Weighing In On Banks & Interest Rates… A “Major Cultural Shift”… A Top Pick Revealed…
Starting to feel those market jitters yet?
You’re not alone. In just a few days, we’ve seen two major bank failures. And another one could be on its way. (We’re looking at you, Credit Suisse.)
Meanwhile, the war in Ukraine rages on. Volatility is spiking. Investors are fleeing to safety.
What to make of all this? To get some perspective, I turned to my colleague Nathan Slaughter.
Nathan and I have worked together for over a decade. As the Chief Investment Strategist of High-Yield Investing, there’s no one I trust more to get level-headed insight on income investing, interest rates, or the market at large.
Below, Nathan and I talk a little more about his background, the latest on SVB and the ramifications for the Fed, a big “generational shift” happening in the market, and one high-yield pick he likes right now.
My questions to Nathan are in bold.
Nathan, what’s something about you that our longtime readers may not know?
I am a gold-medal-winning homebrewer and a BJCP-certified beer judge.
Back in 2012, I had the crazy idea of starting my own business — a craft beer and homebrew supply retail store called Brewniverse. I’m proud to say it was recognized by Men’s Journal as “One of the 50 Best Beer Stores in America.”
There’s no better way to understand the inner workings of the business world than running one yourself. It’s gratifying but far more work than most people realize. I ended up cashing out with a lot of new friends and tons of respect for real business owners.
Aside from that, I am usually near the top of the weekly trivia contest leaderboard at our local watering hole. I once tried out to be a contestant on Jeopardy. I got close but wasn’t selected…
You’ve talked about your first job in finance before. How did it affect your view of the industry and lead to what you do now?
When I started out, I made peanuts. Everything was commission-based. My colleagues were more driven by the insurance side of the business, but that held zero interest for me. I wanted to manage money.
So I started with mutual funds and later became the first in my district to pass the Series 7 exam. I left AXA in 2001 for a regional brokerage firm called Morgan Keegan, which offered much better tools and resources. It felt like getting called up to the Major Leagues. But they wanted brokers to spend 99% of their time in the field meeting prospective new clients and 1% actually managing the assets. This left me disillusioned.
I was more interested in company research, economic reports, and investment performance than cold calls and country club brunches. So I left in 2004 and started working as a freelance financial writer and editor. I wrote for various online and print publications before joining Street Authority full-time.
You’ve discussed the shift in spending habits toward “experiences” over “things.” Can you elaborate and explain the ramifications for investors?
I’ll give you some interesting statistics to start.
Approximately 90% of Americans plan to travel the same or more in 2023 than they did in 2022. Recent polling conducted by Expedia and several other groups found that 72% and 76% of U.S. adults now prioritize experiences over things.
Consider this… While shopping malls sit half-empty, more than 90 million tourists will pour into National Parks this year.
This phenomenon, rather new in the grand scheme, has been strengthening recently. And it has broad ramifications for investors. Bed, Bath and Beyond (NYSE: BBBY) is failing, while Airbnb (Nasdaq: ABNB) has amassed a staggering market value of nearly $80 billion.
Why is this major cultural shift happening? I’ve seen several theories put forth, but here’s one that seems plausible…
Millennials and Gen Z-ers (pretty much anyone under the age of 40) has grown up in an era where friends, family, neighbors, and co-workers document everything on social media. As the saying goes, “pics or it didn’t happen.” They see other people’s experiences online and want to create their own.
While I may not be a millennial, I get it. I love the outdoors, hiking, camping, water skiing, and, most importantly, fishing (salt water or fresh water). Part of that goes with the territory when you grow up and live in Louisiana (we now live in Arkansas – plenty of stuff to do there, too). Plus, my wife and I live to travel — Aruba, the British Virgin Islands, an Alaskan cruise, you name it.
That’s not to say consumers have renounced all material goods. To be sure, we still buy microwaves and blue jeans. But in sifting through tens of millions of card transactions, Visa and Mastercard can quantify what all these polls tell us. Less of our paycheck is going towards stuff that will clutter up the house; more is spent on memorable activities like sporting events, music festivals, and white water rafting excursions.
You recently weighed in on the SVB bank failure. What (if any) implications will this have on the Fed’s upcoming decision on interest rates?
Policymakers were determined to quash inflation by tightening until something broke. Well, something just broke.
Whether you call it a bailout or not, we’re seeing government intervention on a scale we haven’t seen in 15 years. The market is a little spooked, and it wouldn’t surprise me if a few Fed members are, too. They may feel compelled to take a wait-and-see approach for the time being.
But if inflation isn’t fully wiped out, it can return with a vengeance. History has shown this again and again. So I don’t think we’ve seen the end of rate hikes. Remember, the labor market is still running red hot, and the consumer price index (CPI) is still showing a 6% growth in prices. That’s better than where we were, but it’s still triple the Fed’s stated comfort zone of 2%.
If there’s one thing we know, it’s that income investors love high yields. So what’s one high-yielding pick that’s particularly compelling right now?
Over the past year or two, I have repositioned my portfolio over at High-Yield Investing to be less sensitive to rate hikes. Even better, we’ve added a few picks that even benefit from this climate.
As I mentioned earlier, the inflation fight isn’t over.
One standout pick that benefits is Blackstone Mortgage (Nasdaq: BXMT). Rather than a typical mortgage REIT, this hybrid lender/investor originates mortgage loans for hotel resorts, apartment complexes, and other commercial properties. Most of the firm’s liabilities are fixed, while 98% of its loans are variable. So borrowers are paying considerably more than they did a year ago.
I’ve often said that double-digit yields are a sign of trouble. But that’s not the case here. Distributable earnings per share have risen in each of the past four quarters. The lofty 12% yield is supported by a comfortable coverage ratio of 140%. Each percentage point rate increase adds another $0.05 per share in quarterly earnings. So if we’re not done with rate hikes (as I suspect), this bodes well for BXMT.
In the meantime, if you’re looking for a stable of long-term holdings that also pay out generous dividends, then you need to see this…
Nathan and his team have identified 5 safe, high-yield stocks that allow you to keep it simple. You can forget about meme stocks, volatile cryptocurrencies, and complicated trading strategies… With picks like this in your portfolio, you may never have to worry about what the market is doing again!