With a road trip happening as you read this…. was a bit short on time for our mid-week post…. links in this post explain a lot….
Wanted to draw your attention to the move in US Treasury yields/bonds (and show off our new Koyfin technology too) …. this is the 2 and 10 year (still inverted- more to come on this- digressing) ….more importantly, the sudden drop, commenced by an FOMC meeting and then reinforced by weaker Employment data has bond interest rates down, bond prices up…..
This move down in yields has initially pushed Stocks up, and bond portfolios UP… we are cautious to call a victory lap on this bond and interest rate movement, but again worth noting…..
More importantly, bonds go up and rates down, under this circumstance because the smart guys in the room… are pricing in a slowing of the economy…. NOT usually good for Stocks…. after the candy wears off!
Have a Great “Quick Deeper Dive/Second Level Thinking on Rates” Day!
We definitely wanted to talk about this, but it is rather complicated, so it makes our Advanced Analysis Series….Part 5
Inverted Yield Curve is a Big Deal
When short term rates are higher than long term rates, a very unusual and non sustaining event, it is called an inverted yield curve.
Here is a list of over 30 – YEP over THIRTY different articles we have written in just the last 5 years if you need a refresher…
The Un-Inversion (the actual process) or at least Narrowing of Inverted Yield Curve a BIG Deal too
Orange line below the white/zero level = Inverted
Maybe Un-invert, or for sure narrowing?
Note orange line headed towards zero or break even…..Narrowing for Sure –
In true it is different this time…. the UN-inversion is occurring because of what is called a Bear Steepener … something we have not seen in a LONG time…
Note going back all the way to the 1980’s, the most prevalent type of narrowing or Un-inversion is a Bull Steepener, or the FOMC (Federal Open Market Committee) lowering rates – noted by the above white line on the chart (2 year Treasury) marked by the arrows….
A bear steepener occurs when there’s a larger spread or difference between short-term bond rates and long-term bond rates–as long as it’s due to long-term rates rising faster than short-term rates.
What does all of this mean and why are we talking about it?
Bear Steepeners occur when Capital Market Participants begin to price in higher inflation expectations … OR maybe this time, finally accepting the FOMC is not ready to quickly lower rates! hmmmm
You see now why we went for another edition of Advanced Analysis… Stay tuned on this, we will be monitoring closely and will bring you more as this plays out!
Have you ever had some type of team that you follow, could be sports related or the other, that has a pretty good record, seems to be doing well on the surface, but when you look a little closer it becomes apparent that this team is dominated by the performance of just a very few individuals?
Participation or lack there of
There are a lot of similarities in the above analysis to the current capital market environment. Just like the vulnerability of your favorite team, should some of those dominant forces not perform well or heaven’s, even worse, get injured, the real truth will begin to reveal itself.
Capital markets that are thinly led can have distinct vulnerabilities. On a positive side many of the players can catch up to give greater participation. An optimistic outcome. On the negative side just like our team, should some of those more important subjects falter, reality may sink in.
Interest Rates
As mentioned in our Q4 Newsletter, higher interest rates are the tone of the times currently. Our lead article talks about the tremendous positives that higher interest rates have on pensions in the form of higher fixed income earnings. In the very short term, it is a headwind for fixed instruments, but over the long term safer, steadier, and more normalized expected returns.
Political Season Already
While it only seems like yesterday when we had a presidential election, it is hard to believe that next year, approximately this time of the year, we will have another. Recall, there will be many headlines associated with the political process, many of them possibly frightening. You know that we are careful to comment on headlines and things that have not become law, but nevertheless the frightening headlines may appear. Just remember there is a difference between a desire, speaking, debating, and a law.
Positive Seasonality Headwinds
Looking forward to the final quarter of the year, just as it gets cooler in most parts north of the equator, capital markets tend to have positive historical reference. While we are always careful to say this time is different, the Federal Reserve, if resolute in their desire, have both feet firmly pressed on the economic brakes, and as of yet have not been successful in achieving their goals.
