Sunday, January 31, 2021

Borrowers vs. Savers: Who Is Winning?

Easy answer. The house is winning. The house always wins.

This chart shows the average interest rate paid on credit cards at commercial banks minus the yield of the 3-month Treasury bill.

There has never been a worse time to buy Treasury bills using a credit card, unless of course, you are the government offering 0% Treasury bills or commercial banks offering 16% credit cards.

The jury is still out on whether or not there has ever been a worse time to buy GameStop stock using a credit card. That said, it might be worth pointing out that Reddit users and Robinhood investors are most certainly not the house.

Friday, January 29, 2021

VPU Performance v.001

As some of you may know, I decided to go all in on the Vanguard Utilities Index Fund (VPU) inside my IRA at the end of December 2020. This is a long-term investment. All dividends will be reinvested back into the fund. I intend to provide an update at the end of each month to show its performance since the purchase was made. This is the first update.

The red target is the 1.67% 30-year Treasury Bond yield at date of purchase. The yellow target is the 3.53% EE Savings Bond yield (if and only if held a full 20 years). The green target is a 6.0% growth rate that combines a 3.1% dividend, 2% inflation, 1% real yield growth, and 0.1% fund expenses.

Since I am using this fund as a bond replacement in a ZIRP world, my expectations are very low. Riding the yellow target would be satisfactory. Anything more is just a bonus. Anything below the red target would be unsatisfactory. Falling off the chart to the downside would clearly be an epic failure.

Months Elapsed: 1
Total Growth: 1.00%
Annualized Growth Rate: 12.67%

So far, so good. One month down, 199 to go. Apologies if this feels like watching paint dry. It is my hope that it will be similarly uneventful for the next 16+ years. One can always hope.

Wednesday, January 27, 2021

Trading Update

Bought all the tax-deferred savings bonds for the year that the government would allow. Didn't see any reason to wait.

1. 0.1% EE Savings Bonds.

Clearly not buying these for the 0.1% interest rate. If and only if they are held 20 years, then they are guaranteed to double though. That works out to 3.53% per year. That's much higher than the 1.6% yield on the 20-year Treasury bond.

2. 0.0% I Savings Bonds.

Clearly not buying these for the 0.0% interest rate. They do appreciate based on the consumer price index though. The 0.0% fixed rate is higher than the -0.29% fixed rate on the 30-year inflation protected Treasury bond (TIPS).

This has nothing to do with today's stock market action, or even the pandemic. I've been buying savings bonds off and on since 2000, and as long as they offer good relative safety and value then I will no doubt continue to do so.

For those curious about my long-term purchase of VPU (and/or enjoy watching paint dry or water boil), I intend to post a chart on (or shortly after) the last trading day of each month. That will allow you to laugh at my risk taking folly and/or watch it slowly grow with me well into the distant future. :)

Tuesday, January 26, 2021

The Sarcasm Report v.281

Some are arguing that there may be excess speculation in the markets, but I take comfort in the bitcoin to GameStop stock price ratio. It’s really starting to stabilize.

Sunday, January 24, 2021

The Clown Horn Report v.002


This chart is for the naysayers who thought we’d never hit 10% total annual credit market growth again. They clearly did not factor in Donald J. Trump’s business and pandemic acumen.

It wasn’t easy starting with $73.49 trillion in Q2 2019. We did make it to $81.08 trillion in Q2 2020 though, for a 10.3% gain.

$7.59 trillion in extra debt here, $7.59 trillion in extra debt there, and pretty soon we’re talking real money.

World War ZIRP

This chart shows money with zero maturity as a fraction of GDP.

1. Over the long-term, I fully expect to see this ratio continue to climb. We know that MZM will continue to climb. The only real question is how fast GDP climbs relative to it. Over the short-term (Q3 2020), GDP is currently winning, as some parts of our economy are rebounding from the pandemic. Over the long-term, I don’t think GDP has any hope of winning though. It’s competing with, in Ben Bernanke’s words, "a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost."

