is important for bank portfolio's just like for indivual's portfolios. Any bank that holds only risky loans of start-up companies is inherently risky. My feeling about banks and many credit unions is that their expenses are too high. The greed at the top does not trickle down to lower level employees. Directors are resigned to pay exorbitant salaries just to fill corner offices. Depositors also suffer due to below market interest rates for savings accounts. It's no wonder money is flowing out the door and into higher yields. If there is a silver lining to this banking crisis it is that, interest rates will probablly stabilize or decline, the stock market will respond favorbly to lower rates, banks will derisk their balance sheets, lower market rates will shore-up bank investment portfolios, and banks will realize that deposits are not all that "sticky".

WE ARE THE CHAMPIONS

The song "We are the Champions" was recorded by Queen in 1977 on their sixth album "News of the World". Written by lead singer Freddy Mercury, the song reached #2 on the UK singles chart and #4 on the Billboard Hot 100 chart. The song remains as an anthem for sports teams and is still one of the most recognizable rock songs of all time. The song is famous for being performed at the Live Aid Concert at Wembely Stadium in 1985. The song reminds me of the current global economic situation because of the cooling relations between the U.S. and China. Its no secret that the American economy and China's economy are deeply entwined. We have become very dependent on inexpensive Chinese imports of tens of thousands of categories of products. This helps to explain the low rate of inflation we enjoyed for many years prior to 2020. When then President Trump increased tariffs on some Chinese imports, retalitory tariffs were placed on American exports to China. Combine this with sanctions placed on Russian energy exports and a new global trading paradigm is forming. There will be winners and losers as a result of these changes in the flow of money and goods worldwide. The biggest loser will most likely be the American consumer who is used to the cheap and readily available imports from China. We will also continue to experience inflation despite the Feds effort to slow it by raising rates in a vain attempt to slow our economy. While the economy has slowed slightly, the Fed has targeted our labor market in an attempt to put people out of work, thereby decreasing demand of goods and services. I would argue that job creation here will remain strong to replace Chinese manufacturing for necessary goods. Chinese trade policy has been one sided for many years and I agree that action was necessary but we must recognize that a trade war will bring pain to the U.S. So who are the winners in this escalating trade war? I think Mexico will be the first to benefit from our sour relations with China. America is already utilizing cheap Mexican labor to make autos, electronics, and many other goods we need. Just this week, Tesla announced a 10 billion investment in Mexico. U.S. companies are looking for a source of cheap labor and loose regulation for their competitive advantage. Other third world countries with stable politics will surely lobby American companies for a piece of the economic action. Hopefully, American workers will also get a piece of the onshoring of good paying manufacturing jobs. It only makes sense to employ the best educated workforce in the world right here in our own markets. I recently took a look at my portfolio for any exposure to Chinese stocks and was suprised that my emerging market funds were almost exclusivily invested in China. I plan to divest these funds in the near future because of the political tension between us. I'm sure I'm not alone in feeling this way. With all the risk involved in investing, political risk is one I choose to avoid if possible. For the time being, I am satisified to keep my money invested right here at home in safe and sound CD's, Treasuries, and income generating stocks with limited foreign exposure. While it may be too early to tell who the new champions will be, someone will benefit from the decades of bad behavior by China.