Welcome to our Video and Audio Podcast Review of our Q4 2023 Newsletter. For those on the road or just unable to grab the time to read, our podcast type review gives you the behind the scenes insight to our thoughts, observations and deep views of the entire Newsletter.
Click the Download button below, for a direct link to an electronic version (an early peek-good ole fashion paper versions are on their way to you shortly) and here for our Newsletter page
Rate Increase GOOD for Pension Plans and Pension Recipients
Special thanks to Milliman and Rebecca head of medial relations for allowing us the ability to reference this fantastic data… also sourced at the end of our post/article.
Here are the top 100 pension plans, a lot of names you likely know and maybe even have a pension with… At least one family member included in this.
With higher interest rates, something we have mentioned numerous times… Notice because of a rather complex future liability projection, pension plans for the most part are FINALLY funded….YAY
Don’t Fight the Fed! Wait, are we Fighting the FED? YEP
This unusual correlation especially when the blue line is going down, represents the FED (Federal Open Market Committee) pulling money from the economy or trying to slow the Economy.
Add higher rates, at the fastest pace ever….
Interesting that participants are fighting the FED, even though they regularly quote “Don’t Fight The FED!”
Stimulus still sloshing around in the Economy…
True-Up Reminders – 401k and the Like
In the year 2023 (Currently heading towards a close) the maximum amount WE (not including matching) can contribute is $22.500 and for those either age 50 or older or turning age 50 happily in 2023, you get a nice catch-up amount of $7,500 bringing your deferred amount to a whopping $30,000!
Pro-Tip – Contribute evenly throughout the year, with a terminal amount of maximizing in late November or early December.
Pro-Trick – Similar to rushing/upping your contributions near the end of employment to maximize levels, if you are new to an employer and wish to maximize your contributions for the year, dump all you can to maximize your contributions now, with the intention of dropping that contribution level down to a normal level (see Pro-Tip above) after the turn of the calendar.
Do Not Overfill Duplicate Plan Years
Remember, if you have contributed to a plan earlier in the year via another employer, your new employer will not be able to throttle your contributions back if you happen to go over the total annual limit. Reach out for help and clarity on this!
Be Aggressive in New Plans
Lastly, in new plans, starting from scratch with new contributions, allocation should be wide open and aggressive with the hope of choppy entry points as your contributions make up the majoring of the plan and will take advantage of the ups and downs in the early years of the plan.
Cyber Reminder- Tips and Tricks
If there’s one thing, for those of us with little time or patients for a long read that we would like you to take from this article it is that most cyber intrusions come from an e-mail that has a bad actor with a hot link click, do not click on that bad hot link!
The second thing and more encouraging, most cyber security situations are not extremely complicated and are allowed by a simple letting of our guards down- see above point!
Handy tip #1– Use an only known to you, phrase or password.
Handy tip #2– Do not ignore the recommended updates!
USB/Pen Drives a No No Avoid the USB/pen drive at all costs unless you absolutely, 100% know where it came from
RMD Age Changes and other Important Dates
RMD (Required Minimum Distributions)
One of the most important and likely most confusing due to the recent multiple updates is the adjustment of Required Minimum Distributions (RMD) They are now mandatory to commence for those aged 73. Those turning 75 after 2033, your new RMD age is 75. Recall, these just a few years ago, moved from age 70 1/2 to 72, now to age 73 and eventually age 75. No wonder we are all confused!
Social Security Mandatory Commencement Date reminder age 70
The current maximum age that you may defer commencement of Social Security still remains at age 70, well below the new younger thresholds that we hopefully are all feeling.
The earliest one may take Social Security remains age 62, with a 25% discount to the full retirement age (FRA) benefit amount AND has a maximum earnings level of $21,240 from W-2 or 1099 (working income) not pension, investment or other non working types of income.
Have a Great Fall! Talk after the turn of the Calendar!
