The Long Term Investor

I did not pay much attention to the markets today. But I am feeling like investors are getting a bit too negative lately and the markets are showing it. I dont....."feel".....a lot of panic but I think we are starting to see a little bit today. We are three months into the year and we are caught up in a negative feedback loop and a nasty, lingering, correction.

At some point we will break out of it.....but it may be months. We have to get well into the interest rate increases, the balance sheet cut backs, the fall election baloney.........and.....get clear of the potential recession. That is a lot of market overhang.......even if none of it is new or extremely dramatic.

Possible future issues that will impact stocks:

The potential for a housing collapse.
Worsening inflation.
The supply chain issues which are still out there.
The employment and jobs markets
The potential for a recession.
A totally incompetent government.

Many of these issues are not new.....but as a cumulative group of things that are impacting the markets right now and potential issues that might impact the markets in the future........well......we may just have to TOUGH IT OUT for a good number of months.

On the positive side we are starting EARNINGS. This should count for something....but not enough to overcome all of the above.

It will be over......when it is over. Till than.....

I continue to be fully invested for the long term as usual.

 

Here is a BIG ISSUE going forward......no one pays attention to the small business side of the economy. Small business people are SUFFERING.

Small business owners feel 'hit to the throat' when applying for bank loans

https://finance.yahoo.com/news/smal...t-when-applying-for-bank-loans-195250054.html

(BOLD is my opinion OR what I consider important content)

"Small business owners often face hurdles trying to borrow money.

Data from the Federal Reserve shows that 85% experienced financial difficulties in 2021. And during that time, more than half of owners who sought loans were looking to meet their operating expenses rather than to expand their businesses, the report found.

In addition, small business owners are also feeling the sting of higher prices.

Inflation in the country is now running at annual 7.9% for the 12-month period ended February, according to recent data from the U.S. Bureau of Labor Statistics. That's the highest since January 1982. In response, the Federal Reserve is raising interest rates — signaling that cost of borrowing money is going up.

Even in normal times, small businesses struggled to get loans from traditional banks because "the underwriting models are really designed to take a look at like multiple years of historical financials to risk assess whether they can deploy that capital," said Nick Mathews, CEO of Mainvest, an investment platform that aims to connect small business owners and investors.

"The banks don't really know how to reconcile their traditional models to this crazy level of variability," he said about why loan applicants are more likely to get turned down or receive less money compared to before the pandemic.

"The underwriting models that banks use are designed on consistency, and so when you lack that consistency for multiple years, it makes it really challenging for large institutions in order to adapt to that," Mathews added.

Bobby Morelli, owner and co-founder of The Hot Dog Box, a restaurant in Chicago, tried to apply for a Small Business Administration (SBA) loan back in 2020. But the under the SBA process, he didn't qualify because he "hadn't been in business for two years prior."

"It was sort like a hit to the throat," Morelli told Yahoo Finance in an interview. "I had a little bit of money saved from my years of working and stuff like that. [But] not being able to access funding, the traditional route, I felt that what it was putting a halt on our growth."

Unable to convince a traditional bank to give him a loan, Morelli, who runs the business with the help of his 10-year-old daugher, looked for other another source of capital — crowdsourced loans.

"It kind of disarms a lot of the red tape that you'll go through with the traditional funding sources, and you're not tied down to those stingy options, if you will," Morelli said.

Morelli turned to Mainvest, which provided crowdsourced loans at low interest rates to restructure his debt.

"At the time our goal amount was $20,000, and we met our goal within 10 days and once you get that, you set your interest payment. I think our interest is like 1.6%," Morelli explained.

Morelli isn't alone. Data from the 2022 JPMorgan Chase Business Leaders Outlook survey, shows that small business leaders are increasingly seeking untraditional ways to reach their goals.

Nearly half of small businesses plan to use business credit cards to help raise capital — up from 38% a year ago — with line of credit funding being the next most common funding method. And 68% of small businesses also plan to explore online lending options — up from 56% a year ago, the survey found.

Data from online lender Biz2Credit, in February, big banks approved 14.7% of loan requests — which was down from 28.3% in the same month in 2020. And small banks approved 20.5% of loan requests, down from 50.3% in the same month in 2020.

According to Molly Day, vice president of public affairs at the National Small Business Association, one way to help struggling business owners is to change lending rules to allow "community credit unions to lend more to businesses. They're only allowed to lend up to a certain percentage of their total assets to businesses and to small businesses. If we could raise that cap, that would be a huge help because credit unions are in the communities, they know these people you're gonna get more of those character base loans.""

MY COMMENT

As a small business owner I self funded my business. When I was established and successful.......I could get any loan I wanted......but I did not want any. When I first started out it was nearly impossible to get any sort of loan for a new small business.

I am sure it is much more difficult now. the small business economy is in tatters.......and no one seems to care.

 

I posted my LOSS figure for year to date and from my all time high above a few posts. I am NOT posting that to bitch or whine. I am posting that stuff so people can see the.....ebb and flow......of how it goes being a long term investor. I want to show that the short term is inherently volatile and erratic. I also want to show.......some time down the road from here......that what we are going through now is NOT a critical event or time period. It is simply a BLIP on the long term chart of the SP500.

 

WELL.......we have a good first hour today. Considering the news of the day it just shows that you can NEVER predict the short term market action.

