We are entering a "Golden Period" for fixed income investing

[Freedom56]

If I may...

I believe what GenXGuy is failing to understand is we're talking about a portion of peoples' portfolios that they WILL NOT risk in equities. This is the FIXED INCOME portion of their portfolios. What I think GenXGuy is trying to say is that putting the money into equities has a better chance of beating inflation with the possibility of lower tax consequences. But it's an apples to oranges comparison in this discussion, which is only considering the FIXED INCOME portion of peoples' portfolios - that is, money they WILL NOT risk in equities. So, yes, 5% in treasuries is a heck of a lot better than .5% in a savings account.

I hope this puts the "inflation/taxes" argument to rest.

Some of us have zero exposure to equities and are 100% cash and fixed income. Some have rental properties and zero exposure to both bonds and equities. It may surprise many people that many those who invested in real estate over the past 30 years have achieved a significant level of wealth. There are many paths to financial independence that don't involve 60/40 portfolios.

 

[pb4uski]

Exactly. That's why I said the previous poster failed his BBQ guests when talking about the interest income. As you said, many people don't think about it to that degree and need that education about what they are really gaining after taxes and inflation take a big bite.

I hadn't seen you posting for a while, so welcome back.

But at the same time there are many affluent retirees with overfunded retirements who don't really need their portfolios to keep up with inflation which is part of why there isn't focus on it... they have plenty so if real, after-tax returns are slightly negative all it means is that the heirs get a little less at the worst. There is no risk of financial ruin and they can spend what they want to within reason. I suspect that describes a lot of our forum members and many of my peers.

But if as a result of higher rates they feel richer then many will spend more, even though their portfolio is decaying in real terms.

Another factor is that they are conscious that they have less years left for the portfolio to fund. So if they retire at 55 with $x million and 10 years later they still have $x million even though the buying power of $x million is lower it is of less of a concern because there are 10 years fewer of withdrawals.

 

[Free bird]

+1

 

[Freedom56]

I will address the no-context straw men more completely:

1) It's better to earn $2000/yr with only $1000/yr lost to inflation and taxes than $6300 when $8000 of your principal and interest is lost to inflation and additional to income taxes.

2) Inflation is making the $75000 principal worth a lot less, so earning earning 3% on a $75000 CD in a 2% inflation environment is definitely better, as I had been doing in recent years. You will actually come out ahead vs. the high inflation today which erodes your purchasing power on your 5% CD along with taxes

3) Your purchasing power will drop more than $75,000 in the high inflation environment if you spend all your interest, and would drop much less in the low inflation environment possibly not losing anything at all, like if you earn 3% in a 2% inflation environment as I was doing with some CDs in recent years and reinvesting to keep ahead of the game.

They might throw you in the pool if they don't want to hear the truth about their purchasing power not actually increasing after inflation and taxes. But the math is clear. There's not really any extra money to spend until inflation drops. I think core CPI is about 4.6% now. Many of us are paying 27% or more in income taxes on these types of investments. There's no real windfall.

It's $6300 per month or $75,600 per year. It don't understand how you lose $8000 by earning $6300. With your logic, anyone who is cash sorting by moving their money to higher yielding fixed income is losing money so they should leave it alone and earn less. Does that make sense? We are in a 4% inflation environment so earning 1% or less in this environment is not going improve your returns and buying power. Your statements defy common sense, the laws of basic arithmetic, and taxation. This thread is about earning fixed income in a rising rate environment while preserving capital. If that is inconsistent with your investing objectives, start your own thread and show everyone how it's done.

 

[GenXguy]

It's $6300 per month or $75,600 per year. It don't understand how you lose $8000 by earning $6300. With your logic, anyone who is cash sorting by moving their money to higher yielding fixed income is losing money so they should leave it alone and earn less. Does that make sense? We are in a 4% inflation environment so earning 1% or less in this environment is not going improve your returns and buying power. Your statements defy common sense, the laws of basic arithmetic, and taxation. This thread is about earning fixed income in a rising rate environment while preserving capital. If that is inconsistent with your investing objectives, start your own thread and show everyone how it's done.

It's amazing that you keep using these straw men arguments. I never once said 1% is better than 4% if inflation is the same under both circumstances. The fact that you keep responding like that is what is defying logic and show you don't really want to address the issue realistically. Just look at the math. But at least I can see that some others are following. And if someone wants to spend down their portfolio because they have less years to spend, that's fine, and they can do that with inflation is high or low, either way, but that doesn't mean they really had a lot of extra purchasing power to spend that money. It's all in the math.