2. Will more dollars mean more consumer price inflation? Over the short-term, maybe. Pent-up demand may need to work through the system. Over the long-term, I doubt it. And when I say long-term, I only mean in my lifetime. And I’m getting old.

3. As seen in the chart, the rising interest rate problem of the 1970s wasn’t due to too many dollars relative to GDP. Quite the contrary. Those expecting a return to the 1970s need to understand this. I can sympathize with the theory, since I do have stagflationary in my name. However, banks only pay higher interest when they need to attract more deposits. Banks are not charities. Expecting banks to pay much higher interest rates when they are already flooded with money makes little sense to me.

4. Flooding banks with money isn’t just happening in the United States. It’s happening all over the world. As a saver, other than a modest investment in savings bonds each year, there’s nowhere relatively safe left to hide. Think of it as a monetary pandemic. The first outbreak was in Japan. None of us were immune. We’re all infected now. There is no cure. It is way too late for monetary vaccinations.

5. So, cash is trash. Right?  Not so fast. It is my belief that the monetary leaders of every country know that we are all spending above our means. No monetary leader wants the inevitable collapse to happen on their watch. There’s no way out for them either. So, what do they need in order to delay the eventual outcome? ZIRP and low inflation. In theory, ZIRP allows nearly infinite borrowing for everyone at essentially no cost, especially for loans that have interest only payments. Low inflation stops people from hoarding goods. Need both, just like Japan. That’s the only solution there seems to be. When in a hole, dig deeper. A deeper hole is a horrible solution for future generations, of course.

6. Will we see 40 year mortgages in my lifetime? Yes. We’ve seen the duration of auto loans increase. Why not loans on homes? Anything is possible in a world with century bonds. Pretend and extend!

7. I kind of joke. 40-year mortgages are already available. I’m still alive. Yes!

8. This is why I have embraced interest rate sensitive utilities, even as some believe that utilities are in a bubble. If I’m wrong on interest rates, then I’ll be wrong on utilities. It mostly comes down to where interest rates are headed over the next decade or so. I’m sleeping okay since the decision to buy utilities in December. At the very least, ignorance is bliss.

9. Anyone who knows with certainty where we are headed is a fool. We’ve never been in this situation before. Historical data isn’t much more useful than tea leaves. That’s especially true of historical data before we fell off the gold standard. What should the P/E of the stock market be in a world potentially trapped in ZIRP long-term? Perhaps we’ll find out in hindsight. After all, today’s data is tomorrow’s historical data. And so on.

Saturday, January 23, 2021

My Long-Term Inflation Expectations Remain Well-Anchored


This is a can of petite diced tomatoes. Target will currently sell it to us for 49 cents. It’s not on sale. That’s the normal price.

If we spend $35, they will ship it to us for free. If we buy 72 cans, that would cost us $35.28. Each 14.5oz can weighs almost exactly 1 pound (due to the extra weight of the empty can). That means the total shipment weighs a whopping 72 pounds (expect some dented cans).

At the beginning of the pandemic, we also paid 49 cents for these cans at Target. How is it that pandemic hoarding, intermittent shortages, and massive monetary stimulus have not caused the price to go up? How can Target continue to ship us goods this cheap even as online shipping demand has skyrocketed?

It’s not just petite diced tomatoes. I’m only using this as an example. It’s pretty much everything we’ve stocked up on from Target, Costco, Walmart, and Amazon since the beginning of the pandemic.

In related news, it’s not too late to read the 2008 Hyperinflation Special Report on Shadowstats. For what it is worth, I’m personally waiting until their $175 subscription price starts inflating. I need to see them put their money where their mouth is. Even a token one cent increase to $175.01 would attract my attention. Is it too much to ask? It’s been the same price for more than a decade. In my opinion, it’s very difficult to sell a hyperinflation story without at least one subscription price increase in 12+ years!