 

NOW....speaking of the news of the day.

Inflation rises by the most since 1981 as CPI jumps 8.5% in March

https://finance.yahoo.com/news/consumer-price-index-cpi-inflation-march-2022-123202319.html

(BOLD is my opinion OR what I consider important content)

"U.S. consumer price increases quickened in March, underscoring ongoing inflationary pressures as supply chain disruptions and shortages lingered across the economy.

The Bureau of Labor Statistics' (BLS) Consumer Price Index (CPI) rose 8.5% in March compared to the same month last year, according to the latest report released Tuesday. That marked the fastest rise since December 1981. This followed a 7.9% annual increase in February. Heading into the report, consensus economists were looking for an 8.4% jump for March, according to Bloomberg data.

On a month-over-month basis, prices rose 1.2% in March following a 0.8% monthly rise in February.

Some of the biggest contributors to the latest increase in inflation were food, shelter and gasoline, according to the BLS. In fact, the index tracking gas prices surged to rise 18.3% month-on-month in March, comprising more than half of the total monthly increase in CPI. In February, gasoline had posted a 6.6% monthly increase.

But even excluding more volatile food and energy prices, the CPI also posted a marked move higher in March. The core CPI jumped 6.5% in March over last year, accelerating from a 6.4% increase in February and representing the fastest increase since August 1982.

A number of other major categories also contributed to the March increase in CPI, however. Shelter prices rose 0.5% month-on-month in March and by 5.0% over last year, representing the biggest annual rise since May 1991. Airline fares also soared by 10.7% on a monthly basis and by nearly 24% over last year, as rising fuel costs and increased demand for travel pushed ticket prices still higher.
Headline consumer price increases have accelerated on an annual basis for seven consecutive months now. Imbalances between supply and demand have persisted, especially in labor — with job openings still far outpacing new hires — and in commodities amid Russia's ongoing war in Ukraine. Many of these costs have been passed on continuously to the consumer.

With definitive signs of a peak yet to be seen in inflation, members of the Federal Reserve have escalated their rhetoric on using monetary policy tools to bring down fast-rising prices. Last week, Fed Governor Lael Brainard said that bringing down inflation was "our most important task," while San Francisco Fed President Mary Daly said that high inflation was "as harmful as not having a job."

Meanwhile, the Federal Reserve's March meeting minutes suggested that "many participants ... would have preferred a 50 basis point increase" in benchmark interest rates, with the larger-than-typical rate hike serving as an aggressive move toward raising borrowing costs and bringing down demand.

The Federal Reserve is set to convene for a policy-setting meeting May 3 and 4."

MY COMMENT

The massive supply chain and supply/demand issues continue. The lock downs in China and the start of a few college and city mandates here in the USA.....show that the insanity is far from over.

I have little doubt that the next FED raise is going to be 0.50%. They need to start working on their balance sheet if they are serious about these rate increases having some small chance of having any impact at all.

I continue to say that the rate increases and the FED will have little to no impact on inflation. More than half of the increase above is due to GAS PRICES........increasing interest rates is not going to have any impact on gas prices. Gas prices are being TOTALLY driven by government energy policy......and....Ukraine.

So......whatever.

 

Here is the market take today........for the short term.....of course.

Stock market news live updates: Stocks rebound as investors weigh fresh inflation data

https://finance.yahoo.com/news/stock-market-news-live-updates-april-12-2022-222939133.html

(BOLD is my opinion OR what i consider important content)

"U.S. stocks rose Tuesday, clawing back from a sell-off that started the week as investors assessed fresh inflation data out of Washington that showed prices in March further accelerated to a new 40-year high.

The S&P 500 climbed 0.7%, and the Dow jumped roughly 130 points at the start of trading. The Nasdaq Composite gained 1.1% after closing sharply lower on Monday. Meanwhile, Treasury yields slightly retreated, but the benchmark 10-year yield remained above 2.7%, the highest level since January 2019.

The moves follow a down day on Wall Street to start the week marked by mounting worries of an economic slowdown as war in Ukraine, COVID-19 lockdowns in China and the prospect of a more aggressive Federal Reserve weigh on sentiment. Investors look ahead to the start of earnings season and more economic data set for release this holiday-shortened trading week.
Markets are weighing the latest gauge on inflation in the U.S. The Bureau of Labor Statistics' (BLS) Consumer Price Index (CPI) rose 8.5% in March compared to the same month last year, according to the latest report released Tuesday. The figure marks the fastest rise since December 1981 and follows a 7.9% annual increase in February. Heading into the report, consensus economists were looking for an 8.4% jump for March, according to Bloomberg data.

The red-hot print comes as investors grapple with the likelihood Fed officials will act more aggressively to combat inflation after a hawkish readout of minutes last week from the central bank’s March meeting suggested "many" policymakers “would have preferred a 50 basis point increase" in benchmark interest rates last month.

“I think the Fed is already committed to an aggressive rate hike outlook,” Charles Schwab Chief global investment strategist Jeffrey Kleintop told Yahoo Finance Live on Monday. Tuesday's CPI data “may not have as much impact [on the markets] as it might’ve, say, a few months ago.”

Although investors are largely prepared for the likelihood Fed policymakers will be more combative in their inflation-fighting efforts, worries have emerged that a ramp up in monetary tightening may cause an economic contraction. Strategists have begun to discuss the possibility of a recession more widely in recent weeks, notably with economists at Deutsche Bank recently warning central bank measures could materially slow growth in the second half of 2023.