New Year, New Strategy

It's that time again. A new year calls for an evaluation of your current investment strategy and the resolve to make the necessary changes. Before the end of 2022, I sold some stocks that have been dead money for some time and also sold some holdings that have performed well but didn't meet my expectations. The result was to raise cash while cleaning-up my portfolio. My winners roughly equaled my losers so as to not cause a large increase in capital gain tax for the year. I now have some dry powder to take advandage of opportunities in 2023. So what am I looking at? First, some large cap tech companies have suddenly become reasonably priced relative to their growth. It may be a little early but I would rather be early to the party than miss out entirely. I couldn't help but to nibble on Amazon recently. Since I bought it the price has continued to go down. I like the stock so I will add to my holding when it bottoms. Some of the money I raised will find its way into more fixed income like US Treasury I bonds which are indexed to inflation. They are currently paying 6.89% until April when they will reset based on the inflation rate. An investor is only allowed to buy $10k per year and you must hold it for at least 1yr. If you buy the I bond in January, you will earn the current rate for 6 months before it resets to the new rate of inflation. I expect inflation to remain stubborn, so this is my first buy for 2023. After that, I will add to my portfolio of CD's as interest rates rise. I don't expect rates to rise nearly as much as they did in 2022 so there is not a lot of incentive to wait for long before buying more. A search on my broker's website shows CD yields and maturities. As before, I like the 2yr maturity because it pays best for the risk. Many economists agree that we will enter a recession this year or next, I personally don't know so I have to prepare for the possibility of one. This is why I raised cash by selling stocks and have increased my fixed income holdings. If a recession does happen, stocks will probably correct because of lower corporate earnings. That would be a great time to add to your stocks at deep discounted prices. It looks to me that some industries are already trading at deep discounts. Home builders are trading at valuations in the low single digits as are some industrials like metals miners. I recently bought some Cleveland Cliffs (an iron ore miner) because it is just too cheap. I also like gold miners because many central banks are adding to their gold reserves and traditionally gold is a hedge against inflation. I have lived through many recessions, while it's no fun watching your stocks go down in value, it's also an opportunity to buy some great companies at a discount. It's also reassuring to know that you have safe and sound investments producing income during a downturn in the market. Every recession has a beginning and an end. You won't know your in one for several months after it starts and you won't know it's over until months later. The best way to prepare for one is to have cash available for living expenses and investment opportunities while having a stream of income from safe investments.

Money for Nothing

"Money for Nothing" was released in 1985 by the British group Dire Straits with a guest appearance on the single by Sting. The song was the second track of their fifth album named "Brothers in Arms". The single was a huge hit, peaking at #1 for 3 weeks on the US Billboard Hot 100 and the Top Rock Tracks charts. The song went on to win various other awards and was performed at Live Aid and the 28th Grammy Awards in 1986. The lyrics are a reflection of two working class men watching music videos on tv. During the covid 19 pandemic, the U.S. goverment distributed billions of dollars in the form of stimulus payments and PPP payments to businesses. The intention was to keep businesses from failing and to help households during shutdowns and layoffs. The payments were basically money for nothing, you just needed a social security number to qualify. Retail bank accounts swelled with this new-found wealth because due to supply chain disruptions and self imposed quarantees, spending became difficult. Once the economy opened-up, too many dollars began chasing too few goods and rampant inflation ensued. The stimulus also created a problem for banks and credit unions because their deposit base swelled to unprecedented levels and there was not enough loan demand to draw down all the liquidity. Too much cash on the balance sheet can be a problem because the ratios banks use to manage their finances were out of whack. Compounding the problem was the very low level of market interest rates, preventing CFO's from getting a return on all that cash. Currently, the Federal Reserve is raising interest rates to combat the inflation caused by the massive liquidity injected into the economy. The idea is to lower asset prices by suppressing demand and also lower wages by limiting job openings. An example of lowering asset prices is the housing market: higher rates on morgages make housing less affordable because the monthly payment becomes excessive. Auto demand is another example: that car you had your eye on is now unaffordable because higher rates on the loan means you can't make the payments. It will take some time for the excess liquidity in consumers' bank accounts to get spent down but it will happen. My fear is that it will happen suddenly and throw the economy into a deep recession. One thing that could delay a recession is corporate and consumer credit. Even though excess liquidity is drained from bank accounts and corporate balance sheets, buying on credit could keep inflation high for longer. It's almost like Jerome Powell and the Fed is trying to cure inflation with the wrong set of tools, like brain surgery with a hammer and chisel. It's important to remember that stocks are also an asset. If the stock market goes up there is a "wealth effect" where investors feel confident and continue to spend money on goods and services. The Fed's effort to slow the economy also includes an effort to lower stock prices. This is why I can't get too excited about adding new money into this market right now. I still think the stock market is the best place to create long term wealth but for now I sleep better knowing that I have a sizable portion of my assets in safe investments like CD's and treasury bonds. I have waited a long time to get any kind of yield in safe investments and I intend to take advantage of it. I don't worry that the "real" yield is negative because that is beyond my control and eventually inflation will abate. I also have resisted the temptation to invest in any crypto or meme stocks because I view these investments as a symptom of the excess liquidity created during the pandemic. I find it odd that the recent collapse of FTX, which was a brokerage for crypto, scammed some high profile names like Kevin O'Leary out of millions of dollars. How embarassing. These are the people who never hesitate to broadcast investment advise to anyone who might listen. Going back to the job market, my take is that there is simply not enough workers to fill the jobs in the U.S. Raising interest rates simply won't get the job done. Increasing legal immigration would help, so would increasing the worker participation rate. Good luck with that one because with a pension, social security increasing over 7% next year, and 4.5% interest on my savings, I'm getting money for nothing.