With Copyright approval just this Monday – we can finally bring this great information to you- yay
While it may seem like we talk about interest rates and their effects constantly, there are very few things especially in the shorter term that effect an economy more and therefore economic growth and capital markets.
Good News for Pension Plan Owners and Recipients
In this higher interest rate environment, we have some really good news for not only pension plan recipients but the owners of pension plans as well. Higher interest rates help pension plan funding (see periodic table looking chart for the top 100 pension plans), in the forum of what’s called smaller present value obligations (PBO). While we understand the calculus of this equation it’s far too difficult to explain in this context but from a very high level, higher interest rates the effect of computation of PBO and the higher the rates, the lower the funding amount needed.
Said another way, pension plans generally hold large amounts of bonds and bonds are earning more now.
By taking a look at figure 3 from the fantastic white paper of Milliman, it’s easy to see that in 2007 the slashing of interest rates to levels never seen before caused a dramatic loss in pension plan funding. Not only did this funding drop but again by referencing the chart it’s easy to see that this was almost a 1 1/2 decade hurdle that pension plans fought against to regain their funding level.
Fast forward to today, again our Chart 3 favorite, shows pension plans are making a strong comeback in their obligations and with interest rates higher look to be fantastically and happily funded. This should be comforting to corporate pension plans (again looking to our periodic chart for those) that likely are breathing easier, and this should also be comforting from those pension plan recipients that maybe had concerns on the long term funding ability of their plan.
Given the full funding of Pension plans, we would infer the lump sum window may be closed! Those lucky enough to have offers over the last decade and a half, well done!
Have a Great “Funded Positive Interest Rates Pensions” Day!
Check that Social Security Statement no Matter your age
While a late delivery, we managed to remind all (including ourselves) why we need to review annually our Social Security statement, here in this post…. along with some new features from the SSA (Social Security Administration) in their updated website!
From the post:
Confirm your credits via your Earning History
Confirm you received credits for your hard earned money is very important, and easy…. here is what the screen shot look like – Below- oh, there are new drop downs for excellent help if your credits are not showing
Capital Market Comments
Not one, not two, not three …. but FOUR Downgrades with one called by ourselves – Tap Tap on the back
In this first post we commented that Fitch put a shot across the bow of the USA Credit Boat with a mild downgrade from AAA to AA+
Not to be outdone, another of the big three credit agencies, Moody’s chimed in as we discussed here
Then back into the pool goes Fitch with ANOTHER downgrade…. here we discussed Fitch’s second downgrade and mentioned we were surprised the One of the Big Three were silent….
BOOM that night of our above post, the other big three S&P Global Markets came to the party…. as we discussed here along with a timely fun YTD Bankruptcy Graph from our bud at Visual Capitalist
These downgrades among a couple of other items, not surprising, led to an upward push on rates… highlights to the far right…. already headed back to norms!
Have a Great Day, Talk to You at the End of September !
In true “I Spy” like format — come on, you remember the funny kids game … anyway, Fitch Ratings Company played “I Spy” in the last GDP number,(was much larger than expected due to this) noting a large increase in government spending….. tossed a warning shot over the bow of the government in a small downgrade of US debt from AAA to AA+…. Not surprisingly that has pushed rates higher….FOR THE TIME BEING…
With the first Friday in August… and coming back from our “Sharpening of the Saw” Trip…. We will keep today short….
But we did want to say farewell to a few more residents ..this time four legged ones!
Happy Friday – Back in the Saddle next week – Talk then!
AI – Artificial Intelligence Update – Great but Not Saving the World
In this timely post (in our humble opinion – IMHO) we revisit the latest rage… AI – Artificial Intelligence – very similar to Dot.com in our opinion… So we try to clarify…
Oh… Here is a GREAT YouTube resource for explaining AI – Christopher Penn a Marketing Expert we have long followed
From the Post:
AI – Artificial Intelligence Today explained
Program assigns a number to all the words in the English Language – other languages too of course.
