This is the continuation of a 10 part blog series entitled, “10 MACRO HEADWINDS IN THE FACE OF INVESTORS.”
The markets are difficult to navigate due to an unprecedented level of distortions from Federal involvement. October inflation was 3.53%. At least we came down from September’s level of 3.87%. But if the government is manipulating the interest rate markets (which they are through monetary policy at the Federal Reserve) how can we get ahead when the interest rate on a 3 month treasury bill is .01% and the interest rate on a 10 year treasury bond is 2.01%?
Put this in perspective, you are an investor with $1 million dollars. You don’t want to take risk in the volatile equity/stock market so you buy a 3 month treasury bill at .01%. That means you would earn $100 bucks of interest on a million dollar bond. Wow, where do I sign up for that sh!t?
Likewise, the yield on a 10 year treasury is 2.01% today. A million dollars invested at 2.01% would yield only $20,100 in annual interest. We know that inflation is 3.53%. So with each passing day, your purchasing power is being flushed down the toilet. A wonderful treat for savers in this country! How do we expect retired folks to live in retirement off of their savings? After all, we told them over the years that pensions will go by the wayside and that they need to save and invest in their own programs like IRA’s and 401k’s. Now they are ready to retire and we tell them to go screw themselves, we need to bail out the bankrupt. NICE!!!
Dividend stocks are only attractive if we compare them against the manipulated interest rates. Interest rates should exceed the rate of inflation (usually about 150 to 200 basis points on the 10 year treasury). So if inflation is 3.5%, then long term rates should be 5.0 to 5.5%. If these interest rates were market driven (not influenced by Fed policy) then current dividend yields would not look that attractive at all.
Even so, if dividend rates on S&P 500 stocks are averaging 2.3% and inflation is 3.5%, then the only way you could earn a real return (inflation adjusted) is to get some capital appreciation in the underlying stock. But stocks appreciate if earnings are growing and earnings tend to grow when the economy is growing. How’s that growth going in Europe and here in the U.S.? Not so wonderful. Europe is slip-sliding-away into a recession.
So the government isn’t doing investors any favors. Why are they doing it then? They are doing it to save their own butt. We are accumulating federal debt at an unsustainable level (similar to Portugal, Ireland, Italy, Greece and Spain were over the years). Nations have to constantly refinance this debt as bonds come due and have to be rolled over into new bonds. What if we had to pay 4% or 5% or 6% on our new debt issues as a country rather than the manipulated level of 2%? We’d have much higher interest costs.
Eventually, the market realizes that the game is up – see Europe. Once the market feels that the game is up, investors no longer want to buy the riskier and riskier bonds at lower rates in fear that the bonds won’t be paid back (default risk). In order to offset increasing default risk, investors will want higher interest rates. If the debt levels continue to swell and interest rates spike higher and higher, the debt levels end up crushing the country (see Europe). It’s a really fun game.
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