Some have said it’s too early to make such a call but that the possibility is on the table.

"I would say that it's probably closer to a coin toss that the economy will be moving into recession by the end of the year," said Dreyfus and Mellon Chief economist and macro strategist Vince Reinhart on Yahoo Finance Live.

8:35 a.m. ET: March CPI climbed more-than-expected 8.5% over last year

U.S. consumers paid more for a variety of goods and services in March compared to the prior month as price levels across the economy continued to accelerate amid persisting supply and demand disruptions.

The Bureau of Labor Statistics' (BLS) Consumer Price Index (CPI) rose 8.5% in March compared to the same month last year, according to the latest report released Tuesday. That marked the fastest rise since December 1981. This followed a 7.9% annual increase in February. Heading into the report, consensus economists were looking for an 8.4% jump for March, according to Bloomberg data.

With definitive signs of a peak yet to be seen in inflation, members of the Federal Reserve have escalated their rhetoric on using monetary policy tools to bring down fast-rising prices. Last week, Fed Governor Lael Brainard said that bringing down inflation was "our most important task," while San Francisco Fed President Mary Daly said that high inflation was "as harmful as not having a job."

6:40 a.m. ET: US small business sentiment falls as inflation worries rise

Confidence levels among small business owners across the country further waned in March, and a higher number of mom-and pop-shop operators reported inflation as their single most important concern, a survey out Tuesday showed.

The National Federation of Independent Business said its Small Business Optimism Index dropped 2.4 points to 93.2 last month to mark the third straight month of readings below the 48-year average of 98. The index has declined every month this year so far.

Of respondents, 31% identified inflation as their single most important problem, up 5 points from February's survey. The figure is the largest share of participants citing inflation as their biggest concern since the first quarter of 1981, also replacing worries about "labor quality" as the number one problem confronting small businesses.

High inflation caused by shortages, massive fiscal stimulus and low interest rates have pressured the economy in recent months."

MY COMMENT

One thing t keep in mind.......with all the recent discussion about the FED and recession. All we have seen so far is a single 0.25% rate increase. We will see the next increase in May.......a month from now. In reality.....NOTHING has happened.......yet.

At the same time the markets freak out and LURCH up and down. The best thing that could happen to investors is a nasty PANIC that drives a big chunk of the crazy new traders and short term speculators out of the markets.

 

Speaking of the struggles of SMALL BUSINESS.

Inflation overtakes labor shortage as top problem for small businesses
Small business owners' optimism for the next six months has hit record low

https://www.foxbusiness.com/economy/inflation-overtakes-labor-shortage-top-problem-small-businesses

"The U.S. continues to struggle with labor and supply chain woes brought on by the COVID-19 pandemic, but the latest data show the top problem cited by small business owners is now high prices.

The National Federation of Independent Business' Small Business Optimism Index for March indicated that inflation has replaced labor quality as the number one problem facing small businesses, with 31% pointing to soaring prices as their greatest challenge – up five points from the month before and the highest reading since early 1981.

"Inflation has impacted small businesses throughout the country and is now their most important business problem," NFIB chief economist Bill Dunkelberg said.

The net percentage of respondents who reported raising average selling prices also hit a new record high in the survey's history, jumping four points from February to 72%.

The NFIB survey showed that price hikes were most frequent in the wholesale sector, with 84% reporting increases, followed by 83% of construction industry owners, 78% in agriculture, and 77% in retail.

The NFIB noted that energy prices are a major driver of the inflation the U.S. is now experiencing.

Meanwhile, there was a one-point reduction in the percentage of owners who reported job openings that they could not fill, with 47% saying they had open positions in March down from the 46% the prior month. The analysis noted that "the number of unfilled job openings remains far above the 48-year historical average of 23%."

Supply chain issues continue to sting businesses, too, with 40% of owners reporting that supply chain disruptions have had a "significant" impact on their businesses, up three points from the month before. Another 28% reported supply chain problems are having a moderate impact, and 23% reported a mild impact. Only 8% reported seeing no impact.

Overall, the survey showed the percentage of owners expecting better business conditions over the next six months decreased by 14 points to a net -49%, which is the lowest level ever recorded in the survey's 48-year history.

Dunkelberg explained, "With inflation, an ongoing staffing shortage, and supply chain disruptions, small business owners remain pessimistic about their future business conditions.""

MY COMMENT

I am sure most small business owners are EXHAUSTED. They cant hold and find workers. They are getting squeezed by having to offer substantially higher wages to try to get workers. They are being hammered by rising prices for everything they use and sell. There is a limit to how much they can raise prices compared to big business. Supply chain and supply/demand issues are hammering them and they dont have the ability to deal with hose issues that big business has.

NOT a good sign for the economy.......which in spite of everything.....is still very much dependent on small business and the health of small business.

 

Get well soon oldmanram.

I had an anterior hip replacement about 6 years ago. The best thing I ever did. As you know......you have the surgery when you cant stand it any more. Like you I was up and walking an hour after surgery. I was pretty much back to normal in about a month in terms of what I could do. The worst thing was the after affects of the anesthetic making me feel like wiped out after activity for a few weeks.

