September 6, 2016
The Government and Your Investments
The ever-increasing governmental interference with free markets reminds me of the how-to-boil-a-frog analogy. Government involvement has been building up slowly and steadily for so long, no one pays it much attention anymore.
The central banks of several major areas have forced interest rates to artificially low levels by printing money to buy up bonds. But everyone likes low rates, right – unless you are a saver trying to live on your interest, that is. The government is forcing you to spend, not save.
Even more troubling is the government’s ownership of stock. At its current pace of purchasing stock funds, the Bank of Japan (BoJ) will own enough shares to control more than 50 companies in the Nikkei 225 Index in just two years.
Of course BoJ is doing this to goose the Japanese stock markets, but the Nikkei, their equivalent of the S&P 500 Index**, is still 50% below where it was 25 years ago, so it is not really doing the job.
Japan is in a downward spiral that they are having trouble breaking out of. The economic outlook there is so dismal that young Japanese are not marrying and having children. The country is running out of workers, and to be productive, someone must work.
Very soon, government officials in Japan will own so much stock that they will be able to replace board members with cronies, and their economy will begin to look a lot like Communist China’s.
That is a pretty scary outcome, and I don’t see any easy way out.
What the Markets Are doing
In the 7-8 weeks since the Brexit crash and subsequent bounce, the S&P 500** has leveled off and produced no further gains. Year-to-date through August 31st, the S&P 500** has gained a little over 6%, making up for the 12% decline earlier this year and then some.
The bond market remains steady despite what hand-wringers say. The extremely low rates in Europe and Japan force those investors to buy US bonds if they want to collect any interest at all. As long as our rates remain above Europe and Japan, our bond market should remain stable.
The gold market has drifted downward over the past month as long and intermediate term cycles converge, exerting downward pressure on gold prices.
We are entering what is historically the weakest part of the year for the stock markets, and with the presidential election generating lots of uncertainty; I expect that buy and hold investors will find the markets to be a little nerve-wracking for a while.
“Non-government money market funds will be required to charge a redemption fee when liquid assets drop below certain levels, and under certain circumstances, will also be able to suspend redemptions. I’ll bet you didn’t know that your money market fund is growing teeth, did you?”
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I am teaming up with CPA Jay Lode, with whom I share an office, to present a new class – my third – at Yavapai College. You can see the details below.
College Classes Coming
Tax Tips for Arizona Newcomers
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Call Yavapai College at 717-7755 to register for class #FA16-148
Sept 14th, 1-3 p.m. Tuition is $45
This course is designed to help investors become more confident about their financial decisions. In an easy-to-grasp format, this class provides a broad knowledge of investments preferred by investors approaching or already in retirement. Learn the ins and outs of stocks, bonds, mutual funds, annuities and more. Topics include recognizing risk, controlling the tax impact of IRA withdrawals, avoiding common investment mistakes and simple risk-reducing strategies that anyone can use.
Call the college at 717-7755 to register for course #FA16-151
Sept 21-Oct 5, 1-3 p.m. Tuition is $65.
What’s Going on in Your Portfolio?
Our Shock Absorber Growth* portfolios were flat for the month of August, much like the S&P 500 Index**. However, I increased our hedge during the second half of the month, so the past few weeks were perfectly positioned and made money as the S&P 500** weakened.
Flexible Income* portfolios gained .97% for the month and 3.45% for the quarter-to-date (after all fees and expenses), giving us reasonable gains in all strategies managed at Trust Company of America.
And, of course, our blended strategies all made money for the month and the quarter to date through August 31st, helped by the strong performance of our Flexible Income* strategy.
All strategies are profitable for the year.
What We Were Saying Back Then
In 2007, I raised eyebrows by moving clients out of regular money market funds (MMFs) into government-only money market funds when I became concerned about the potential for defaults in MMFs. That was long before most investors realized there was trouble coming in 2008.
Most investors look at MMFs like savings accounts, but they really are not. MMFs are just very short-term bond mutual funds with maturity dates so close that prices of bonds in the portfolio fluctuate less than the amount of interest being earned, keeping share prices stable.
If you insist on owning the highest paying MMFs, you probably own junk bonds and don’t realize it. In the few instances where bonds defaulted in 2008, the government stepped in to protect investors, but it will no longer do so.
In October, MMF regulations will be changing to allow floating share prices on all MMFs except government-only MMFs. While the once-radical idea of a floating share price for certain money-market funds gets most of the attention, the bigger concern has become the special redemption fees and liquidity restrictions the new regulations bring.
Non-government money market funds will be required to charge a redemption fee when liquid assets drop below certain levels, and under certain circumstances, will also be able to suspend redemptions. I’ll bet you didn’t know that your money market fund is growing teeth, did you?
The odd thing about this is that government-only MMFs can lose value during a run just like non-government MMFs.
In other words, the SEC says it’s OK to maintain the buck-a-share fiction in their own bonds as long as investors believe it. This is a poor foundation for financial stability. A fiction is still a fiction, and investors are likely to figure this out at the worst possible moment.
Simply put, risky products shouldn’t be sold as safe: It’s too risky!
Disclosure: Hepburn Capital does not use MMFs, but instead uses FDIC insured deposits for client moneys that are in cash.
Our Spotlight Strategy – Shock Absorber Growth
With our Shock Absorber Growth Strategy we strive to provide an acceptable rate of capital appreciation while experiencing one half of the risk of the S&P 500 Stock Index**, using primarily equity investments.
Your money will be invested primarily in stocks and commodities mutual funds and ETFs, both foreign and domestic, inverse and leveraged, and a money market fund. The proprietary HCM Safety Net indicator is designed to warn of potentially sudden declines, in which case stock market exposure may be quickly reduced.
Click here to read more about Shock Absorber Growth.