Investing for income has never been harder. The Federal Reserve continues to indicate further interest rate increases are on the horizon. This makes bond buying dangerous for those seeking capital preservation in the face of rising rates. This danger shows in the graph below, which indicates a strong probability of another rate hike at the Fed’s next meeting in June.   What makes this chart so interesting is that recent economic data doesn’t support the Fed’s conclusions. In the past several weeks, we’ve seen weakness in consumer spending, including negative consumer spending revisions, and falling prices. Read More

Investing for income has never been harder. The Federal Reserve continues to indicate further interest rate increases are on the horizon. This makes bond buying dangerous for those seeking capital preservation in the face of rising rates. This danger shows in the graph below, which indicates a strong probability of another rate hike at the Fed’s next meeting in June.   What makes this chart so interesting is that recent economic data doesn’t support the Fed’s conclusions. In the past several weeks, we’ve seen weakness in consumer spending, including negative consumer spending revisions, and falling prices. It goes without saying that falling prices aren’t a harbinger of a strong economy or strengthening GDP. These are on top of abysmal auto numbers that show steep declines in sales and an exceptionally high 70-day supply.  Even so, higher rates aren’t exactly leading income investors to the Promised Land. While June might see another rate increase, it will only be the fourth such increase since 2006 — leaving rates in the 100-125 basis point range. The difference to income investors is negligible. So what is an income investor to do? Well, there are safe places for income investors to… Read More

“Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it.” The above is a quote by Laurence J. Peter, the man who formulated the Peter Principle. For the uninitiated, the Peter Principle states that an employee is promoted based on their performance in their current position — not on their ability to do the new job. This means the employee will continue to receive promotions until they get a job they can’t do.  Once they reach this level, they have gone as far as they can… Read More

“Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it.” The above is a quote by Laurence J. Peter, the man who formulated the Peter Principle. For the uninitiated, the Peter Principle states that an employee is promoted based on their performance in their current position — not on their ability to do the new job. This means the employee will continue to receive promotions until they get a job they can’t do.  Once they reach this level, they have gone as far as they can in that organization. Peter called this level their “level of incompetence.” Unfortunately, once an employee reaches his level of incompetence, the organization begins to suffer. And by default, the customers of that organization are harmed by the incompetent person’s inability to do their job. What The Peter Principle Looks Like In Reality The Wall Street Journal has been taking comments in an online debate over the idea of investing the Social Security trust fund in stocks. The idea is that the Social Security trust fund has about $2.9 trillion in assets that, if invested in… Read More

Anyone who knows me knows that one of my favorite investing techniques is to find a trend to follow. Once found, I stay with it as long as possible. Of course it helps to find the trend early, too. But finding an early trend can be difficult. For example, finding an actionable trend in natural gas seems almost impossible. As you can see from the chart below, the median price of natural gas has trended around the $2.50 range for the past 18-months. And this lack of positive momentum in the price of natural gas makes gas stocks… Read More

Anyone who knows me knows that one of my favorite investing techniques is to find a trend to follow. Once found, I stay with it as long as possible. Of course it helps to find the trend early, too. But finding an early trend can be difficult. For example, finding an actionable trend in natural gas seems almost impossible. As you can see from the chart below, the median price of natural gas has trended around the $2.50 range for the past 18-months. And this lack of positive momentum in the price of natural gas makes gas stocks unattractive. But here’s the thing: Natural gas prices are at the beginning stages of a long-term trend that will prevent them from staying this way. Here’s Why While natural gas averaged $2.51 in 2016, the U.S. Energy Information Administration (EIA) estimates average prices will rise to $3.55 in 2017. This bodes well for natural gas companies as well as companies moving product across the United States and the globe. EIA predicts that commercial use of natural gas will rise by 6 percent in 2017. Even so, those kinds of numbers are not a trend that… Read More

If you listen to the talking heads on CNBC, gold’s move from $1,230/oz. to $1,280/oz. since last December occurred despite the threat of at least one, and possibly two, interest rate hikes in 2017. This reasoning has resulted in the idea that gold prices will have to decline from current levels unless the Fed fails to raise interest rates. And frankly, unless the United States enters a recession, the likelihood of at least one more rate increase in 2017 is inevitable. #-ad_banner-#But are the talking heads correct? I don’t think so. Here’s why… Gold prices correlate more to ‘real’ interest… Read More

