FT Alphaville had a post yesterday that recapped a paper that explored whether or not there is actually enough investment capital in existence to buy amount of debt the US treasury will have to issue in the coming years. We've all heard the rhetorical question of who is going to buy all that debt but this is a little more interesting.
Per the FT post;
By the authors’ calculations, the large increase in foreign official holdings implied by the base case would require those investments to rise to about 19 per cent of rest-of-world GDP, up from less than 5 per cent in recent history. That’s a big change but not, technically, impossible.
The number may or may not be exactly right but the direction, when framed this way, should not surprise anyone. There has been a sentiment of stimulate now no matter the cost and worry about it later. Later will come eventually. Maybe you could correctly predict when or maybe not but at some point. My hunch is that the consequence will not be a violent disruption as the current disruption has not been violent but more like the markets demanding a higher interest rate from from such an over extended borrower. Personally I have no sense of when this might occur as I would have thought that rates would be higher be now. For now however deflation (whether it is the real deal or just a threat) is helping keep rates lower and this could last for quite a while longer.
No matter anyone's ability to predict anything here, hopefully it is obvious that the bond market is distorted and that prices are very high. I have made this point many times that prices are high but could stay high for a long time. But prices are high, the Fed has kept rates at zero for a long time and will keep them at zero for a long while yet and treasuries are being bought by the Fed which means the market is distorted. I'd rather participate as little as possible in an expensive and distorted market.
The muni bond market seems to be getting a lot of positive attention of late and I don't know why. The last time I checked only Montana and South Dakota did not have budget deficits and we have all learned much more about the extent to which state and other municipal pensions are underfunded. I had a conversation yesterday with a friend in the business who relayed a comment from a mutual fund wholesaler. Essentially this fund company is of the belief that the ratings companies don't have the time to provide ongoing analysis to rated muni bonds which means there are many issues out there that should have been downgraded but have not been.
If you go through the archives from people like Mish and Edward Harrison you can find all sorts of charts and tables with details about the extent to which deficits are up, pensions are underfunded, sales tax receipts are down, income tax revenue is down and so on. For people who do not want to be aggressive with the fixed income portion of their portfolios I would simply avoid these segments of the bond market.
Most clients have two-four individual corporate issues that are investment grade maturing from 2012-2014, two-three individual foreign sovereign issues, the TIP ETF, one incredibly unvolatile closed end fund, a GNMA fund and one or two bank preferred stocks. My hope is that these don't move a lot and pay some interest into the portfolio, I am not looking for meaningful capital gains from this part of the portfolio.
Finally this little working in retirement nugget. One time Red Sox Bill "Spaceman" Lee has signed a contract with the Brockton Rox of the Can-Am League, which is an independent league. Lee is 63 and per the news release has kept active.No doubt Lee was concerned about the paltry interest rates available for his portfolio but was not willing to chase yield. Surely the Spaceman lives below his means so the couple of hundred bucks he might get per start (this is a professional league) will go a long way to covering his expenses and reduce the burden off of his portfolio for a little while.
Being a little more serious this league has six teams, plays more 100 games over five months which means plenty of jobs for the 50plus home games each team has and there are other leagues like this as well. At 50 games with each game day being six hours, if the the pay is $10/hour that works out to $3000 for 50 days of seasonal work which for someone who loves sports is pretty good. While not a lot of money, it should cover car insurance for the year and some of the utilities. If the same sports fan can find something similar for a winter sport then maybe the rest of the utilities are covered with another 265 days off during the year.
Some might think this is stupid which is fine but I think this is a reasonable example of part time work that someone might enjoy versus staying in a full time job they hate until they're 70.
7 comments:
LOL, fun. A good reason to work on my golf game!
I think the interest in munis is being driven by wealthy folks who are looking at the prospect of higher taxes down the road.
One thought on preferreds--call risk is becoming more of an issue as companies raise money at historically low rates. I'm sure some investors hold older issues that are well over par (I did,) exposing them to some loss of principal.
the senior tour!
Hopefully Bill Lee can avoid facing Tony Perez in a Can-Am League playoff game. But if he does, just throw him a curve or a fast ball.
The financial conditions of state and local governments are indeed dire and everyone is spooked about Greece and so forth and so on hence everyone is buying treasuries and high quality GO municipal bonds are essentially selling at a discount while the muni yield curve steepens. How steep? Longer AAA muni yields are now higher than treasuries of comparable maturity with spreads growing to 50 bips or better at the top of the curve.
Stated more directly, when an investor in the 28% tax bracket is likely to keep 95% of muni yields even if bonds from out-of-state are chosen and those yields are now higher than t-bonds it is time to be a buyer of muni's ...if the right issues can be identified.
Note: I'm not a huge fan of bond funds because they never mature but those uncertain about assessing individual issues and/or in doubt about the accuracy of rating's (not unreasonable given the history) do have some excellent fund choices in this space: Vanguard in particular stands out but Fidelity, Price and even American Century have some good intermediate to long-term muni offerings too.
I agree that folks who bought preferreds over the call may be in for a rude awakening.
One can still find, through the vagaries of the preferred security market, mispriced investment grade securities with a rich yield trading below the call price.
It appears as though the fast traders and other program-driven technologies are not really involved in the preferred markets with the intensity found elsewhere. That gives the investor a fighting chance to obtain value.
Bill Lee - now there's a SoCal wildman from the past. I remain a loyal 1959 White Sox fan, and recall sitting as a boy two rows above the guy that dropped a full beer on Al Smith's head as he was catching a fly ball from an L.A. player during the World Series in Comiskey Park. I loved that place!
The REAL Mayor Daley was a fixture at the games.
T
Recognizing that you constantly write to not bank on social security or a pension to be there when you need them, I work for a Fortune 500 company that does have a funded pension plan. What I struggle with is how to account for the pension when determining the asset allocation for the rest of my retirement accounts that I control. Thoughts? Would you go with a larger equity allocation or ignore the pension completely in the allocation?
re the pension, I would plan for a good scenario that sours. what can go wrong, plan for that and then when it doesn't go wrong you are much better off.
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