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These low (no) yields, along with their treasury and corporate counterparts mean tens of trillions of dollars of fixed income portfolios are priced so fully as to negate future upside.

Protect Yourself

July 15th, 2020 by Kurt L. Smith
  • In my opinion, markets perform like markets. Narratives may try to explain them, but the narrative is a lie. The market did not go up because of ‘X’ or ‘Y’, the market just went up.

    For the past several years I have been writing about the end of something, specifically the end of asset (stock, bonds, gold) prices rising trend. This was the case at the beginning of the year, as well, before we learned to spell corona.

    Six plus months into this lousy year, just where are we? Let’s start with bonds because it is easier, or should be, to recognize a top or the top in bond prices when the price of a bond is just about the sum of all cash flows to be received throughout the life of the bond because the yield isn’t worth noting as a discount.

    Look at this month’s bond sale from Tarrant County College District, Texas (below). Are those yields just not ridiculous? Would you entrust your money to a governmental entity for any length of time at those low (no) yields?

    As discussed in my March 6th letter, earlier this year, whether you buy these yields or not is irrelevant. What is relevant is these are the yields that are used to price mutual funds and other portfolios of bonds. These low (no) yields, along with their treasury and corporate counterparts mean tens of trillions of dollars of fixed income portfolios are priced so fully as to negate future upside.

    Yet bond holders do not budge except in early March when a selling spree sent prices tumbling double digits. That will not happen again you say. I will take the market’s side of that bet, as prices never going down is a long time.

    At these yields, which as we know in bond world is the same thing as saying ‘at these prices’, there appears to me to be only downside. Mutual fund investors will not see it or get it as they are usually looking at past performance or their current dividend yield. But there is no yield so dividends are largely a return of capital, not earnings from the portfolio. This is bond math.

    To say the market will quit functioning like a market because of (insert reason here) is foolish reasoning. The market has continued to act like a market for centuries. What we are discovering (all over again) is how governments/authorities/leadership will not protect us. As we in Texas have been slapped up the side of our head now know, if we want to protect ourselves, we better do it ourselves. This attitude applies to today’s financial markets as well.

    Stocks did not sell off thirty-five percent in March to give you a buying opportunity. Nor have they rallied back strongly because this was the reason. This narrative, like all other narratives about markets are still stories or lies. Like bonds, stocks have peaked. Same with gold.

    The markets for our investment assets have been in a topping pattern for years! The ultimate question of how high is high for these assets will ultimately be preserved in history just like we look back at the stock price of Dell or General Electric and say, there it was.

    We have an alternative and you have been working the alternative with me for many years as well. Markets do top and markets do fall and that will not be fun either. This is what markets do and this is what I have been preparing for, whether you know it or not.

    I hope you now know it and recognize that the only thing that can protect you in a falling asset price market is you. You can act because the market will not remain static. You can say you won with your stocks, your bonds and your gold. Just do not make the mistake of believing (or hoping) that things will not change. They will. They already have.

    Tarrant County College District, Texas

    General Obligation

    AAA S&P Underlying

    Due 8/15 Dated 8/1/20 Maturity 8/15/40

    $264,175,000 Sold

    1            2021          5.00%           0.25%

     2            2022          5.00%           0.31%

     3            2023          5.00%           0.34%

     4            2024          5.00%           0.40%

     5            2025          5.00%           0.50%

     6            2026          5.00%           0.68%

     7            2027          5.00%           0.79%

     8            2028          5.00%           0.89%

     9            2029          5.00%           0.96%

     10          2030 5.00%           1.03%

     11          2031**      5.00%           1.10%

     12          2032**      4.00%           1.28%

     13          2033**      4.00%           1.39%

     14          2034**      2.00%           1.93%

     15          2035**      2.00%           1.98%

     16          2036**      2.00%           2.02%

     17          2037**      2.00%           2.06%

     18          2038**      2.00%           2.10%

     19          2039**      2.00%           2.128%

     20          2040**      2.125%         2.18%

    * Yield to Worst (Call or Maturity) ** Call 8/15/30

    Source: Bloomberg

    This is an example of a new issue priced the week of 7/7/20

    Prices, yield and availability subject to change


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