If you listen to the talking heads on CNBC, gold’s move from $1,230/oz. to $1,280/oz. since last December occurred despite the threat of at least one, and possibly two, interest rate hikes in 2017. This reasoning has resulted in the idea that gold prices will have to decline from current levels unless the Fed fails to raise interest rates. And frankly, unless the United States enters a recession, the likelihood of at least one more rate increase in 2017 is inevitable. #-ad_banner-#But are the talking heads correct? I don’t think so. Here’s why… Gold prices correlate more to ‘real’ interest rates than to ‘nominal’ rates. Real interest rates are nominal rates less the rate of inflation. In simple terms, a nominal interest rate of 3% yields a real rate of 1% if the inflation rate is 2%. Now, nominal interest rates are likely to rise in 2017. But real rates are not, since expectations are for higher inflation, not less. What this means is that even if the Fed attempts to ‘normalize’ them, real interest rates have likely already hit their highs — meaning that gold prices are not likely to go significantly lower from here.   In fact, given… Read More

Flying an airplane is one of my passions. The view from 4,500 feet on a clear day is just unbelievably refreshing. Despite my passion for flying, there are inherent risks in taking an aircraft 10,000 feet above the earth. Everything from weather to mechanical issues can provide a brutal end to an otherwise beautiful day. #-ad_banner-#So safety is paramount when planning a trip. Whether the trip is to practice landings or a cross-country trip, emergency planning is the rule. Now, think about what equipment you’d want when flying — beyond the most basic stuff like fuel and a properly functioning… Read More

Flying an airplane is one of my passions. The view from 4,500 feet on a clear day is just unbelievably refreshing. Despite my passion for flying, there are inherent risks in taking an aircraft 10,000 feet above the earth. Everything from weather to mechanical issues can provide a brutal end to an otherwise beautiful day. #-ad_banner-#So safety is paramount when planning a trip. Whether the trip is to practice landings or a cross-country trip, emergency planning is the rule. Now, think about what equipment you’d want when flying — beyond the most basic stuff like fuel and a properly functioning aircraft. The most obvious piece of equipment is a GPS. A good GPS provides the pilot with information about the position of the aircraft in relation to the earth, but most models today provide weather data as well as charts identifying backup airports in the event of an emergency. Another piece of equipment essential to the safe operation of an aircraft is a radio. The ability to communicate with air traffic control — especially when the weather unexpectedly turns — is critical. And that alone has saved thousands of lives. So what does flying have to do with investing? It… Read More

Prior to 1913, cashing a check in the United States was a hit-or-miss proposition. Many larger banks refused to clear checks from smaller, less well-known banks for fear that the originating bank might not be solvent. This was especially true in times of economic distress, such as the financial panic of 1907. #-ad_banner-#The refusal of some banks to cash the checks of other banks was one of the reasons the Federal Reserve was established in 1913. But it wasn’t until 1918 that Congress ordered the Fed to create a nationwide check-clearing system. For this, the Federal Reserve Banks created a… Read More

Prior to 1913, cashing a check in the United States was a hit-or-miss proposition. Many larger banks refused to clear checks from smaller, less well-known banks for fear that the originating bank might not be solvent. This was especially true in times of economic distress, such as the financial panic of 1907. #-ad_banner-#The refusal of some banks to cash the checks of other banks was one of the reasons the Federal Reserve was established in 1913. But it wasn’t until 1918 that Congress ordered the Fed to create a nationwide check-clearing system. For this, the Federal Reserve Banks created a telegraph network to transfer funds between member banks. Many Americans would be surprised to know that the check-clearing system created in 1918 is still in use today. It’s called the Federal Reserve Wire Network (Fedwire, for short). And it’s truly massive. Fedwire processed more than $835 trillion worth of transactions in 2015. In 2016, the value of the transactions dipped by 8.1% to $767 trillion due to a slow economy. Even so, that’s still more money changing hands every nine days than the entire GDP of the United States. But Change Is Coming Fedwire’s telegraph lines lasted into the… Read More

It’s 1720 in England. A hard-working printer is busy at work. But he’s not happy… #-ad_banner-#All around him are ordinary people starting businesses and making great sums of money by selling their stock. What bothered him was that the businesses didn’t seem legitimate on the surface. For instance, one company’s prospectus promised, “to bring up hellfire for heating.” Another business advertised the ability, “to squeeze oil out of radishes.” Unbelievably, these business owners sold out all their stock in a matter of days. So he asked himself how rational people could… Read More

It’s 1720 in England. A hard-working printer is busy at work. But he’s not happy… #-ad_banner-#All around him are ordinary people starting businesses and making great sums of money by selling their stock. What bothered him was that the businesses didn’t seem legitimate on the surface. For instance, one company’s prospectus promised, “to bring up hellfire for heating.” Another business advertised the ability, “to squeeze oil out of radishes.” Unbelievably, these business owners sold out all their stock in a matter of days. So he asked himself how rational people could buy into such stupid business concepts. But then he made a decision. Instead of trying to understand the rationale behind such silliness, he decided to join the club. He printed a prospectus describing a business “for carrying out an undertaking of great advantage, but nobody to know what it is.” When he opened for business the next morning, long lines of people were waiting to buy his stock. The printer took every penny offered for the stock, and immediately boarded a boat for France. He disappeared forever. Now, the efficient market… Read More