My pain was gone immediately after surgery. Here in my local area they dont even do PT for hip replacements. They do for knee replacements.

Let us know how you do........you will have your life back soon.........and......for the rest of your life you will trigger the metal detector when you go through security at airports

 

Hearing about oldmanram and his hip surgery made me think about the Baby Boom generation. There are about 71.5MILLION of us. By 2030 ALL the Baby Boomers will be age 65 or above. About 3.5 MILLION of us retired in 2021.

The above data comes from various sources.

IMAGINE....being a new retiree in the current financial conditions. I dont know the data but.......I imagine that a fair percentage of Baby Boomers have at least some traditional pension.....those that worked for government and those that worked in private business before the dominance of the 401K. How the baby boomers do in retirement will be a......small lesson......as to what will happen with the future generations that ONLY have a 401K. Us baby boomers are going to learn a big lesson about managing money in retirement......but.....not quite as big a lesson as the future generations.....with no pensions at all.....are going to learn.

At some point in about year....... 2065 to 2070.......you young guys will see stories in the media......if there still is a media.....about the last Baby Boomer dying. Of course at that point you young guys will be 65 to 75 years old yourself. At that point you young guys that invested for the long term your entire lives will be ENJOYING an amazing retirement. You will be in the MINORITY of retirees.

 

That pretty well sums up the markets TireSmoke.

How are you holding up? You are a very concentrated investor in that area. Are you having second thoughts on that strategy? Or.......are you confident and willing to hold through this time period and on into the future....which is bright for those companies?

 

I left this morning and the markets were nicely UP. I got back a few minutes ago......and they are RED as usual lately. Glad I do not sit around in the middle of the day and watch the markets. NOTHING to see in the markets of any interest lately.

 

For the right person......these may be a very good investment.

Even If Inflation Is Peaking, You Should Buy I Bonds In April To Lock In A Year Of 7% Plus Yield

https://seekingalpha.com/article/45...ril-to-lock-in-a-year-of-7-percent-plus-yield

(BOLD is my opinion OR what I consider important content)

"Summary

• Inflation may peak with the March number, but the case for I Bonds remains strong with 7%-plus one year yield and up to 30 years inflation protection as an option.
• To get the outgoing and incoming six month yields buy at TreasuryDirect a few days before the May 1 reset, which should add another 3.5% plus to the outgoing 3.56%.
• I Bonds with their zero fixed rate beat the daylights out of TIPS which have negative real yield up to 10 years plus vulnerability to a general bond selloff.
• The flexibility of I Bonds is such that you can exit anytime after a year (sacrificing 3 months yield for the first five years) or hold for a 30-year inflation hedge.
• Nobody really knows where inflation will go or whether we will experience deflation; I Bonds purchased now defend against deflation too, never declining from their highest accumulated value.

Here's advice which may sound a little counterintuitive: even if inflation is peaking, it's a great time to buy I Bonds. The Federal Reserve has embarked on an aggressive campaign to suppress inflation. They may or may not succeed immediately, but the odds are good that they will eventually get their way within a year or two. What seems most likely is that the Fed's campaign will produce a softer economy if not outright recession. If that takes place, the weak economy may give an assist to the Fed's work and help bring inflation down. Does that mean that you should stop buying I Bonds? Absolutely not. I Bonds have special characteristics which make them continue to be the best solution for short term yield and long term inflation protection. For the inflation-adjusted niche in your fixed income portfolio they continue to be much better than TIPS, which continue to trade at a negative real yield.

If you still haven't heard about I Bonds (I have done my best to remedy that on this site) it's because Registered Investment Advisors can't make any money from them. They were introduced by the US Treasury in 1998 as a way to allow small investors to hedge against inflation risk. For the first few years individual investors could buy up to $30,000 per year with a large fixed rate, but the Treasury soon realized that this was way too generous and cut both the maximum amount and the fixed rates. The current rates are merely generous, $10,000 per year per Social Security Number and a fixed rate set for the moment at zero. That's still the best deal there is.

I Bonds don't trade. They remain in your account at TreasuryDirect until you cash them in or they reach maturity. Once upon a time you could buy them at certain banks and receive paper recording your holdings but now the only way to buy them is to go to TreasuryDirect. The site will walk you through what you need to do. There's also a telephone number you can call for assistance. If you are new to the process I suggest starting to do this by around April 20 as TreasuryDirect is understaffed and they get really busy around the end of the month. If you are like me you are busy too and things always come up. Don't let buying in April get away from you for those reasons.

There are two kinds of investors who may find I Bonds an ideal solution: (1) those who are seeking an outstanding parking place for cash and (2) those who are seeking a longer term instrument for longer term protection against inflation. The former will wish to compare the I Bond yield to instruments such as CDs or short term bond funds. The latter will wish to compare I Bonds to TIPS or other riskier inflation hedges such as commodities. Here's how I Bonds can work for each type of investor:

