Interest Rates, Inflation, and Shipping Containers

If the news says interest rates are rising, that's a forward looking opinion. It is not a fact. It is a prediction. In sharp contrast, if the news says interest rates have been rising, that’s a verifiable backward looking fact.

As examples, when the temperature recently hit 110 at my home, I would never have said that the temperature is high and rising. 110 was the peak. When a submarine reaches the surface of the ocean, no sane person ever says that the submarine is high and rising. The submarine is obviously done rising.

So why does the news do it with interest rates? It’s subtle. It’s biased. And I wonder if anyone else notices that an opinion often sneaks in there where a fact should go.

If it was so easy predicting where interest rates were truly headed then we could all become heavily leveraged bond day traders and never lose money. And yet, plenty of bond traders do lose money. I suspect most money is lost betting on what the news implies is obvious, while the professionals and algorithms take the other side of those trades.

One would think that since interest rates had been falling for 40 years, the burden of proof would be on those predicting the long-term reversal to rising interest rates. And yet, for at least the past 20 years, the burden of proof has always been on the “Japanificationists” as they continue to simply predict more of the same.

And on that note, I offer my opinions and predictions of more of the same.

1. Although inflation is running temporarily hot, we are not returning to 1970s style interest rates anytime soon, if ever, at least in my lifetime. Bet on long-term interest rates north of 3% over the long-term at your peril.

2. The recent growth of inbound loaded containers into Los Angeles and Long Beach (as seen here) is ridiculously unsustainable over the long-term. The recent growth of shipping costs into Los Angeles and Long Beach is therefore also ridiculously unsustainable over the long-term. Any price inflation seen inside those fully loaded containers due to extreme growth in the number of containers and their associated shipping costs is therefore also ridiculously unsustainable.

3. I don't want to sell anything, buy anything, or process anything inside those shipping containers when a sustainable reality hits. I don't want to sell anything bought or processed, or buy anything sold or processed, or process anything sold, bought, or processed, or repair anything sold, bought, or processed. Yes, I'm having a Say Anything moment. Pent-up demand can easily lead to pent-up demand destruction. I want no part of the latter. We did overshoot to the downside as the pandemic hit. We are overshooting to the upside now. We can easily overshoot to the downside again (like a pendulum with little dampening), especially if the Fed feels the need to fight transitory inflation.



This is obviously not fantastic investment advice. If it was so easy giving fantastic investment advice then we could all become heavily leveraged traders and never lose money. Right? Seriously.

Sorry to bring up heavily leveraged traders twice in the same post. I guess I just have historic margin debt as a percentage of GDP on my mind. Shouldn't be a problem in a temporarily overheating economy filled with sure things like SPACs, NFTs, cryptocurrencies, and Tesla though. What's the worst that could happen?

The Cascading Exponential Trend Failures of Real GDP Growth

The headlines are dominated by talk of robust GDP growth during the recovery. Thought it might be a good time to offset that with a few charts of real GDP reality.

Here is a short-term chart of the natural log of real GDP. When using logarithms, constant exponential growth is seen as a straight line.

Note that, thanks to the virus, we failed to stay in the green channel. We're currently throwing everything at real GDP, including the kitchen sink, just in an attempt to get back to where we were. Also note that real GDP growth was weakening before the virus even hit. The Fed raised rates in 2017 and 2018. In 2019, the Fed was forced to backtrack on that plan. In hindsight, a rate of 2.4% was too draconian. The Fed ended the year at only 1.6%. And then, the virus hit.

So, in the short-term, we're definitely attempting to claw our way back to that green trend channel. But what about long-term?

The red channel is where we once were. That ship has sailed. No hope of ever getting back to it, especially now that we have a Covid baby bust. That exponential trend failed spectacularly, leaving us with a new green channel. The green channel then failed too. Cascading exponential trend failures. That's where we are now.