As far as starting my own thread, remember, I only responded because of your misinformation about there being a lot of additional stimulus and windfall when in fact there isn't any "real" stimulus. I didn't bring this up out of no where. But that's all I have to say.

 

[madatrub]

The ADP private payroll number has come in hot at 497,000 and more than double expectations. As I stated before the economy is strong and getting stronger. The long rates have breached 4% today. The two year is above 5%. We will be taking out the peaks from last October and March pretty soon. Bank of America is projecting a 6% terminal rate on the Fed funds.

https://www.cnbc.com/2023/07/06/adp-jobs-report-private-sector-added-497000-workers-in-june.html

FWIW, this payroll number makes little sense. ADP says companies with 50-249 employees added 171k jobs. BLS says companies with 50-249 employees lost 33k jobs last month. One of them is wrong.

 

[Freedom56]

But at the same time there are many affluent retirees with overfunded retirements who don't really need their portfolios to keep up with inflation which is part of why there isn't focus on it... they have plenty so if real, after-tax returns are slightly negative all it means is that the heirs get a little less at the worst. There is no risk of financial ruin and they can spend what they want to within reason. I suspect that describes a lot of our forum members and many of my peers.

But if as a result of higher rates they feel richer then many will spend more, even though their portfolio is decaying in real terms.

Another factor is that they are conscious that they have less years left for the portfolio to fund. So if they retire at 55 with $x million and 10 years later they still have $x million even though the buying power of $x million is lower it is of less of a concern because there are 10 years fewer of withdrawals.

That pretty much describes us, my siblings, my in-laws, our next generation of trust fund children, most of my friends that have retired early, many of my neighbors. Those that are 100% debt free , have control over their expenses and spending habits, and have capital, will thrive in this environment.

 

[Freedom56]

FWIW, this payroll number makes little sense. ADP says companies with 50-249 employees added 171k jobs. BLS says companies lost 33k jobs last month. One of them is wrong.

Wait for the BLS numbers tomorrow.

 

[Montecfo]

Navigating through this period in history requires lateral thinking not the conventional sound bites spewed by the financial media. The Fed never hiked rates in an economy where record amounts of cash were sitting in accounts earning zero and are suddenly earning over 5%. The rapid rise in interest rates are adding stimulus shock caused by all that cash that was earning next to zero. As I stated consistently, long rates are too low and will move higher. This is what is happening now. As the yield curve flattens, long duration fixed income will revert back to yields seen in the past. We may see that soon as investors liquidate their positions out of bond funds and the forced redemptions add pressure to bond prices. In addition, the treasury will be auctioning $1.6-1.7T of longer duration notes and bonds that will put pressure on long yields.

Those opinions are fine as far as they go.

But higher interest rates do not stimulate the overall economy. No amount of spinning on your part will change this.

 

[Freedom56]

But higher interest rates do not stimulate the overall economy. No amount of spinning on your part will change this.

Here are some more thoughts on this.

5% Interest Income from CDs, T-Bills, Money Markets Fueled Spending.


"Interest income to households is surging, fueled by 5% money-market funds, 5.2% CDs and Treasury bills, 4.5% savings accounts, and other fixed-income products that people have invested many trillions of dollars in. Those rates are now producing a significant increase in cash flow to those households – and many are spending this extra cash, especially retirees that have gotten bludgeoned by the Fed’s interest-rate repression over the prior 15 years."

"For people who have no debt but have interest-earning assets, the rate hikes just produce higher income, and they’re loving it, and many of them are spending some of it."

https://wolfstreet.com/2023/06/10/5...gher-borrowing-costs-cut-spending-and-on-net/

Again, navigating through this period requires lateral thinking not voodoo math and believe systems based on cult like investment strategies.

 

[pb4uski]

Actually, higher interest rates do both. They make the cost of capital more expensive which puts a damper on economic growth. At the same time higher interest rates provide savers with more income, some of which will be spent. I suspect that the net impact hampers economic growth but IMO it is foolish to not recognize that there are somewhat offsetting impacts.

 

[Montecfo]

Those puzzling jobs reports

FWIW, this payroll number makes little sense. ADP says companies with 50-249 employees added 171k jobs. BLS says companies with 50-249 employees lost 33k jobs last month. One of them is wrong.

The ADP and BLS figures often diverge. The jobs report tomorrow could be similar or quite different.

Even the BLS' own numbers are at odds with each other. The May jobs report featured:

339K new jobs according the the BLS' payroll survey.
-310K jobs lost according to the companion household survey

Unemployment rate rising .3% from 3.4% to 3.7%, a huge rise in a single month. This also comes from the HH survey.

