“Is It Real, Or Is It Memorex”
By Julien B. Booth
September 2, 2021
I hope this note finds you doing well.
In the spirit of candor – here is where we are:
I would love to write to you about the titillating world of bonds and income securities; however, in the context of NEW purchases of bonds we are almost at the END.
The Federal Reserve’s purchases of $120,000,000,000 per month ($120 BILLION) have effectively crowded out any prospective value and/or margin of safety to income securities.
Our EXISTING bonds remain outright sexy, yielding 5%-7%. These securities are absolutely irreplaceable. We will hold them forever.
The additional effects of this Federal Reserve policy is the inflation of ALL asset prices.
Real estate (ex. office buildings), stock prices, high yield bonds & commodities are at all time highs.
For perspective, the cyclically adjusted P/E multiple of stocks is at 2000 Internet-Bubble levels and junk bonds yield less than inflation.
Is it real? The younger Julien, cherishing intellectual honesty, would say HELL NO. The older Julien – get on with accepting the new world.
We are in a new world. In the context of this new world, it sure is “real”. Money printing (the Federal Reserve) is here to stay and is the only “fundamental” that matters.
Underlying investment fundamentals be damned – it’s all the Federal Reserve, all the time. The Federal Reserve (and foreign Central Bank equivalents) policy, and the knock on affects to currency/commodity markets are in complete control of the Global financial system. We have come a long way from capitalism in a few short years.
Investment Safety is the primary victim. New bonds have little yield, stocks are at nosebleed levels, and real estate cap rates are at all time lows (prices all time highs).
Welcome to the new world.
Net net, we prefer solutions to whining.
As income positions mature, are sold, or called away we are increasing our exposure to a select group of equities (for balanced accounts only) that have a simple thesis:
- REAL Profitability
- REAL Balance sheet strength (i.e. Cash)
- REAL Pricing power
- REAL Underlying assets
- REAL Growth potential
The first 25 years of my investment career was based on fundamentals (like math). The next 25 are going to require a new mindset. Either way, safety first.
Thank you for your interest. I welcome questions/comments and sage advice.
Julien B. Booth
Chief Investment Officer – Fixed Income & Real Assets
BRC Wealth Management