“The real problem is that a decade of experimental distortion encouraged unprecedented speculation in every conventional asset class, not to mention fringe speculation in assets detached from any standard of value, including meme stocks, pictures of bored monkeys, and digital Pokémon posing as ‘currency.’ As with every similar episode across history, the unwinding of this bubble in the form of financial crisis is already quietly baked in the cake.”
– Dr. John Hussman, “Central Bankers Wandering in the Woods” September 2023
Today we update Treasury bond and U.S. stock market forward return estimates.
Treasury bond return estimates are very easy. It’s simply the current yield offered by the bonds… assuming the U.S. government doesn’t default of course. Here are the current annualized yields for various maturities: Continue reading “Meme Stocks, Bored Monkey Pictures, Digital Pokémon”
A key to successful long-term investing is to ensure you’re getting compensated for the risk you’re taking on. Otherwise, the inherent risk will occasionally materialize and eat up your returns.
Investors must understand the long-term cash flows of a potential investment and compare those cash flows to the price of the asset to develop a long-term return model. This applies to stocks, real estate or any other asset class. I’ve done that analysis with stocks before, but today we’re talking about real estate.
Then the investor must determine if the projected return adequately compensates for the inherent risks as well as, in the case of real estate, the time and effort required.
With short-term treasury yields now between 4.4% to 5.4%, the hurdle rate for a real estate project is much higher than it’s been over the last fifteen years. After all, we can throw $1,000,000 into short-term government bonds and get over $50,000 per year in safe, effortless income. Continue reading “Current and Potential Real Estate Investors Need to Read This”
On Wednesday, I wrote about the positive and negative of rising interest rates for bond investors. I also promised a follow-up to share my opinion on where interest rates go from here so let’s dive into that.
Note: In both today’s and the recent commentary, I’m addressing treasury bonds, specifically, not to be confused with corporate bonds, which I hold relatively very little of across client portfolios as I’m purposely avoiding credit and default risk at this point in the market cycle.
In short, I believe by the time this market cycle is complete over the next couple years, interest rates on 0-10 year treasury bonds could fall back towards zero again. This would imply a great investment opportunity in an asset class that is widely hated at the moment! But that’s how it normally works doesn’t it?
Obviously, if inflation is sustained for a prolonged period then rates will continue higher, but I don’t think that’s the likely outcome. Therefore, this is really a forecast about inflation / deflation over the next couple years. Continue reading “Follow Up: Where Will Interest Rates (Inflation) Go?”
Bond prices go down when interest rates rise and vice versa. How is that? Well, think of it this way.
Imagine you bought a 10-year Treasury bond with $1,000,000 at the end of last year when the interest rate was 1.5%. That implies $15,000 of annual interest payments over the next ten years until maturity at which point you also get your $1,000,000 principal back.
However, the interest rate for 10-year treasuries has since risen to ~3.5%. So, who’s going to want the 1.5% bond when they can go buy essentially the same 10-year bond and get 3.5%? Nobody. Therefore, the price of the 1.5% bond must fall to attract buyers so that the yield-to-maturity is aligned with prevailing interest rates. Continue reading “The Bad News is Interest Rates Increased. The Good News is Interest Rates Increased.”
The most common discussion with clients recently has been about interest rates (and bonds) as interest rates have been rising swiftly as of late.
It’s a popular topic because interest rates impact our lives in various ways; rising interest rates causes bond prices to fall, rising interest rates means things purchased with borrowed money cost more (houses / mortgages, autos / auto loans, credit cards, etc…), future cash flows from investments / projects become less valuable, etc… 30-year mortgage rates have doubled to over 5% from 2.5%
On the other hand, rising rates also motivate us to save more as savings vehicles yield more and motivate us to take on less debt / pay down debt faster. When’s the last time we’ve earned any notable interest in our checking and savings accounts? Many young people probably don’t even realize that banks used to pay interest on those checking and savings balances. Continue reading “On Interest Rates: The Federal Reserve is in a Difficult Position”