Looking Backwards …
LB #1
Henry Kissinger died this week at the age of 100. We have talked about his influence on American politics before and how he was the architect of the Petrodollar system as America battled with high energy prices during the 1970s. It was also the inflation stemming from coming off the gold standard and trying to balance the Great Society programs and the Vietnam War. He was both the Secretary of State and the National Security Adviser at the same time. A man of tremendous responsibility to his nation and the Nobel Peace Prize winner for ending the Vietnam War. He was voted the most admired man in America in 1973.
He fled the Nazis, but would return to fight them in the army for 3 years during World War II. Harvard educated, he taught at the university for years before becoming involved in politics. Presidents continued to seek out his advice as he served as an advisor for Ronald Reagan and George W. Bush had him lead the 9/11 commission which he did for a weeks before resigning.
He was powerful and a powerful man gets the ladies as he was known to date numerous starlets in the 70s and it was perhaps this wandering eye for pretty that found him caught up in the Theranos blood testing startup with pretty Elizbeth Holmes, who is a knockout compared to Bill Gates and Warren Buffet in comparison. He lost money and he influenced others to invest with her that also were scammed. Like most humans, his judgment was flawed at times, but he was America’s best diplomat for decades and met with leaders well into his 90s as a voice of reason in American politics. He was awarded the Presidential Medal of Freedom in 1977, the nation’s highest civilian award, and then continued to serve his country for almost another 50 years. A true giant in politics. RIP
LB#2
Moving from the well-respected to Elon Musk. This week Elon Musk told his advertisers to go fuck themselves if they didn’t like his behavior. Wal-Mart quickly went to fuck themselves evidently by dropping advertising on his Twitter platform. They have followed other companies like Disney, IBM, and Sony to pull ads from the platform. Musk accused them of blackmailing him. Welcome to cancel culture Mr. Musk and cancelling advertising is not good for Twitter. Remember, Musk had to borrow a lot of money and he has loan payments to make and if he can’t Tesla shares might have to be sold to meet those loan obligations…. Another alternative for Musk to raise money is to IPO Starlink or SpaceX. Since his customers are the US government in SpaceX, they can’t cancel him for free speech like private businesses can. No one milks the government teet like Elon.
LB#3-
I’ve been hearing a lot of people spouting off about how TIPS are such a great investment right now. Barron’s had a great article promoting just the thing this week in it they explain that “TIPS are inflation protected bonds issued by the Treasury. The value of a TIPS principal is adjusted higher when the consumer price index rises, resulting in increased coupon payments. The Treasury pays the interest on the adjusted face value of the bond, creating a rising stream of interest payments so long as inflation continues to rise. When the TIPS mature, the investor gets the original face value of the bond plus the sum of all inflation adjustments since the bond was issued. “These are in in theory great products. I can actually hedge the inflation risk of the US government using the CPI? Not so fast… Just like the underlying risk-free rate of the financial system is the US Treasury, this is a US Treasury plus a manufactured and adjusted CPI statistic.
We have mentioned numerous times to not trust the CPI statistics but go over to John Williams’ great work at Shadow Stats for real inflation statistics. Ones that don’t have hedonic adjustments and normalizations and government adjustments made to them to show less inflation than what is actual. If you do, you will see that the real rate of inflation should be almost double what the CPI shows today. So if you should have been earning 2% real yields and last year’s CPI was 6% you should have been earning twice that plus 2% so 14%. That is an inflation proof yield, one that would protect your purchasing power from the insidious inflation that is affecting our society from too much government spending.
We have already attacked the “real interest rate” that is estimated out 5 years and forms the basis for the TIPS logic. If inflation expectations are 3% for the next 5 years and you are offered a 2% real yield, then you should get 5%. We’ve said it before and we will say it again. Inflation forecasts are like EBITDA as Charlie Munger, RIP, always say is bullshit earnings, well real rate expectations are bullshit expectations. They don’t have any clue, just go back and see what they expected for the last two years like we did in a previous episode. Bullshit. Remember the CPI is used for social security adjustments so if the government was honest in its calculations, it would cost billions more in social security payments running us further into debt. Don’t trust the government. That is the problem with TIPS, the products themselves are great, but they are built on a bullshit foundation.