Here's the good news. We're all in this perma-ZIRP handbasket together and some of us strongly suspect where we are headed. Brush up on your Japanese and enjoy the ride! We might not like the ultimate destination all that much, but the path to get there is filled with easy money. And when I say easy money, I'm not expecting retired savers patiently waiting for interest rates to "normalize" to someday make out like bandits. This isn't a Hollywood movie. If anything, it's more like Gilligan's Island. Being stuck at zero is normal. Interest rates have been exponentially decaying for 40 years. It's just more of the same.

Thoughts on Food, Services, Health, and the Economy

The following chart compares the annual percentage change in personal consumption expenditures of food and services.

Looking forward to a return to normal.

There are three reasons we spent more money on food since the pandemic started. First, we have more food stockpiled. Second, our food has been delivered. Third, we have not been as price conscious. Taking advantage of sales hasn't been nearly as important to us over the past year. All of these things will soon reverse once we are vaccinated.

There is a disturbing fourth reason that food expenditures are up for others.

March 11, 2021
One year later, a new wave of pandemic health concerns

Weight change is a common symptom when people are having difficulty coping with mental health challenges. A majority of adults (61%) reported experiencing undesired weight changes, since the start of the pandemic, with more than 2 in 5 (42%) saying they gained more weight than they intended. Of this group, adults reported gaining an average of 29 pounds (with a median gain of 15 pounds), and 1 in 10 (10%) said they gained more than 50 pounds. For the 18% of Americans who said they lost more weight than they wanted to, the average amount of weight lost was 26 pounds (median of 12 pounds).

50 pounds is a lot to gain in one year, and a surprisingly large number of people managed to do it. Ouch.

For what it is worth, I intentionally lost about 10 pounds. It wasn't from eating less. I chose to walk more. I've averaged 6.7 miles per day during the pandemic. Trying to make a permanent habit out of both walking and cycling. Bought a bicycle late last year and will soon be riding it again. I'm optimistic that even more weight will be lost this summer.

I'm more optimistic in general. I do think inflation will be transitory. I do think interest rates will remain low. If true, I'm not even that concerned about debt. I don't currently see a stock market bubble or a housing bubble (although I do see pockets of great excess). Like Japan, it won't be a great era for savers, but that's okay. There are worse things than ZIRP. Not expecting the roaring twenties, but perhaps the meowing twenties? Could that be a thing?

I'm basing my optimism on a reversion to the mean, or lack thereof. We are continually told that when interest rates normalize, blah, blah, blah. I am arguing that rates have been normalized. They've been decaying exponentially for 40 years. That's what has been normal. Unless someone can give me a good reason why rates will soon stop decaying then I'm going to continue to believe that they will continue to decay. More money deposited in banks certainly won't lead to higher interest rates. Any counterargument based purely on excess money makes no sense to me at all. And man, has there ever been more excess money than right now?

This is not investment advice. My optimism is tempered. A friendly reminder that this is still an Illusion of Prosperity blog. The meowing twenties could easily become the hissing thirties. Sustainable and stable is not the long-term path we find ourselves on. Each economic crisis has been worse than the last.

Revisiting a 2014 Fed Funds Rate Prediction for 2020

September 25, 2014
Illusion of Prosperity: Fed Funds Rate Prediction for 2020 (Musical Tribute)

I'd be tempted to predict a rate between 1.0% and 3.3% based on the "Cone of Decaying Monetary Policy" channel (and using the inverses of the natural logs to predict the rate in the future). However, that would assume we can even get back into that channel and stay there for any appreciable length of time. Can you say exponential trend channel failure?

I therefore predict that the Fed Funds Rate at some point in 2020 will be a mere 0.25%. Think ZIRP + Japan. It just feels right (and oh so wrong). Can it go higher between now and then? Maybe, maybe not. The higher it goes the more likely a monster will be unleashed though. I have few doubts about that.

Dare I double down with the exact same rate prediction for 2030? I do dare! 0.25% at most.

When milk sours over time, more time just means more sour. At no point does the milk start becoming fresh again. Interest rates have been exponentially decaying for 40 years. Old money won’t soon be turning fresh again.