Our government is definitely taking a “shock and awe” approach to thwarting deflation. Will it be enough to counter the increased pace of automation due to a pandemic though? Robots don’t get sick, nor do they require living wages. Based on Japan’s “success” at thwarting deflation, my long-term bet is on the robots. Their present seems to be our future.

January 1, 2021
NHK World - Japan: Autonomous delivery robots hit Japanese streets

A robot knocks on your door to deliver a freshly brewed cup of coffee, which you ordered just minutes earlier with one tap on your smartphone. This vision of the future could soon turn into reality as Japanese companies have started testing autonomous delivery robots on public streets. This comes as the need for social distancing amid the coronavirus pandemic has pushed up demand for autonomous delivery services.

Monday, January 18, 2021

Trump Was Dune’d to Fail

And Kynes, returning the stare, found himself troubled by a fact he had observed here. This Duke was concerned more over the men than he was over the spice. He risked his own life and that of his son to save the men. He passed off the loss of a spice crawler with a gesture. The threat to men’s lives had him in a rage. A leader such as that would command fanatic loyalty. He would be difficult to defeat. Against his own will, and all previous judgments, Kynes admitted to himself, “I like this Duke.” - Frank Herbert, Dune

I think the similarities between President Donald J. Trump and Duke Leto Atreides are uncanny, other than the 400,000+ American pandemic deaths while Trump spent much of his time golfing, Trump continually throwing his loyal men under the bus to save himself, Trump’s inquiries into self-pardoning, “Sleepy Joe” easily defeating Trump, Trump’s lowest approval rating of his presidency (nearly of any American presidency), and that Trump’s not a fictional character (much to the dismay of most Americans), of course.

Other than that, uncanny!

Earning $1 in Interest


This chart shows how many dollars we need to invest in 30-year Treasury bonds to earn $1 in annual interest. I have added a linear trend channel in red. It’s just another way to look at the chart in my last post.

To infinity and beyond! (Not joking. See German bonds below.)

It continues to be more and more difficult to make money off of money. Those betting on this long-term trend reversing anytime soon will most likely be sorely disappointed.

It’s not a bug. It’s a feature. Nearly infinite borrowing at 0% interest is seen as the least-worst option. We’ve been gliding on this path for decades. Not seeing much that can change the trajectory in my lifetime. (Keep in mind that at age 56, I’m not likely to be alive in 30 years.)

The German government sold 869 million euros of 30-year bonds with a negative yield, for the first time ever, adding to the world’s growing $15 trillion in existing negative yielding debt. - Patti Domm, CNBC, August 21, 2019

Sunday, January 17, 2021

Long-Term Interest Rates: The Newer Normal?


This chart shows the natural log of the 30-year Treasury yield. On a log chart, constant exponential growth is seen as a straight line. In this case, the line is sloping down. That represents constant exponential decay. The half-life has been about 20 years, meaning it takes about 20 years for the 30-year Treasury’s interest rate to get cut in half.

From about 1987 on, there have been no failures to the top of the decaying channel. The Great Recession did cause a failure to the bottom of the decaying channel though. As seen in the chart, a “new normal” bottom appeared with the same slope as the original but offset to the downside. The Covid-19 recession caused an additional failure to the bottom of the decaying trend channel. Will this become a “newer normal” bottom? Will the top of the channel also fail to the downside this time? Would be nice to know.

I keep hearing some experts and pundits say the long-term trend of declining long-term interest rates is finally over. They seem to think long-term interest rates can only go up from here. Where’s the evidence? So far, the only failures to this trend have been to the downside. While I could easily see long-term rates reach the top of the trend channel again, I am not at all convinced that the overall long-term trend is anything but down.

When exponential growth trends fail to the downside, most agree that the trend is over. Up is no longer likely. Apparently, most do not agree when exponential decay trends fail to the downside though. For what it is worth, I still continue to believe that up is no longer likely over the long-term.

What could change my mind? Well, it’s simple. It needs to fail to the upside instead of the downside. That means the yield has to reach the top of the channel and then exceed it. We’re certainly a very long way from that!

