E Investors Need To Remember All That Free Money Comes At A Cost

Country singer Chris Ledoux put it adroitly, “Some men look forever and still they never find, They don’t know that freedom is a state of mind”. Well, I’ve never been more wrong than in my tome when I posited, “where are interest rates going, zero?” Of course that was slathered in sarcasm.  I should have left off the sarcasm and I would have been crowned a genius as rates went exactly to where I believed was impossible. Then as a second slap to my mockery of interest rate policy, rates dipped below zero and went negative. Luckily, we adapted to the new normal and maintained our aggressive posture to both equity and fixed income markets.

We appear to be living in a somewhat surreal monetary policy era where anything goes. Being fiscal policy has been neutered by our inept politics, we’re left with the only tool to fend off any global economic weakness, free money.  Free and Freedom both can offer great riches; as well both can carry great responsibility.  

Investors are chasing dividends. Since treasuries as measured by the 10 year note yield a paltry 1.60%, the rush to a quasi-bond surrogate, equities, is stretching valuations. This behavior is dangerous and creates bubble-like traps. I.e., 1. Buy stock yielding 2 ½%.  2. The Federal Reserve hikes rates.  3. Stock price tanks 10% = -7 ½% total return.  

There is a well known scenario when investing in beaten down stocks referred to as a value trap. I coin the chase for yield as a “yield trap” trade. Investors are drawn to the relative high yield of equities, the price of their stocks takes a hit, leaving investors trapped.  Equities, unlike bonds or CDs, do not have a maturity date.  So holding them to a maturity that doesn’t exist to recoup one’s principal becomes a case of hope and desperation rather than based on good fundamental investing. TRAPPED.

Where we’re at:

Gross Domestic Product (GDP).  Second quarter GDP was revised down -.1 to +1.1%. The drivers to growth were personal consumption and exports. The detractors came from the drawdown in inventories along with a slowdown in state and local government spending.  Second quarter GDP will be revised one more time but we don’t anticipate any large revisions. Current quarter GDP is tracking in the +3%-+4% range.  Very positive.

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Disclosure: We own each and every position mentioned above.  Before making any investments decisions of your own we recommend you do your own due ...

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