I might sound like a broken record, but this economy can’t afford to reward savers with vast riches any longer. If you are a saver, don’t panic though. This economy also can’t afford stagflation or hyperinflation. The only temporary safe harbor is to keep following Japan’s lead. Won’t work forever, but it may delay the inevitable for far longer than most think possible, in theory.

My opinion and a dollar could pay off the total credit market debt outstanding, if repeated 83,523,750,000,000 times. Unfortunately, I'll run out of dollars long before I run out of opinions!

Consumer Prices Have Grown Linearly Since 1982

It is very interesting, at least to me, that prices have consistently been growing linearly (and not exponentially). On average, the consumer price index has been growing by about 4.4 points per year. Was true when the index was only 100. Was still true when the index exceeded 250.

Should the trend continue, the average growth rate of 1.72% per year over the last decade will fall to 1.56% over the next decade.

Of course, the trend won't necessarily continue. And if it doesn't continue, which way will it fail?

I'm leaning heavily towards eventually failing to the downside like Japan. Even if I am ultimately right (certainly not a given), eventually is a very hard thing to time. *shrug*

Source Data:
St. Louis Fed: CPI

When Will Savers Be Rewarded?

The following chart shows deposits at commercial banks divided by GDP.

Savers will be rewarded when the cows come home.

After vacationing in Japan for a few decades, the cows recently launched into space and were last seen roaming the Alpha Centauri system.

The Future of Retail Employment

The following chart shows monthly nonstore retail sales per nonstore retail employee.

In December 2020, there was $132k in nonstore retail sales per nonstore retail employee. That's a whopping $1.6 million per year pace and it’s a pace that continues to grow much faster than inflation.

There really isn't much of a future for retail employment, unless one happens to be a robot.

July 15, 2020
Reuters: Japanese robot to clock in at a convenience store in test of retail automation

TOKYO (Reuters) - In August, a robot vaguely resembling a kangaroo will begin stacking sandwiches, drinks and ready meals on shelves at a Japanese convenience store in a test its maker, Telexistence, hopes will help trigger a wave of retail automation.

The Ongoing Baby Bust

January 26, 2021
Brink: The Coming Baby Bust Caused by COVID-19

We’re already down 500,000 to 600,000 births per year from the recent peak in 2007, so now you’re starting to talk about approaching a million fewer babies born per year.

The following chart shows the fertility rate since 2007.

According to the United Nations Population Division, our fertility rate needs to be 2.1 just to maintain our population. Our recent 2007 peak was barely adequate, and it's been downhill ever since.

Over the long-term, those expecting a booming economy and higher real yields on investments will most likely be sorely disappointed. Welcome to Japan. Prepare for endless ZIRP. Brace for continued fertility rate disappointments as more and more come to realize the dire situation we find ourselves in.

For those who thought Trump would make America great again, you might want to look closely at the fertility rate since he was elected in 2016. Chaos and incompetence at the top only led to more uncertainty and divisiveness at the bottom. Chaos, incompetence, uncertainty, and divisiveness are not exactly great underlying conditions for fruitfulness and multiplication, if you catch my meaning.

Addicted to Rising Debt and Falling Interest Rates

 

This chart shows the 10-year Treasury bond yield compared to the inverse of our economy’s total debt securities and loans. It is not a coincidence that they are clearly highly correlated. They are our two linked financial addictions. Our debt is growing exponentially as our interest rates decay exponentially. Can’t really have one without the other.

In theory, our debt can approach infinity if and only if interest rates approach zero. This keeps our “what do you want your payments to be” economy in balance for business, home, and auto loans.

In practice, Japan’s debt is approaching infinity as their interest rates remain zero. We’re following their lead.

For two decades, we’ve been listening to the experts talk of normalizing interest rates. My reaction remains the same. Interest rates are normalized. They’ve been normalized for 40 years. As our debt goes up, interest rates must come down. If interest rates don’t eventually come down, the economy collapses.