Highway To Hell

In 1979 AC/DC recorded the album "Highway to Hell" which featured the song of the same name. The album was the sixth recorded by the Austrailian group and its second highest seller behind "Back in Black". The lead singer for the group was Bon Scott who died the next year on Feb. 19, 1980. By 2006 "Highway to Hell" was a 7X platinum seller and reached the Top 100 chart in the US. The album is considered one of the greatest Rock albums ever made. The stock market seems to also be on a highway to hell so far this year. Many people are worried about their retirement accounts as they watch them continue to fall to levels not seen for many years. Anyone who was heavily invested in technology stocks has suffered especially heavy losses. It seems like financial markets have encountered the perfect storm of conditions: The war in Ukraine, high inflation, a rapid ramp in interest rates, threat of recession, lower corporate earnings, food insecurity, energy insecurity, trade tensions, and supply chain disruptions just to name a few. So how does an investor navigate these ugly events? My first reaction to the difficult investing environment is to develop a defensive strategy. I feel like the Federal Reserve is offering me a rare chance to derisk my portfolio by raising interest rates on Treasury Securities and certificates of deposit which are federally insured. Just today I bought a two year cd which is paying an effective rate of 4.9%. Even most local banks and credit unions are offering attractive rates on short maturity cd specials. While I don't think rates have topped out yet, I know that with every increase in the Fed Funds Rate is a step closer to the end of this tightening cycle. This may be the last opportunity I have during my life to generate interest income with almost no loss of principle. The recent bear market rally is based on the concept of a Fed pivot, which is a point where the rate hikes slow or are paused. I think I have a better chance of catching Santa stuffing my stockings than seeing a pivot this year. My Christmas list includes a 5%+ rate on CD's in the coming months and a 3/8 cordless Dewalt impact driver, (just in case Santa reads this blog). With all the layoffs announced by big tech companies and the cloudy forward guidance given by CEO's, I doubt this rally has legs but I will take what I can get out of this market. Anyone who needs to free-up some cash to buy fixed income at this time has my blessing. While scanning over my stock portfolio, I can't help but notice how cheap some stocks have become. Homebuilders have been hit especially hard due to the increase in mortgage rates. Most companies in this space are trading at multiples of 5X or less. Some financial companies are also very cheap. Brighthouse financial is trading at about 4X as well as some wireless providers. Mining companies are also way too cheap, Cleveland Cliffs' PE is in the low single digits as are some gold miners. These stocks won't stay this cheap forever so it may be a good time to start nibbling on some of the bargains. Between picking up some yield on Treasuries and CD's and buying select stocks dirt cheap, I plan to exit the Highway to Hell and start climbing the Stairway to Heaven.