1. Buying in April assures you minimally a 14-month return of around 7% and likely higher. You will get the present 6 month rate of 3.56% (7.12% annualized) and the amount to be announced May 1 after the final monthly addition, for March, is added on April 12. That's tomorrow as I write. The first five months already sum to 3.43% (6.86% annualized) so that the May 1 number is virtually certain to bring the annual amount to 7% and likely higher. That's what you will get until May 1, 2023. If the numbers at that point are going to be less favorable, you may want to exit by July 1, 2023. You can cash in your I Bonds after one year, but there's a three-month penalty so you will want to hold for fourteen months in all. April counts for a month. Buying at the end of a month, in this case April, earns you the entire month's interest. You will have received at least 6% annualized for 14 months (12/14 of 7%). That's an amount you can't beat with any safe fixed income instrument. If it is clear in April 23 that the inflation number for the next six months is going to be fairly large you might prefer to continue parking your money in I Bonds.
2. My own approach has been as a long term investor. I Bonds are an inflation hedge you can hold for up to 30 years if you wish or sell at no sacrifice any time after five years. I was lucky to start buying in 2000 when we were having a little inflation bump. I have the bonds I bought in 2000 and a couple of years after with real yields 3.6% and 3% as well as all the I Bonds I bought annually in subsequent years. They will get quite a little pop from the current inflation bump. Current buyers will have that too. Inflation may persist longer than many think or flare up again before my I Bonds start rolling off at 30 year maturity. Who knows? But what if inflation rates crash and sink into outright deflation. This has happened for a few months in the past decade. No worries on this either. When a six month period has outright deflation, your accumulated I Bond interest simply freezes. The fixed rate never goes negative (unlike TIPS), and when inflation resumes, as it always does, accumulated interest begins to compound again from its highest previous point. What this means is that I Bonds effectively provide protection against deflation as well as inflation. My personal expectation is that within a few years the normalized inflation rate will slide back to 2-3% with the possibility of a few brief swings in the deflationary direction. I Bonds are perfect for this scenario.

That's the short version. You should buy I Bonds to the limit in April regardless of what you believe inflation may do. The section that follows gives the longer version. If you have not read my previous I Bond articles you will want to read it for an amplified version with details. If you have read it in earlier articles you could skip it but don't neglect to read the subsequent sections which contain additional current data.

What Are I Bonds And How Do They Work?

Because each article on I Bonds attracts a number of new readers I feel an obligation with each successive article to restate a few basics about what I Bonds are and the slightly complicated way they work. Because I think I said it pretty well in two earlier articles I'm going to repeat a few paragraphs verbatim or nearly so. If this starts to feel tediously familiar feel free to skip and use it as a reference if at some point lower in the article you have a question. Bear in mind that many highly intelligent people have to hear about the workings of I Bonds a few times before they have a solid command of what I Bonds can accomplish and their many attractive features.

I Bonds are a form of US Treasury Savings Bond which is inflation-adjusted. Like ordinary EE Savings Bonds, I Bonds are backed by the United States Treasury. Savings bonds have been around since 1935. Under a temporary name change to War Bonds, US Savings Bonds helped fund World War II. I Bonds have been around since 1998.

I Bonds produce returns with two components. The first is a fixed rate which provides the "real" return - real meaning inflation-adjusted. For new purchases this rate resets semiannually on May 1 and November 1, or the next business day if the first day of the month happens to fall on a holiday. Once you purchase an I Bond the real rate in force at that time continues for 30 years until the bond matures or until the owner chooses to redeem it. The second component of I Bond return is the inflation rate as represented by the Urban Consumer Price Index (CPI-U). One can argue about the defects of the Urban CPI but it's what is used for all important measures such as resets of Social Security payments. The inflation rate used for I Bonds is reset semiannually at the same time the fixed rate is reset, on May 1 and November 1, and the accrued value of your I Bond is updated so that the return compounds semiannually. I'll repeat for the purpose of clarity that the fixed rate doesn't change for bonds you already own. The inflation rate is updated every six months starting from the date of purchase. It is then updated every six months. If this seems complicated, TreasuryDirect was kind enough to provide this table:

Issue month of your bond New rates take effect
January January 1 and July 1
February February 1 and August 1
March March 1 and September 1
April April 1 and October 1
May May 1 and November 1
June June 1 and December 1
July July 1 and January 1
August August 1 and February 1
September September 1 and March 1
October October 1 and April 1
November November 1 and May 1
December December 1 and June 1

You can currently buy up to $10,000 annually of electronic I Bonds in a TreasuryDirect account. That's $10,000 per Social Security Number. You can buy the same amount for your spouse and each of your children. You can also request that up to $5000 of your Federal income tax refund be received in the form of a paper I Bond which will be mailed to you whenever the IRS gets around to sending refunds. If you want to do this you should over withhold for that amount.

Like all Treasury Bonds, I Bonds are not taxable by States and Municipalities. Another advantage of I Bonds is that you can choose to defer paying Federal taxes until maturity or redemption. This can be helpful if you or your heir (whom you designate with each purchase) expect to have lower taxable income at some point in the future. Under some circumstances I Bonds are tax free when used for educational purposes - read the fine print, though. All of the terms included in this paragraph are also true of EE Savings Bonds, by the way, which I discussed in an earlier article.

One of the most important but seldom noticed qualities of I Bonds is that they are not only an excellent inflation hedge, but a hedge against deflation as well. The reason is that the inflation component of the composite return never dips below zero. The fixed return earned for a six month period may dip for bonds with a positive fixed rate if inflation is negative for a full six months, but the current zero rate takes this off the board. With the current zero fixed rate, the combined value will never drop. In the event of a deflationary period the accrued value of the I Bond would simply freeze at its highest level. When inflation returns, as it always has, the total value of the account begins to compound again from the highest level it has reached.