Looking Forwards…
LF#1
Megan Henney writes for Fox News that the Biden administration is planning to purchase 2.7M barrels of crude oil at a price of $79/ barrel to begin refilling the strategic petroleum reserve. Biden sold more than 40% of the SPR last year to offset higher gas prices after the Russian conflict with Ukraine began. They released 180 million barrels just last year. The stockpile is at the lowest levels since the 1980s. The current price of crude has been hovering around the mid $70s since a sell-off last month following the flare-up in the Middle East between Hamas and Israel.
Hnney writes “However, it is a notable increase from early 2020, when prices were under $20 per barrel. At the time, former President Donald Trump tried to add 77 million barrels of oil to the emergency oil cache, but he was blocked by congressional Democrats. “ We are savers here at the CTPC so I think it is better late than never, and think this is a good thing that the Biden Administration is doing and I hope they continue refilling the reserve.
LF#2
Hannah Miao wrote an article in the Journal this week talking about how investors are surprised to find defense stocks in their portfolios and some adjusted their portfolios and others didn’t depending on their political or moral convictions. “Shares of General Dynamics have gained 14% since Hamas militants’ Oct. 7 attacks on Israel and Israel’s subsequent military campaign in Gaza. RTX has rallied 18% and Lockheed Martin has risen 12%, outperforming the S&P 500 over the same period.” That is one hell of a year in only 7 weeks. Remember, these companies had two long wars in Iraq and Afghanistan over the last two decades to make millions and billions of dollars as the US debt is $2 trillion higher from war costs alone and a lot of that money was a transfer from the people to these defense companies. Peacetime is not good for their business so as the military is called into more conflicts, keep an eye on these stocks. War is what America manufactures and business is good.
LF#3
Lauren Foster had an article out this week for Barron’s which noted a new milestone in bond ETFs, or exchange traded funds, $100 billion in assets for the Vanguard Total Bond Market ETF with the ticker BND. She notes AGG, iShares Core US Aggregate Bond ETF, with $96 billion not far behind. “The inflows are a testament to the enduring popularity of low-cost ETFs and investors’ appetite for bonds.”
Bonds have been on the move lately. In the past 6 weeks the 10 year US treasury bond yield has weakened from over 5% to 4.2% which means bonds have risen since bonds and yields move in opposite directions. This is something to keep a very close eye on going forward. Corporate bonds and high yield take their foundational pricing from the underlying risk-free US Treasury. 6 weeks ago the bond market was in a panic as yields had risen to the highest levels in over a decade and here we are 6 weeks later and all is well. Todd Rosenbluth, head of research at VettaFi, a financial research and data company is quoted saying “There’s expectations that the Federal Reserve will cut interest rates, but even if they are high for longer, it’s unlikely that the Fed continues to raise interest rates in 2024, which means, if nothing else, investors are going to get the income from bonds and the added benefit is that they might get price appreciation from them as well,”
In fact, the 60/40 portfolio which featured 40% bonds had its best month in 32 years averaging 9.6% in November according to a B of A report. They also reported that high-yield bonds saw their highest 4 week inflows since June 2020.
The Dow Jones just set a 52 week high on Friday. The market has spoken, C Thomas Printer is wrong, all is well. My response to that is remember the Alamo and Santa Ana’s soldiers, they came in waves and would not stop no matter how many died. People are buying bonds today and we have another $816B to buy next year in Q1. The next quarter will be larger as the debt gets bigger and bigger…The reverse repo facility dropped $98 billion last week from Friday to Friday. I guess we know who was buying at the Treasury bill auctions. 7 weeks of supply left. Then we are back to …Who is going to buy the bonds, and at what price? El Duguellos, no mas.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.