We all know this. The whole world knows this. Just imagine what a 6%+ yield on the 10-year Treasury bond would currently do to the housing market. Housing would implode. We saw a yield this high in 2000. 2000 is over though. It’s 2021 and our debt is so much higher now. Can’t live in the past.

For those worried about inflation, we’re so addicted to debt that 4% Treasury yields should be more than enough for a major deflationary event, especially with the stock market’s current level of exuberance and so many people parsing every word out of Powell’s mouth for any signs of tightening.

The party can continue as long as debt rises to stimulate this economy and interest rates fall to stimulate this economy. Don’t think of our economy as a patient in the intensive care unit. Think of it instead as an addict with stimulants in both hands. Over the long-term, this can’t end well. It has has worked for 40 years so far though, so good luck betting on the timing. In the meantime, stimulated life goes on.

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.

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.

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

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.

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.

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.

Who to Really Thank for Today's Stock Market Rally

I would never ask for myself, but I do think my fellow bearish bond anti-vigilantes deserve a round of applause. In the past week, the 30-year treasury yield has fallen from 2.50% to 2.27%. The yield held its ground today, in spite of the rising interest rate environment we find ourselves in, and in spite of the stock market rocketing higher. That's an amazing amount of spite and support for our fragile financial system. We're there for you. We've got your backs.

Not only will we continue to support future stock market valuations, but we also pledge to continue ruthlessly attacking the evil New York bank net interest margins on your behalf (as seen in the chart below), just as we ruthlessly attack the future returns of this country's many underfunded pension funds. It's all for you. Enjoy this era of permanent modern prosperity! Please don't let it go to waste!


Click to enlarge.

February 17, 2016
The Telegraph: Negative interest rates a 'dangerous experiment' for the world as monetary policy hits buffers

Commercial banks are at particular risk from negative rates, which have been described as a tax on the banking system.

Sub-zero rates reduce the profit made on interest, while increasing the cost of capital for borrowers. Japan's banking sector has seen its net interest margin (NIM) fall to 25-year lows as a result of the Bank of Japan's unprecedented monetary stimulus, according to data from Morgan Stanley.

Sometimes, in order to save a thing too big to fail, one must first nearly destroy a thing too big to fail.

Source Data:
St. Louis Fed: Net Interest Margin for Banks in New York

This Investment Is Guaranteed to Test a Long-Term Saver's Patience

The 20-year treasury constant maturity rate hit 1.83% today. That's the lowest rate I have ever seen, and I'm 51 years old.

You'd think I'd be crazy for telling a long-term saver that it is a relative bargain. You'd be right. Not only would I be crazy, but I'd be Game of Thrones Ned Stark raving mad. I'd have lost my head!

The relative bargain for patient long-term savers is the EE savings bond. If you buy it today, it is guaranteed to double in 20 years. That works out to 3.53% per year. That's a full 1.7% more than a 20-year treasury also purchased from the US government.

In order to get the 3.53%, you must hold the full 20 years. That's going to require serious patience. The patience doesn't end there though. For new investors, that yield is guaranteed through October. There's no hurry. Bonus points will not be awarded for locking it in early. You can therefore patiently wait until October to make the decision to buy. I strongly suggest waiting.

I know what you must be thinking. A lot can happen in 20 years. Rates may rise, especially if inflation gets out of control. Could ruin you. Could ruin me. That's absolutely true. What's also true is that rates could continue to fall though, just like they've been doing for nearly four decades. Very few financial "experts" ever warn about that outcome though. Why is that? You'd think Japan and ZIRP would give at least some of them reason for pause and/or self-doubt.

There are no sure thing investments. I can say the following five things with absolute certainty though.

1. You will be earning the exact same 3.53% rate that I'm earning on the EE savings bonds that I first started buying in 2010 (just 14 years to go on those). I intend to buy this year again, in October. Until then, I patiently wait.

2. I cannot profit off your decision by so much as a penny, no matter what you do. Buy them or not, makes no difference to me. There is no market price for savings bonds. I am not rewarded if people flood into them. I get what I get. Further, I cannot profit off of your transaction. Nobody can. You buy directly from the government. There are no middlemen looking to take a cut. I find that refreshing in this era of greed.