I Bonds are probably the most flexible investment available. This is because their duration is any date you choose from one year to their maturity date of 30 years. You cannot redeem your I Bond during the first year, but after that you choose any moment you wish if for any reason you want to get out. You can use them as a place to park cash for the short to intermediate term or leave them in place and continue to have an assured long-term hedge against inflation. I have never redeemed an I Bond.

For the first five years the price paid for redeeming a bond is giving up one quarter (three months) of returns. After five years of owning an I Bond, the forfeiting of one quarter's returns no longer applies. Beyond that there are no special rules or asterisks attached to cashing out until the final maturity at 30 years. There are, by the way, no commissions or other costs involved in buying or selling I Bonds. Paper bonds - now available only as part of your tax refund - can be bought at price intervals from $50 to $10,000 while electronic bonds may be bought in penny increments starting at $25. You could, for example, buy an I Bond with a face value $25.23.

Guesstimating Inflation And Gaming Purchases

Market savants are divided on how inflation will trend over the next few years. Cathie Wood for one thinks deflation is the natural tendency of our era, a point of view which may well be right notwithstanding the fact that she is hocking her book. Low inflation and low rates are of course friendly to her many high-priced fast-growing zero-current-profit investments with returns which must be discounted far into the future. On the other side of the argument many other high profile and highly qualified observers such as Mohamed El Erian, Larry Summers, Henry Kaufman, and Jeremy Siegel all of whom feel that the Fed is badly behind the curve and inflation is likely to be higher for longer than the Fed or anyone else thinks. It's possible that both views will be proven right at different moments in the future.

Your guess may be as good as theirs. In any case your own estimate of future inflation will inevitably have an impact on whether you buy I Bonds for the short term or the long term. The very short term choice is already pretty clear and the very long term has the inherent uncertainty of distant events. Nobody can really be certain what will happen over time periods greater than six months because of the many variables. That being said, 5, 10, and 30-Year Treasuries and TIPS come with a forecast of sorts represented in this chart.

Term Treasury Yield TIPS Yield Inflation Assumption
5 Year

2.79 -.58 3.37
10 Year

2.74 -.12 2.86
30 Year

2.76 .25 2.51

Bond investors express their views on future inflation with actual money in both Ordinary Treasuries and TIPS. As you can see in the above table the sum of their opinion is that inflation will recede fast enough to bring the five-year forward inflation rate to an average of 3.37% annually. That implies a fairly sharp decline in inflation from the present 7% rate. Over ten years the actions of Treasury investors predict a continuing but much more gradual decline. As for the 30- year rate, it's a sort of baseline involving a best stab at the far less knowable long term future. All three periods project satisfactory returns for I Bonds. This is especially the case taking into account the fact that I Bonds held for 30 years provide an insurance policy against a policy mistake by the Fed or loss of reserve currency status for the U.S. dollar, two events which might lead to an unexpectedly high rate of inflation in the future. Even if ordinary Treasury rates rise quite a bit, I Bonds are likely to provide a competitive return as they have in recent years.

In a short term period like one year, I Bonds are pretty much a cinch to beat the daylights out of all other safe investments for real return. The first important break point to consider is the one-year return (actually, to take maximum advantage of current rates, 14 months if buying near the end of April). The next break point is the five-year return. Remember that after one year you may choose to bail out at any point with the sacrifice of three months of interest payments. If the inflation rate has dropped precipitously and you have a short term perspective you may wish to wait until you have held your I Bonds for 15 months (or as stated above closer to 14) and then cash in your I bond. After five years you may exit without sacrifice of any kind. There are, by the way, no commissions or expenses. Every dollar invested goes into the investment without friction.

The March CPI number announced on Wednesday April 12 will provide a definitive number for the variable (inflation) rate for the reset on May 1. The table below provides the numbers for five of the six months going into the May 1 reset and the second table describes the terms of the six-month rate still in force since last November 1, 2021. I have seen estimates of the March number which would produce a six-month rate around 0.60%, enough to lift the six month return starting May 1 to around 4% (8% annualized). I won't speculate about this number personally although I think the probability of an upside surprise exceeds the probability of a downside surprise. It would be an enormous surprise if the month over month increase replacing the X in the table came in low enough to pull the one-year return below 7%. The March rate will come across the wire at 8:30 AM tomorrow, April 12. Unfortunately I will be in transit including appointments the greater part of the day. I will consult with the SA site as to the best way to provide an update.

(To get the 12-month yield of an I Bond purchased before May 1, wait for the additional number and simply add the present 6-month yield (3.56%) and the 6-month yield after adding the CPI report for March.)

You should in any case buy your 2022 annual allotment in April to capture the outgoing rate if you haven't done so already. This is true whether you are making your initial I Bond purchase or followed the suggestion of my September and November 2021 articles and took advantage of the 3.56% (7.12% annualized) yield before the end of last year. It's a new year and you can now double dip on that rate with your 2022 purchase, assuring that you enjoy 18 months of spectacular returns. You don't have to wait for the new, possibly better, May 1 rate because you will get it anyway six months down the road starting on October 1, 2022. See the helpful chart in the previous section extracted from the TreasuryDirect web site.