This is probably one of the most important investment decisions one could make right now. Where are long-term interest rates ultimately headed? And when I say ultimately, I really mean within one’s lifetime. I don’t think anyone really expects the ultimate conclusion of all this debt to be favorable outside of one’s lifetime. What can’t go on forever, won’t. But there’s still the question of timing. Sigh.

Wednesday, January 13, 2021

Interest on Short-Term Money

The following is a chart of the weighted average interest rate earned on the interest bearing components included in the MZM (money of zero maturity).

This series was discontinued in the summer of 2019. Unless someone can convince me that our easy money housing market can tolerate higher interest rates, or that stimulus money flooding into banks means that banks will offer higher interest rates to attract even more money, I offer a potentially suitable alternative for this series going forward.

It's Japanese. It's a Zero. Easy to remember. No chart necessary.

Doom, Gloom, and Dogs

January 13, 2021
The Guardian: Top scientists warn of 'ghastly future of mass extinction' and climate disruption

Dealing with the enormity of the problem requires far-reaching changes to global capitalism, education and equality, the paper says. These include abolishing the idea of perpetual economic growth...

Reading all of this doom and gloom during a pandemic is a bit much, even for an Illusion of Prosperity blogger. I therefore attempt an escape from reality to the relative safety of my German Shepherd puppy memories.

Wow! That actually worked? I feel so much better now. In fact, I'm barely even thinking about how our very own loser of a president recently incited violence, death, and looting at our very own U.S. Capitol.

Dog therapy for the win! Let the healing begin!!

Saturday, January 9, 2021

The Sarcasm Report v.280

January 8, 2021
CBS News: Object that whizzed by Earth probably came from alien world, Harvard professor asserts

Loeb argues in his book that the object was probably debris from advanced alien technology – space junk from many light years away. It may have been a type of "light sail" propelled by sunlight, a technology that humans are currently developing for space exploration.

Yeah, out of the nearly infinite number of ways an object like that could have potentially been created, debris from advanced alien technology does seem to be the most probable reason for its existence. I mean, really. The object looks weird. What more evidence do we need? In fact, weird objects are almost always debris from alien technology, advanced or otherwise.

He said his ideas aren't popular in the scientific community right now – talking about potential extraterrestrial intelligence is "out of the mainstream, and it should not be."

Who would have predicted that his ideas aren't popular in the scientific community right now? That's the truly shocking part! ;)

(Possible? Yes. Probable? Bat**** crazy.)

Thursday, January 7, 2021

Worst President in American History

Lost the House.
Lost the Senate.
Lost the Presidency.
Lost his sanity.

(Not necessarily in that order.)

Sunday, January 3, 2021

My Asset Allocation


My IRA may have recently filled with the Vanguard Utilities ETF (VPU), but it is not the majority of my nest egg. Want to make that clear. I also want to repeat that I am definitely not offering investment advice on this blog. I’m just showing what I am doing. As you can see, not much of a risk taker in retirement. Things might look different if I had a job to fall back on.

These are ballpark numbers. I’m valuing the long-term TIPS based on their inflationary gains from when I bought them many years ago, and not on their current market value (which is considerably higher). One small bond matures this month (1.17% real yield), a large bond matures in 8 years (1.75% real yield), and the rest mature in about 20 years (2.13% real yield).

The savings bonds are mostly I-Bonds also earning an average weighted real yield of about 2%. There are some EE-Bonds as well, which are guaranteed to double if held 20 years. The earliest purchases in 2010 are halfway there.

The savings account is earning 0.3%, thanks to the pandemic and the relentless long-term decline in interest rates.

I’m basing the value of my home on current Zillow estimates. Subject to change during the next earthquake. I do live in the Seattle area. This downside risk to my nest egg is not trivial.

Yardeni Research

Today, I wished to see an historical chart of the S&P 500’s earning yields vs. the 10-year treasury yields. I found that chart at Yardeni Reasearch. Dr. Edward Yardeni has a blog (Dr. Ed’s Blog) and I have added it to my blog list.