Hours worked declined to 34.3 per week, lower than the average for 2019

https://www.wsj.com/articles/labor-...rt-could-be-overestimating-job-growth-c7ea020

So something appears to be up.

“In the past, reducing working hours has been a reliable harbinger of a wave of layoffs,” said Aichi Amemiya, senior U.S. economist at Nomura Securities.

https://www.wsj.com/articles/lots-of-hiring-but-not-so-much-working-d4f01646?mod=article_inline

 

[Montecfo]

Actually, higher interest rates do both. They make the cost of capital more expensive which puts a damper on economic growth. At the same time higher interest rates provide savers with more income, some of which will be spent. I suspect that the net impact hampers economic growth but IMO it is foolish to not recognize that there are somewhat offsetting impacts.

Your suspicions are correct and don't think anyone failed to recognize it. As net savers, we can see it. Higher rates provide a benefit to net savers, but most folks and businesses are net debtors, meaning they owe more than the cash they have on hand. So sure, there are offsets but the total effect is clear.

And this fact is the key basis for monetary policy.

ETA: to put a finer point on it, the FRB of NY says US considers have $17T of outstanding debt. Cash is $4-6T.

 

[Freedom56]

Actually, higher interest rates do both. They make the cost of capital more expensive which puts a damper on economic growth. At the same time higher interest rates provide savers with more income, some of which will be spent. I suspect that the net impact hampers economic growth but IMO it is foolish to not recognize that there are somewhat offsetting impacts.

Notwithstanding the fact that one third of homeowners own their properties free and clear, the vast majority of homeowners who have mortgages are locked in to record low yields. Those people are not budging and are really not impacted by the higher cost of borrowing. This is keeping inventory levels relatively low and home prices elevated.

 

[Chuckanut]

Exactly. That's why I said the previous poster failed his BBQ guests when talking about the interest income. As you said, many people don't think about it to that degree and need that education about what they are really gaining after taxes and inflation take a big bite.

I hadn't seen you posting for a while, so welcome back.

Bob Brinker, a person many of us have talked about lately and found helpful in our financial journey, used to use the loaves of bread approach. That is measure each dollar you earn in regards to how many loaves of bread it purchases. Ok, today it is how big a fraction of a loaf of bread it will buy. That is the best way to think about inflation.

A decade ago, I could buy an entire loaf for $1. A few years ago, I could buy 4/5 of a loaf. Today, I can buy 1/2 a loaf.

In the above example, I don’t feel better off. What does make me feel better is that the higher interest rates at least give me a chance to break even. Before the FRB started raising rates we had 6+% inflation, and were still lucky to get 3% on a 5 year CD and 2% on money market accounts. Relative to those days I am better off. In absolute terms, when I look at higher food prices, higher taxes, higher insurance premiums, higher appliance prices, higher utility rates and now the country’s highest gasoline price, I feel like Alice in Wonderland, running as fast as I can to stay where I am. I have to use every after tax penny of those higher interest payments to keep up.

My 2 cents. Take what you wish and leave the rest.

 

[Echard]

IN the context of this discussion about the impact of higher interest rates on the economy, this economist has a very provocative view of how higher interest rates actually cause more inflation. It turns some of the conventional thinking upside down.

Do High Interest Rates Fix High Inflation?
https://www.lynalden.com/

 

[Montecfo]

IN the context of this discussion about the impact of higher interest rates on the economy, this economist has a very provocative view of how higher interest rates actually cause more inflation. It turns some of the conventional thinking upside down.

Do High Interest Rates Fix High Inflation?
https://www.lynalden.com/

I did not find it provocative but it is interesting.

The main point is today's inflation may be driven primarily by deficit spending. I have always thought this the case. And government needs to reign in deficits.

But that is not a tool available to the Fed.

Perhaps this is another reason why the Fed seems to be excessively hawkish. They may view jawboning as more effective than hikes, or at least a key element.

The good news is that Americans' expectations for inflation are moderating to the 2-3% level over the long term. I expect this is where we will end up.

And there was no discussion to the effect that higher rates are fueling inflation or driving the economy as some here have suggested.

 

[Quattro73]

If I may...

I believe what GenXGuy is failing to understand is we're talking about a portion of peoples' portfolios that they WILL NOT risk in equities. This is the FIXED INCOME portion of their portfolios. What I think GenXGuy is trying to say is that putting the money into equities has a better chance of beating inflation with the possibility of lower tax consequences. But it's an apples to oranges comparison in this discussion, which is only considering the FIXED INCOME portion of peoples' portfolios - that is, money they WILL NOT risk in equities. So, yes, 5% in treasuries is a heck of a lot better than .5% in a savings account.

I hope this puts the "inflation/taxes" argument to rest.