3. My only motivation is to inform. Some may not be aware of this alternative. The banks certainly aren't going to tell you if you are looking to buy a long-term CD. They certainly never told me when I first started buying I-Bonds in 2000!

4. All bets are off on November 1st. Although those buying EE savings bonds before then are guaranteed the rate if held 20 years, there's no telling what the terms will be for those investing later. If rates do keep falling, the risk of the terms changing unfavorably continue to rise. I'm amazed that the terms haven't already changed.

5. If EE savings bonds end up being a truly horrible investment over the next 20 years, which they very well could be, know you will not be alone. I will be right there with you, licking my wounds too. The one "saving" grace will be that at least we didn't buy the 20-year treasury and hold to maturity, or buy stocks counting on permanently low rates to support their high leverage. Could potentially be worse, lol. Sigh.

This is not investment advice.

Sitting in a sizable inflation protected treasury bond ladder, a rather substantial inflation protected I-Bond ladder, a very modest amount of potentially riskier and potentially more rewarding EE savings bonds, and cash (for short-term needs, emergency funding, and for potential future investment opportunities), all for the long-term. Not a single regret about any of it. I retired in 1999. After fully recovering from the dotcom bubble, this baby boomer lost the desire to swing for the fences in 2004, near the peak of the housing bubble. Not ever swinging again. Don't need to. Been there, done that. Done.

If you absolutely need to swing for the fences, then go for it I guess. Just make sure you aren't confusing want and need. You need to swing if your personal loan shark will kill you if you can't give him back the 50 grand you previously blew on sure thing day trading investments. You want to swing if your 2015 convertible has tragically lost that new car smell that once made it such a pleasure to drive at the same time your butler is looking for a raise. Just sayin'. ;)

Three Point Five Percent

June 12, 2016
Japan’s Second-Biggest Bond Fund Doesn’t See Value in Yen Debt

The yield on the 10-year Japanese government bond plunged to a record low of minus 0.165 percent Monday, while that on the 20-year security slumped to an unprecedented 0.17 percent.

The TOTAL interest earned on a 20-year Japanese Treasury held 20 years is 3.5%.

1.0017^20-1 = 3.455%

A US EE Savings Bond issued today is guaranteed to double in price if (and only if) held 20 years.

The ANNUAL interest earned on an EE Savings Bond held 20 years is 3.5%.

2^(1/20)-1 = 3.526%

For long-term savers willing and able to hold 20 years, you could certainly do worse than an EE Savings Bond. That's especially true considering that the US 10-year Treasury currently yields just 1.61% and the US 30-year Treasury currently yields just 2.43%. No joke.

EE Savings Bonds: Rates & Terms

Treasury guarantees that an EE Bond will be worth at least its face value after the first 20 years. If an EE Bond does not double in value (reach its face value) as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20 year anniversary of the bond's issue date to make up the difference.

This is not investment advice. You know this isn't investment advice because it is seldom, if ever, mentioned on CNBC. Wall Street's middlemen can't make any money off of investors buying Savings Bonds directly from the government. Go figure.

The Radioactive Treasury Bond

Data that is growing exponentially at a constant rate will appear as a straight line when plotted on a log chart. If the line is sloping upwards, then that's positive exponential growth. If the line is sloping downwards, then that's exponential decay. That's really all you need to know to understand the following chart showing the natural log of the 30-year Treasury bond yield.


Click to enlarge.

Oh, look. The 30-year Treasury bond yield continues to exponentially decay just like plutonium in a nuclear warhead. In fact, we're currently even a bit below trend. That's bonus decay for those keeping track at home! Isn't it wonderful?

Here's even more good news though. Should the trend continue, even in this "rising" interest rate environment, there will always be a little bit of radioactive yield left for savers to feast on. Take Japan, for example. Their 30-year Treasury still yields 0.261%. Fantastic news for long-term savers!

