In Leiu of Yield, Risk.
By Julien B. Booth
July 8, 2020
I hope this note finds you well, and safe.
The financial system has become quite brittle – and now solely dependent on the U.S. Federal Reserve.
Patience+understanding = wisdom. Yet it is a virtue so few exercise (myself included).
It’s somewhat akin to adding more booze to the punchbowl, after midnight, rarely does it end well.
Net, net, we have gone over the waterfall: https://www.brcwm.com/2020/06/26/interest-free-risk/
All income securities trade on a spread to these yields. The spreads for US investment grade bonds is about +1.40% = 2.08% (gross return).
After fees/taxes/inflation (friction) you have a low probability of a positive return. We do not like trades that are all risk, no return.
Given scant returns in fixed income, a deteriorating profile in credit, and stocks at Bubble levels, opportunities do not abound. To us, capital preservation is the most prudent course.
Where does this financial reality leave investors?
We have a simple 4-legged strategy:
These securities are not immune from price volatility, only cash fits that need at this point, but the durability of their cash flows is where we focus.
Longer duration, we have serious underlying concerns for the monetary system. Quite simply, we are losing dollar purchasing power = stagflation.
Please note the performance of Gold vs. US Dollar (see attached charts).
For the time being the U.S. remains the cleanest, dirty shirt.
We remain focused on capital preservation and generating a real (after inflation) return.
Thank you for your interest in Forest Capital-BRC Wealth Management.