Yes what he is failing to understand is inflation from 2020 to now is up some percentage…CPI chained inflation is supposedly about 16.50% increase per a very quick look at Google. Sure it is probably more. Maybe double. BUT Interest rates paid on savings have gone from about 0.50% to 5.0%. That’s a 900% increase. To a person with a high cash/savings amount it is significant and far outpaced inflationary impacts. That’s the simple math. 900% vs. 16.50%

 

[Freedom56]

Yes what he is failing to understand is inflation from 2020 to now is up some percentage…CPI chained inflation is supposedly about 16.50% increase per a very quick look at Google. Sure it is probably more. Maybe double. BUT Interest rates paid on savings have gone from about 0.50% to 5.0%. That’s a 900% increase. To a person with a high cash/savings amount it is significant and far outpaced inflationary impacts. That’s the simple math. 900% vs. 16.50%

It's encouraging to see that other people understand arithmetic. I thought I was in the Rod Serling's Twilight Zone for a time.

 

[copyright1997reloaded]

One of the more fascinating econ courses I took so long ago (as an economics major) was in the area of behavioral economics. It has influenced my thinking (pun intended) in terms of better understanding how psychology and traditional neoclassical economics conflict. That is, people sometimes make decisions based on perceptions rather than a cold hard analysis of economic "truth".

We can see this come into play in terms of higher interest on savings and peoples thoughts as to it being better, even when real rates are negative (due to inflation). Even here on Er.org, there have been many symbols on posts, discussing the great rate they got on a CD, Tbill, bond or whatever.

That is, a certain set of people (those with large amounts of short term fixed income savings) "see" themselves as better off due to the much larger interest income flow. That is indeed simulative if they don't analyze father to understand that they really aren't really (in many cases) better off.

Also, deficit spending *is* a net boost (in the short run) unless and until it is offset by increased interest rates (due to the governments demand for money choking off other more productive uses of that capital in private investment).

Higher interest rates is restrictive in terms of private use of capital, e.g. investments in plants, equipment, and other things which result in higher productivity. This is because borrowers a) need to have an ROI that exceeds the cost of capital, and as a result less projects get financed and b) higher rates (and bank run scares) cause tightened lending standards (and as a result less lending). Thus, the effects of higher rates will (eventually) impact the GDP.

 

[madatrub]

The ADP and BLS figures often diverge. The jobs report tomorrow could be similar or quite different.

Really going out on a limb here.

 

[GenXguy]

Yes what he is failing to understand is inflation from 2020 to now is up some percentage…CPI chained inflation is supposedly about 16.50% increase per a very quick look at Google. Sure it is probably more. Maybe double. BUT Interest rates paid on savings have gone from about 0.50% to 5.0%. That’s a 900% increase. To a person with a high cash/savings amount it is significant and far outpaced inflationary impacts. That’s the simple math. 900% vs. 16.50%

That's another straw man. I never said anything about 2020 or getting a 0.5% return. That's on you. In early 2019, inflation was closer to 2%, and I was getting 3% on CDs. So, I was actually coming out ahead. Now, I'm coming out behind after taxes and inflation, despite 5% interest, plus as referenced, inflation is really higher than the government CPI core figures, so it's even worse. Anyone here that knows how to figure their real return after taxes and inflation will understand there's no stimulus or windfall here. Don't let OP or anyone else fool you that you're coming out ahead with extra money to spend. As an example, a CD earning 5% interest gives me a yield of about 3.65% interest after taxes. Inflation has been running 4 to 9% over the last couple years. That's more than my 3.65% again from interest. See those interest dollars may feel good, but don't forget to figure in the taxes and inflation effect to see if you're really gaining much if anything. I know some here are following, so that's good.

 

[COcheesehead]

Let’s keep this thread open.

 

[Quattro73]

Let’s keep this thread open.

Agree I won’t say more.

 

[GenXguy]

One of the more fascinating econ courses I took so long ago (as an economics major) was in the area of behavioral economics. It has influenced my thinking (pun intended) in terms of better understanding how psychology and traditional neoclassical economics conflict. That is, people sometimes make decisions based on perceptions rather than a cold hard analysis of economic "truth".

We can see this come into play in terms of higher interest on savings and peoples thoughts as to it being better, even when real rates are negative (due to inflation). Even here on Er.org, there have been many symbols on posts, discussing the great rate they got on a CD, Tbill, bond or whatever.

That is, a certain set of people (those with large amounts of short term fixed income savings) "see" themselves as better off due to the much larger interest income flow. That is indeed simulative if they don't analyze father to understand that they really aren't really (in many cases) better off.

Exactly! Well said.