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There is no precedent in the markets for losing trillions of dollars in a matter of months. To rely on feel, or experience, or even on the experts, in a time of unprecedented change may be dangerous to your financial wealth.

Evaporating Asset Prices Continued

August 1st, 2022 by Kurt L. Smith
  • Asset prices continue to evaporate. The cryptocurrency assets, led by Bitcoin, have lost over $2 trillion since its peak in November according to Coin Gecko back on June 12th. The Big Tech names of FAANG stocks (Meta, Apple, Amazon, Netflix, and Alphabet) along with Microsoft have collective losses of $3.3 trillion this year per S&Ps June 13th report. For context, the entire municipal bond market totals only $4 trillion (Bloomberg).

    Whether stocks, bonds (Bloomberg’s U.S. Treasury index is down over 10% year to date, June 24th) or crypto your portfolio is hurting. Inflation, by any measure, is taking a toll on your wallet. There seems to be nowhere to hide.

    Listening to the experts, the ones who manage trillions and spend billions on advertising, and you will hear the familiar refrain, just hang in there. This is great advice for them as they continue to collect billions of dollars in fees managing your money.

    This is your money. If you want to keep it, you might need to do something about that. We have seen asset prices evaporate. Will that continue? And what if it does? With inflation surging, what are the alternatives?

    For perspective, let us go back to my March 2020 letter. March 6th  was the top of the bond bull market bond. Bond prices were as good as they get and those that were not soon played catchup over the following months. How ever one values bonds as an asset class, the result was tens of trillions of dollars valued at prices never seen. You know what happened to stocks. New all-time highs culminating late last year or early this year depending on your gauge. Both markets have now ended about four decades of consistently higher prices. The bull market for both stocks and bonds are now over.

    You have been the beneficiary of these rising prices. Of course, giving up some of gains to inflation and evaporating prices has been tough. It is also hard to go to cash or the add to the alternatives here at The Select ApproachTM while inflation continues to be much greater than returns.

    Yes, inflation is greater than the returns currently. If we accept the dogma premise that the market discounts all information, we are left with the idea the market does not expect inflation to continue to be this high. The bond market continues to see inflationary as transitory (hence lower interest rates than current inflation).

    The market has been both wrong about inflation; the experts have been wrong about inflation. Inflation has continued higher for longer and not only the experts, but the market, may need to catch up. Higher interest rates, along the lines Federal Reserve chair Jerome Powell spoke of earlier this week, are coming.

    Consequences? You are beginning to see the consequences of the ending of bull markets. While perhaps painful, this may be the tip of the iceberg. The drive towards higher asset prices was a long one; so long that we seem to believe high prices are either normal, or worse, we are entitled to them.

    Which leads me to the favorite refrain, sell. Yes, this is an outlier proposition because I am an outlier. Telling you to sell your bond funds in March 2020 did not make me any money; telling you to sell stocks now will probably not either. I am a bond guy and at the end of the day, the purpose of bonds, is for a store of value. For me this means building a portfolio of worthwhile bonds that should perform like no other. You receive the monthly statements… you tell me.

    There is no precedent in the markets for losing trillions of dollars in a matter of months. To rely on feel, or experience, or even on the experts, in a time of unprecedented change may be dangerous to your financial wealth.

    For whatever reason you have found The Select ApproachTM to work for you. Yes, I am a bond guy. And as such I am a store of wealth guy, and as the markets continue to shed trillions, I am concerned about your wealth.

    You continue to have options. While prices have dropped, this appears to me to be only the tip of the iceberg. Asset values can and do evaporate but things can get very bad in a hurry and then you will have lost your options.

    Additionally, just because I have not mentioned other alternative asset classes such as real estate, private equity and gosh knows what other assets have been sold in the name of an inflation hedge, it does not mean that I am not concerned about these. I have spoke repeatedly of liquidity issues I believe building. These assets typically have little to no liquidity so, at this point, the best one can usually do is pray. If that is not the case and you remarkably have a chance to exit these assets quickly, I suggest you do so. Unprecedented asset price evaporation in stocks, bonds and cryptocurrency will affect all asset classes in my opinion…we just have not seen it priced yet in many alternatives.

    Meanwhile I will be here finding worthwhile bonds. Bonds that mature. Bonds that provide liquidity as well as bonds to absorb your liquidity. You need not to continue to lose both value and to inflation. You have options; exercise them.

    New Braunfels, TX

    Utility System Revenue Refunding Bonds, Series 2022

    Aa1 Moody Underlying

    Due 7/1   Dated 7/1/22 Maturity 7/1/53

    $73,855,000 Sold

    Years   Maturity           Coupon      Yield*

    1         2023             5.00%           1.95%

    2         2024             5.00%           2.28%

    3         2025             5.00%           2.48%

    4         2026             5.00%           2.64%

    5         2027             5.00%           2.72%

    6         2028             5.00%           2.90%

    7         2029             5.00%           3.06%

    8         2030             5.00%           3.18%

    9         2031            5.00%           3.29%

    10       2032             5.00%           3.41%

    11       2033**          5.00%           3.53%

    12          2034**        5.00%           3.64%

    13          2035**        5.00%           3.72%

    14          2036**        5.00%           3.80%

    15          2037**        4.00%           3.82%

    20          2042**       3.875%        3.99%

    25          2047**       4.00%           4.18%

    31          2053**       5.00%           4.18%

    *Yield to Worst (Call or Maturity) ** Call 7/1/32

    Source: Bloomberg

    This is an example of a new issue priced the week of 6/20/22

    Prices, yields and availability subject to change

    This Letter Originally Published 6/28/22


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