It is highly unlikely, but not quite impossible, that the Treasury might increase the fixed rate for I Bonds by 0.1% or 0.2% on May 1. As desirable as a higher fixed rate would be over the long term, the chance of picking up an extra 0.1% or 0.2% doesn't justify waiting. The odds strongly favor going ahead and buying now. The sooner you buy the sooner you will receive the full annual yield which may well prove to be the high point of the present burst of inflation. This is what the chart comparing ordinary Treasuries and TIPS implies.

What you should bear in mind is the long term power of receiving an outstanding yield on the front end. Your $10,000 investment stands to be worth something around $10,700 after a year and all future returns will compound from that base. If your view is short term, you can wait 14 months and see if inflation (the variable part of your return) has fallen far enough that you want to exit with a sacrifice of three months of income at that lower rate. If so, you can give yourself a pat on the back and then take your amazing one-year return and move on.

On the other hand you can decide that, with such a large head start, you might want to stick around until the second break point at five years when you don't have to give up anything to exit. You could do a little arithmetic and see what the 5-year return would be like under various levels of inflation. My suggestion there is that the 10-year projection on the chart comparing Treasuries and TIPS suggests about 2.86% on average while the stated Fed goal is 2%. It's possible that inflation might overshoot the average and go negative for a six month period or two, but remember that your highest total value will simply freeze and resume compounding when inflation returns. This is one of the reasons that I have always held my own I Bonds first purchased in 2000 with the intention of hanging on for 30 years. They now amount to a fairly large insurance policy against anything that could come along in the way of a major enduring inflation.

I Bonds Versus TIPS

TIPS are currently a mediocre investment with a hidden risk. There. I said it. I realize that many readers may own TIPS one way or another, perhaps on an advisor's recommendation or because they are often part of model portfolios diversified between stocks and bonds. Some readers may have noticed the zero real yield on I Bonds and thought that was bad, but the truth is that it is absolutely wonderful compared to TIPS. Every TIPS from the shortest duration out 10 years has a negative - repeat, negative - real yield. After that the positive real yield is still very low and in my opinion does not outweigh the other advantages of I Bonds as the first inflation-protected $10 K of every portfolio. The table below gives the overall picture.

Term

I Bond TIPS Difference
5 Year

0.00 -.58% -58 Basis Points
10 Year

0.00 -.12% -12 Basis Points
30 Year

0.00 25% 25 Basis Points

That's only half the story of what's wrong with TIPS. The other part of the story is that unlike I Bonds, TIPS trade every day the bond market is open. They are linked to other Treasuries of similar duration, and as a result when interest rates rise, TIPS fall in price along with other bonds. That's exactly what has begun to happen over the past few months. The following chart provides an education in this phenomenon:


Data by YCharts
What you see in the above chart is that the TIPS price element falls along with the ordinary Treasury Bond ETF, just not quite as much. It's a tug of war between two opposing forces, the downward tug as rising rates drag down all bond prices and the upward tug as the TIPS ETF is supported by monthly increases due to high and rising inflation. Even so, the TIPS chart produces only a 2.38% yield in a 7% inflation environment.

Now ask what happens if inflation begins to abate as the Fed raises rates three or more times in 2022. The bond element of the TIPS ETF will follow straight bonds and fall sharply while the monthly contribution of inflation will decline as the Fed's rate increases produce their desired effect. At that point, the flat fixed return line of I Bonds will be a game saver and the inflation return, despite falling, will feel like a risk-free gift. Just to repeat, the short version of my advice on TIPS and I Bonds is to put your first $10K per Social Security Number into I Bonds and only then, if very very very worried about inflation take a calculated look at TIPS.

Safety, Flexibility, A Current 7%-Plus Yield, And A 30 Year Inflation Hedge

Just in case is one of the more underrated phrases in the language. Who'da thunk it is a phrase my mother used to apologize for being an English teacher. She used it for a set of unexpected events we would prefer to be able to accept with equanimity and a little humor. Bursts of very high inflation call to mind both expressions. Having some protection against high inflation should be a permanent "just in case" strategy. No one asset will totally solve the problem, but an I Bond portfolio will help. When the current inflation suddenly appeared, having some kind of hedge might have made the difference between who'd a thunk it and expressions I can't write here.

In a famous 1977 Fortune article entitled "How Inflation Swindles The Average Investor" Buffett articulates with his usual eloquence how inflation is the one thing that quietly erodes value in every portfolio. It's not just what it does to your personal dollars, but the ways it damages the performance of companies in which you may own shares. Buffett made the case in the 1970s that equity investments may not provide the defense against inflation that many investors expect. Over the decade leading up to the present burst inflation has actually been quite tame - an average of about 1.9% annually. That's the lowest rate for any significant period since the 1930s (see this table). We should celebrate, right? Before becoming too cheerful, there's this fact that you should think about: that tame 1.9% inflation rate still knocked about 21% off the purchasing power of a dollar over the past ten years.

Investors must ask themselves a basic question about investment portfolios: what are they designed to do? For many investors the portfolio is treated as though its goal is to build wealth. This is a valid goal but it may not be primary. The primary goal for many portfolios, whether recognized or not, is to serve as a store of value which will not lose ground in terms of purchasing power. Even at the current zero real rate of return, I Bonds achieve exactly that goal. The best part is that I Bonds do not trade or fluctuate in value and are an investment that does not require warnings or disclaimers. You don't have to keep an eye on them.