Cluster of huge computers located somewhere inexpensive scans everything it can get its eyes on, and tags the patterns of the numbers from the words it has scanned…
As we say goodbye to the end of the second quarter, the middle of the year is currently right before us, and remarkably interesting cross currents abound.
“It was the best of times; It was the worst of times.”
The Charles Dickens old favorite seems like a good quote given the cross currents at our mid-year review and more importantly forward-looking possibilities.
It is no secret that interest rates have risen dramatically, actually on a percentage basis fastest ever, quoting our Q3 2023 Newsletter and main lead article. What is most interesting is the continued stamina of the US economy given the FOMC (Federal Open Market Committee) chaired by Jerome Powell gigantic attempt to slow the US economy in bludgeon hammer like format, with the afore mentioned higher interest rates.
In true what is old is new again “Higher interest rates for longer” again a terrific article in our Q3 Newsletter. What was once a necessary evil of stability, (fixed income/bonds), is possibly the most pleasurable fixture in our investment house. Now that the preponderance of interest rates hikes is likely far behind us, the hard work is done, and the reward of higher income with lower volatility is looking forward!
Partying like it’s 1999
The vast majority of stocks are adhering to Powell’s desires and at best treading water, at worst admitting defeat. Similar to the dot com (.com) times of 1999, Artificial Intelligence aka AI is the sexy theme of the moment and has put jet fuel on a small handful of company stocks.
Just like lightning, markets rarely tend to repeat, but they do rhyme, and while our hope is that this is not the.com 1999 party, our radar is certainly up.
Referring to our Q3 Newsletter one more time, there seems to be stimulus, just like the candy for the kids at the pool, that has not worked its way through the system. We continue to find more evidence of this and call your attention to the “Slower for longer Article” again in our newsletter.
While cautiously optimistic, we are happy not to be swinging for the fences investors and look forward to how this economic book is finally written! Time will tell and is our Friend.
Student Loan Update – No forgiveness – BUT story not over
Supreme knocks the loan forgiveness down – BUT plans continue – story not over !
There are plans to delay the repayments, what will be interesting to see if interest starts acrueing again and the end result of the forgiveness… stay tuned, likely not over!
Capital Market Comments
Robert Kaplan gets Candid – Accidentally Lets Rabbit out of the Hat
In a stumbled upon podcast, we discover some accidental VERY candid comments from former Dallas Federal Reserve chair, Robert Kaplan, here in this post.
There are still TONS of stimulus in the system – We new it!
Higher for Longer
Good Ole Boys Club – New it again!
Have a Great Day, Talk to You at the End of July !
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, please consult your financial advisor prior to investing!
Background
The is the vocal portion of J.K. Financial, Inc. a Dallas Texas Based Fee Only Total Wealth Financial Planning Firm. Founded by John Kvale, a Dallas Texas Fee only Financial Planner and Total Wealth Manager.
Quick Update on Treasury Yields…. 2 Year and 10 Year Treasury Yield Down, Price Up, Good for Stocks at the Moment but ….
With a road trip happening as you read this…. was a bit short on time for our mid-week post…. links in this post explain a lot….
Wanted to draw your attention to the move in US Treasury yields/bonds (and show off our new Koyfin technology too) …. this is the 2 and 10 year (still inverted- more to come on this- digressing) ….more importantly, the sudden drop, commenced by an FOMC meeting and then reinforced by weaker Employment data has bond interest rates down, bond prices up…..
This move down in yields has initially pushed Stocks up, and bond portfolios UP… we are cautious to call a victory lap on this bond and interest rate movement, but again worth noting…..
More importantly, bonds go up and rates down, under this circumstance because the smart guys in the room… are pricing in a slowing of the economy…. NOT usually good for Stocks…. after the candy wears off!
Have a Great “Quick Deeper Dive/Second Level Thinking on Rates” Day!
John A. Kvale CFA, CFP
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Posted in Interest Rates, Investing/Financial Planning, Market Comments
Tagged 10 Year, 2 Year, Inverted, Inverted Yield Curve, Smartest Guys in the Room, Treasury