Janet Yellen just launched a nuclear missile into the heart of Social Security. You see, the Federal Reserve announced a 25 basis-point increase in the fed funds rate last Wednesday. At the same time, she made known the Fed’s intention to raise interest rates at least two more times in 2017. Now, by all accounts, the Fed’s actions were correct. The Fed is roughly 300 basis points behind the curve on interest rates. And should the economy enter another recession, the Fed would have no ammunition with which to fight an economic downturn if rates were kept at these lows. Read More

Janet Yellen just launched a nuclear missile into the heart of Social Security. You see, the Federal Reserve announced a 25 basis-point increase in the fed funds rate last Wednesday. At the same time, she made known the Fed’s intention to raise interest rates at least two more times in 2017. Now, by all accounts, the Fed’s actions were correct. The Fed is roughly 300 basis points behind the curve on interest rates. And should the economy enter another recession, the Fed would have no ammunition with which to fight an economic downturn if rates were kept at these lows. Yellen simply had no choice. But at the same time, this increases the unfunded liabilities of Social Security by trillions. That means Social Security’s troubles will show up much sooner than the trustees’ estimate of 2033. Rising Interest Rates Are Bad News For Social Security The U.S. government decided a long time ago to use non-marketable Treasury bonds to replace the cash Congress removed from Social Security. Adding insult to injury, these phony bonds pay phantom interest back to Social Security. #-ad_banner-#So when Social Security went into deficit spending in 2010, some of the interest generated by the trust… Read More

In May 2013, then Federal Reserve Chairman Ben Bernanke hinted to Congress that the Fed would consider tapering its $70 billion monthly bond-buying program. The markets reacted swiftly and violently to the news. Investors immediately began pulling money from the bond markets. Bond yield pushed significantly higher as money outflows scared investors. The event became known as the “taper tantrum.” #-ad_banner-#The reaction in the U.S. REIT market was just as swift. The total returns of the FTSE NAREIT All REIT Index fell sharply, ending the month down 6.6%. The index lost another 8.5% over the next six months. The volatility… Read More

In May 2013, then Federal Reserve Chairman Ben Bernanke hinted to Congress that the Fed would consider tapering its $70 billion monthly bond-buying program. The markets reacted swiftly and violently to the news. Investors immediately began pulling money from the bond markets. Bond yield pushed significantly higher as money outflows scared investors. The event became known as the “taper tantrum.” #-ad_banner-#The reaction in the U.S. REIT market was just as swift. The total returns of the FTSE NAREIT All REIT Index fell sharply, ending the month down 6.6%. The index lost another 8.5% over the next six months. The volatility in the REIT sector illustrated the conventional wisdom among investors about REIT prices and interest rates. REIT prices usually decline when interest rates rise. This is because higher interest rates reduce the present value of future cash flows. As such, asset prices must come down — all other things being equal. And that’s exactly what happened. But that doesn’t mean some economic law is in place here. Nor does it mean that all REITs should experience declines equally. Residential and office REITs can actually rise with interest rates, thanks to the higher demand and rising rents that come with economic… Read More

Insurance is the best business in the world. It’s not just one of the best, but the very best. After all, insurance is the only business in the world that routinely enjoys a positive cost of capital. Every other business on earth is required to pay for its capital. And the cost of capital is always a consideration when starting or growing a business. But not for insurance. A good insurance company gets all the capital it needs for free. Not only that, but it is actually paid to take it. Simply put, insurance is in a class of its… Read More

Insurance is the best business in the world. It’s not just one of the best, but the very best. After all, insurance is the only business in the world that routinely enjoys a positive cost of capital. Every other business on earth is required to pay for its capital. And the cost of capital is always a consideration when starting or growing a business. But not for insurance. A good insurance company gets all the capital it needs for free. Not only that, but it is actually paid to take it. Simply put, insurance is in a class of its own. But that doesn’t mean the industry isn’t without risks. After all, insurance contracts are set up such that the insurer keeps the premiums even if no loss occurs. But it also means that losses could exceed the amount of a customer’s premiums. And if too many large losses occur, an insurer could face a financial nightmare. That’s the reason insurers are so heavily regulated by governments around the world. The Key To The Insurance Business Thankfully, the best insurance companies mitigate these risks. They ensure the fees they charge for investing a customer’s capital exceed the risks they… Read More