Never lose site of your first goal: to preserve the purchasing power required to meet your future needs. It's for this reason I Bonds can fill an important niche in your long term portfolio. They amount to an insurance policy you are being paid to own. My hope and expectation is that readers who decide to buy an I Bond for its one year 7%-plus yield will come to understand in the course of 12 months that I Bonds should occupy a niche in every long term portfolio. You can't beat the combination of safety, flexibility, yield, and a 30-year hedge. I cherish my I Bonds acquired over 22 years and plan to hold them for the full 30. They go a long way toward avoiding that undesirable expression coulda, woulda, shoulda.

Conclusion

I Bonds continue to have spectacular yields which beat all safe fixed income investments with a likely 12-month forward return of 6% to 7% or more. You buy them at TreasuryDirect which is the same place where you buy all new Treasury issues. The site has detailed instructions and a number to call if you are unclear about anything. You have me for other details. I commit to reading all comments and doing my best to clarify and answer questions.

I Bonds are great for natural born nitpickers like myself. Many successful investors have a bit of nitpicker DNA and it's a good idea to pull up as much of it as you can when offered a great deal just for paying close attention. Success in investing starts with doing the little things right, and I Bonds are one of those little things."

MY COMMENT

For the right person.....in the right situation......these I Bonds might be something to research and consider. See the full article for all the charts and graphs......some of them get distorted in posting them on here.

 

A very minimal RED day for me today. Six positions down and four positions up. About the only other good thing I can say is that I beat the SP500 by 0.12%.

 

Since I am mostly IGNORING the markets lately.....here is some info that people might be able to use.

As I was posting about I Bonds I got curious what current CD rates were......so i looked on Schwab. Here are the.....highest yielding CD's by maturity:

1 year 1.5%
2 year 2.35%
5 year 2.8%

Here is some info for anyone that has student loans and wants to hang onto their money for a while:

Student loan payments won’t be due until September. Here’s what borrowers need to know

https://www.cnbc.com/2022/04/12/stu...e-until-sept-what-borrowers-should-know-.html

(BOLD is my opinion OR what i consider important content)

"Key Points

• For the sixth time, the U.S. Department of Education has extended the pandemic-era payment pause on federal student loans.
• Here’s what borrowers should know.

The U.S. Department of Education has extended the payment pause on federal student loans for the sixth time since the pandemic began more than two years ago.

This time, borrowers have been told they won’t have to resume their bills until September. So, here’s what borrowers need to know.

Student loan forgiveness could still happen

Despite improvements to the economy since the pause on federal student loan bills was first announced in March 2020, President Joe Biden has said it remains too early to ask borrowers to begin paying again.

“We are still recovering from the pandemic and the unprecedented economic disruption it caused,” Biden said, in an April 6 statement announcing the latest pause.

At the same time, part of the delay seems to be a result of the fact that deliberations around student loan forgiveness are still ongoing at the White House.

Biden is under tremendous pressure to reduce some of the country’s $1.7 trillion outstanding education debt balance. Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Elizabeth Warren, D-Mass., are pushing him to cancel $50,000 per borrower.

Nearly 66% of likely voters are in support of the president forgiving student debt, with more than 70% of Latino and Black voters in favor, a recent poll found.

White House chief of staff Ron Klain said last month that the administration wanted to come to its decision on loan forgiveness before turning payments back on.

“The president is going to look at what we should do on student debt before the pause expires, or he’ll extend the pause,” Klain said on the podcast “Pod Save America” in early March.

The pause could be extended again

Because the payment pause has been extended so many times, experts say borrowers are unlikely to take the latest announcement of bills resuming in September too seriously.

“What’s a borrower to believe or plan for anymore when the government keeps changing its mind?” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers.

And this time, the payments are scheduled to start back up again just a few months before the midterm elections, which many have said could trigger troubling headlines for Democrats and lower turnout at the polls for the party.

“I can’t see them restarting repayment two months before an election,” said higher education expert Mark Kantrowitz.

If you’re pursuing public service loan forgiveness or are on an income-driven repayment plan, it’s a bad idea to continue making payments, experts say.

That’s because the months of the payment pause count toward the eventual debt forgiveness these programs lead to — whether or not you’re paying, and so any money you direct to your loans during this reprieve just reduces the amount of forgiveness for which you’ll eventually be entitled.

Covid pandemic has taught us how important it is to have a healthy savings account to fall back on, according to experts. People should try to build up at least six months’ worth of emergency savings, they say.

With interest rates on most federal student loans at zero, it can also be a good time to make progress paying down more expensive debt. The average interest rate on credit cards is currently more than 16%.

However, make sure you have enough in your emergency savings account before you address credit card debt, said Ted Rossman, an industry analyst at Creditcards.com.

That’s because your credit limit shouldn’t be relied on as a safety net.

“Many people had their credit card limits cut unexpectedly over the past year as lenders got especially worried about risk,” Rossman said."

MY COMMENT

It might be a good strategy to wait and take advantage of the payment pause.......in order to see if the government is going to forgive some portion of student loans.

 

Lets hope TireSmoke........IS.....calling the bottom today.

You getting any sleep oldmanram? Between the pain pills causing weird dreams and having to sleep on your back and being paranoid about crossing your legs......it can be a long first couple of weeks after hip surgery. You sleeping in a recliner?

Day by day......hang in there......you will be totally back to normal before you know it.