Cocaine, Heroin, and Now Ritalin

Cocaine, Heroin, and Now Ritalin

By Julien B. Booth

March 11, 2016

Thank goodness for pithy Federal Reserve Governors – the Fed is now actually admitting the inflation of asset prices – to create a long-hoped-for wealth effect (economic growth).

This video is just too good to not share. It is the actual disclosure of the Fed’s manipulation; we do prefer honesty. Post-QE, the crashing of the commodity markets/global currencies (and many great jobs) has clearly been an unintended casualty. Minutes 1-3 are just too good. “Cocaine and Heroin – maintaining it on Ritalin”.

The post QE world is becoming more and more bizarre. Global interest rates are crashing (NEGATIVE rates in Japan and the bulk of Europe out 7+ years). It is merely a matter of time until global capital flows push our rates even lower. Additionally, the 10y-2y US Treasury yield spread is certainly not signaling a growth renaissance after 7+ years of an expansion cycle.

We had several conversations with clients this week about where we are finding value TODAY. I believe the excerpt below is the simplest way to communicate our thoughts.

The search for yield is a global struggle – negative rates in Japan and the EU will only pressure our spread markets. Rates will trend downwards absent a new growth miracle.

My primary focus when evaluating yield producing securities ultimately comes down to risk – income securities are inherently asymmetric (limited upside vs. permanent loss of capital). It is imperative to be a cautious investor.

In that backdrop – along with the tax friction, we continue to find tax-free securities very attractive for highly taxed clients. For example, I believe your max intra period draw-down during Jan-Feb was about x.xx%. Other sources of income (preferreds, HYield debt, bank loans, REITS, etc.) had 5%-10%+ drawdowns, not to mention the underlying credit risk. Investment-grade munis have extremely low default rates.

Our process will migrate between asset types as the balance of the risk favors investment – ie. when they misprice at a compelling value to take said risk. The addition of the mortgage REITs preferreds late last month was a current example – equity cushion + 9.5% taxable yields with underlying collateral that is liquid. @ 65% of book value. After tax, and with some appreciation potential, these positions start to come to parity with a 5% net closed-end muni yield.

I hope this helps you see our logic and desire to preserve capital as foremost. Thank you for your interest in Forest Capital Corp. and Sixty Guilders Research.

Please advise questions, comments, or if you would like additional information.

Growth indicators (yield spreads and company earnings, aka reality) continue to de-link from underlying stock valuations. Please thank your Federal Reserve.

“The Road Goes on Forever and the Party Never Ends” -Robert Earl Keen

As usual, thank you for investing with Forest Capital! For additional information on portfolio positioning, please contact Forest Capital directly at