So optimistic about the future I am. Bring on the radiation! Our strong and resilient economy, and its many underfunded pension plans, can take it. The Fed has permanently put a stop to all future recessions. And the best part? No unintended consequences. Woohoo!

When it comes to reliable long-term investments in this modern and innovative financial world, can there really ever be too much sarcasm? I think not!

Source Data:
St. Louis Fed: Custom Chart

The 8% Return Assumption Will Not Die

June 7, 2016
Bloomberg: A Simple Recipe for the 50-Year Investor

A portfolio allocated 50 percent to the S&P 500 and 50 percent to five-year U.S. treasury notes has returned 8 percent annually since 1926 (including dividends).

The 5-year Treasury currently yields 1.22%. Should that continue, stocks would have to earn 14.78% per year to make up the difference. At these lofty valuations, good luck on that.

(I concede that neither U.S. stocks nor bonds are priced to provide that kind of return today, but I think the long term average is a useful gauge for what’s likely to happen over multi-decade periods.)

Classic denial. More interested in the rear-view mirror than the view out the front window. Concedes that stocks and bonds aren't priced for 8% returns, yet has faith that we can still count on 8% returns over the long run. That historical mirror is just so enticing.

The 30-year Treasury currently yields 2.53%. If you buy today, you know exactly what you will be getting over the next 30 years. There is no room for debate. The bond market doesn't care about what once was. It cares about what is and what will be. In order to hit the 8% target with an equal mix of stocks and bonds, stocks would need to return 13.47%. Once again, good luck on that.

Further, bond yields have been falling for nearly 40 years. To ignore that fact and instead use data going all the way back to 1926 can best be described as wishful thinking. Ask the Japanese about bond yields after their massive housing bust. They'll tell you. It isn't pretty.

As more and more money is deposited in banks, that money has an increasingly difficult time generating real returns. This isn't rocket science.

October 8, 2015
WSJ: Big Banks to America’s Firms: We Don’t Want Your Cash

The developments underscore a deepening conflict over cash. Many businesses have large sums on hand and opportunities to profitably invest it appear scarce. But banks don’t want certain kinds of cash either, judging it costly to keep, and some are imposing fees after jawboning customers to move it.

8% returns over the long-term? I am incredibly skeptical. Inflation could someday do it I suppose, but we won't like the results. Few investors look back at the 1970s and think it was an investor paradise.

Want scary?

April 6, 2000
Risk and Risk Control in an Era of Confidence (or is it Greed?)

All of these statistics leave me apprehensive. Why? Because the future is not only unknown but unknowable. Yet with the acceptance of Modern Portfolio Theory; the ease of massaging data with the computer; and our existence (at least in the U.S.) in today's era the of remarkable political stability combined with powerful economic growth, investors seem to have developed growing confidence that they can forecast future returns in the stock market. If you fall into that category, I send you this categorical warning: The stocky market is not an actuarial table.

To which I add: When everyone assumes, at least implicitly, that the market is an actuarial table, that the past is inevitably prologue, and that common stocks, held over an extended period, will always produce higher returns than bonds and at lower risk then stocks inevitably will be priced to reflect that certainty. At that point, however, the certainty becomes that stocks will produce lower future returns, and at higher risk at that. It is impossible to escape the suspicion that such an actuarial mindset, if you will, is extraordinarily prevalent today among investment advisers, consultants, and economists and, for that matter, the individual and institutional investors themselves. Forewarned is forearmed.

SPY, adjusted for splits and dividends, has returned an average of 4.1% per year since April 6, 2000. There is no telling what it will return over the next 16 years. Seriously.

I do have a fairly good grasp what the I-Bonds I purchased in April of 2000 will do though. 3.4% over inflation, every year, like clockwork. They mature in 2030, 14 years from now. No rear-view mirror needed. Barring an apocalypse default scenario, they pay what they pay. Every month they hit a new record high, not that you will ever read a headline saying that. Unlike the stock market, they can never fall in value. Go figure.