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Why Interest Rates May Not Rise Quickly, or Much at All

In response to this article cautioning against buying long-term municipal bonds, I wanted to outline some reasons that interest rates may rise slowly, or not much at all. Here are some items that also need to be considered when factoring in whether to invest in municipal bonds:

Global interest rates are incredibly low.  The market for securities becomes more global every day and investors worldwide have a choice between buying bonds almost anywhere in the world with low transaction costs.  So if interest rates in Germany and Japan stay minuscule, it is unlikely that Uncle Sam is going to pay so much more.

Economic growth is likely to remain subdued.  Demographics are destiny, and we have an aging workforce and are pretty close to full employment.  Economic growth is largely based on two factors – size of the workforce and productivity growth.  The workforce can get a little bigger, but if GDP growth was under 3% when unemployment went from 10% to 5%, how is it going to rise above 3% going forward?  Also, in a service oriented economy there are limits to how productive we can become.  What tools are making us more efficient at our jobs that don’t eliminate workers and reduce the size of the workforce?

An aging population means people need investment income.  Ten thousand baby boomers turn 65 every day, and they will need income in retirement beyond what they are receiving from Social Security and pension.  Bonds provide a more reliable source of income than stocks, and despite low rates they also offer a higher rate of income.

The stock market is incredibly expensive.  Using long-term valuation measures such as Shiller - PE and stock market capitalization to GDP, investors are paying a very high price for stocks.  If earnings disappoint, some money will come out of stocks and likely into bonds, keeping a lid on rates.

The budget deficit is going to rise, limiting fiscal stimulus.  The Federal Reserve already has a massive balance sheet of bonds and the interest they earn gets paid to the Treasury Department.  As those bonds mature the Treasury gets less income, increasing the deficit.  Then consider increased Social Security and Medicare benefits, and the impact of rates that have already risen nearly 1%, and the ability of our government to lower taxes or increase spending to stimulate economic growth become severely compromised.

Short-term rates may stay fairly low.  The Fed has been extremely cautious in raising rates, largely because they don’t see much inflation or wage growth.  Even if they do raise rates 4 times or 1% over the next 2 years, the longer end of the yield curve may not move up nearly as much as short-term rates, as has been the history during periods of Fed tightening.

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Securities offered through Kestra Investment Services, LLC.,(Kestra IS) member FINRA/SIPC.  Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.  J Matrik Wealth Management is not affiliated with Kestra IS, Kestra AS, or Five Star Professional.


Not Even Smoke and Mirrors

BestCashCow first projected that Trump’s extreme and malignant narcissism would cause him to fail properly to divorce from his assets in a way that would call into question his independence, his freedom from the emoluments clause, and his and his family’s liability.

Many well-versed in the law and in trusts maintained that Morgan, Lewis and Bockius, Donald Trump’s law firm, would put together an air-tight, yet complicated, ownership structure.  A smart ownership structure would use his ascendency to the presidency as an opportunity to pass his assets to his children and grandchildren with limited tax liability, while assuring that he would have all of his needs met for the rest of his life should he be removed from the presidency.

Following this weekend’s release of the trust documents under the Freedom of Information Act, it is very clear that everything, including the lease on the Old Post Office Building in Washington, has passed into the Donald J. Trump REVOCABLE Trust.  President Trump is the only beneficial owner of the trust, but the trust is run by his son and chief financial officer.  There is no legal impediment to Donald Trump’s receipt of information on the trust assets and their performance (as Sheri A. Dillon proclaimed in her January 11, 2017 news conference) and the trust is revocable at any time.

In short, Donald Trump’s law firm has done nothing, absolutely nothing, to separate Trump from his assets and the ethical liabilities that those assets create, save to introduce a single legal entity, wholly owned by Donald Trump himself.

The new administration – and the Republican Congress – are bent on exploiting the government for their own self-interests.  Inherent in that goal is an assumption that the majority of the population at large is totally indifferent to, or unable to understand, the color of the wool being pulled over their eyes.  In this case, there is no smoke, no mirrors, and the wool can be seen right through.

See the best savings rates here.


Retirees Face Uncertain Future

It is exceedingly hard to look even months out with a modicum of confidence as to coming trends and events.  We are in the most uncertain of times.

This is especially true for those in retirement.  Over the last decade, really beginning in 2008, retirees have had to break with conventional wisdom and invest a much larger proportion of their assets in the market than in the past and than wisdom would suggest; bonds and cash simply offered too little yield to meet their needs. 

Now, with a new and unsteady president, the market seems even more risky for all Americans, and especially for those depending solely on unearned income.  The country has certainly enjoyed a significant upswing following the election, but that seems more fueled by irrational exuberance than by a thoughtful weighing of the major risks ahead resulting from irrational and off-the-wall government leadership.

Logic suggests that the market, however strong in recent days, is due for a major fall as the impact of a seriously unstable president with a seriously flawed agenda clashes with reality.   Those in retirement are caught in the middle.  Stay in the market and enjoy a temporary surge or get out now before an almost certain and lasting drop takes place. 

Market timing has never worked.  While all looks good for the moment (interest rates are beginning to creep up and the market is doing well), logic and clear thinking dictate that retirees need to act now in their best interests, reduce significantly their market holdings, and move to the safety of government-insured bonds and bank or credit union savings accounts and CDs.  To do anything else will leave a significantly large proportion of the population today in great jeopardy of falling short of the resources required to cover basic needs.  

Explore FDIC-insured, high yielding savings accounts and CD accounts here.