It’s like reading the optimist version of John Hussman. Both are clearly very intelligent individuals, but only one has offered consistently better investment advice.

Hussman’s Strategic Growth Fund has an average annual total return of just 0.5% since its inception on July 24, 2000 to October 31, 2020. Investors would have been much better off just passively buying I-Bonds purchased that year. Not only would they have locked in 3.4% in interest each year (like I did), but the bonds would have also received inflationary gains (and interest on those inflationary gains). And further, that will continue for another 10 years until they mature in 2030.

It is not my intent to bash Hussman. I do read what he writes and he does offer much to think about, even if I don’t always agree with his conclusions.

I do intend to read all of Dr. Ed’s older posts in the coming weeks. I think there’s a lot of good information to be found there. Here’s a teaser to help get you interested. Dr. Yardeni continues to believe, as I do, that interest rates will remain low for a very long time. Welcome to Japan. There’s so much more to read though, and it’s all very thought provoking.

This brings “the glass is more than half full” blogs in my blog list to 2. Calculated Risk is no longer alone.

Of course, I’m still very concerned about our country’s long-term future. That’s not going to change. However, Rome did not fall in a day. I can’t preserve my standard of living betting on things that may happen long after I’m dead. I have to plan for what is most likely while I’m still alive. Can’t say for sure if my plan to load up on utility stocks in my retirement account is a good one. Hopefully, hindsight will be kind to me. I can say that I’m sleeping better since I did it though, which is a pleasant surprise.

Saturday, January 2, 2021

Charting VPU


This chart shows the adjusted close (adjusted for dividends and stock splits) of VPU since the depths of the Great Recession. It is plotted on a log scale so that constant exponential growth will appear as a straight line. I have added a trend channel in red for your consideration.

I offer no predictions on where this fund goes from here. I’m simply offering a glimpse of history. As they say, past performance is not necessarily indicative of future results. I think that would be especially true in this case.

My expectations remain low. I do not expect VPU to permanently stay in the channel. However, it is my hope that this fund will outperform the 1.64% 30-year treasury bond if held the full 30 years, and I intend to personally test the theory to its ultimate conclusion.

The ability to easily and safely make money off of money continues to become both more difficult and less safe. Unfortunately, this is a trend that I do not see improving within my lifetime.

The source data for this chart can be found at Yahoo Finance.

Friday, January 1, 2021

Thoughts on VPU

 From MarketEdge:

“Until VPU can find a price level that supports the stock, further price depreciation is probable. Momentum is negative. Wait for accumulation indicators to turn positive as a sign that demand for the stock is improving.The stock has underperformed the market when compared to the S&P 500 over the last 50 trading days.”

They rate VPU as avoid, for the same reasons I rate it as attractive. I’m not a momentum trader. I seek value. Heaven help us all if utility stocks outperform the market over the long-term.

I do expect VPU to outperform the 30-year treasury over the next 30 years though. VPU’s dividend yield is about 3%. The 30-year treasury now yields just 1.64%. My expectations are set very low. Not feeling any exuberance.

I had similar expectations for the one long-term TIPS bond filling my retirement account. For years, it poked along exactly meeting my low expectations of 2% per year plus inflation. Was happy holding to maturity. This year, money flooded into bonds though. The market made me an offer I couldn’t refuse. In theory, the same thing could happen to utilities. All it would take is more safety seeking low expectation “savers” to someday make the same decision I have recently made. And if they never do, that’s fine too. As one who is reinvesting the dividends, I’m not going to complain much about cheaper share prices to keep buying.

Setting expectations below what is likely means life is often filled with pleasant surprises. It is ultimately more rewarding to me to invest in something mundane that turns exciting than something exciting that turns mundane.

Note that I chose to buy mundane utility stocks over shares in a very exciting $669 billion car company. Perhaps too exciting. That’s roughly equivalent to a $2000 stimulus check for every man, woman, and child in the United States. How many more times do Tesla investors realistically think it can double from here? Dare I ask?