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My Notes on the Market: June 2022 Part II

My Notes on the Market: June 2022 Part II

June 22, 2022


Markets recovered through the end of May and, so far in June, have revisited the lows for the year in all asset categories[i]. We were hoping for stability and we got more pain.

It is clearly during times like this that we need to think clearly, understand what is happening, place it in historical context, try to stay unemotional and work to get through this mentally – and of course financially.

We have an interesting perspective based on our history. We work with 200 financially successful, highly intelligent, broad-minded and self-made individuals. Many have owned businesses that gave them their self-made success. We value their opinions on the recent events as much as they value our opinions on economics, investments, fund performance and long-term investment strategy.

We wanted to give you some of the collective thought, analysis and strategy that we have discussed with nearly every client over the last three months. Client insights have been so profound we find it imperative to share them at a time like this.

Before we do that, a brief restatement of what investment returns have been so far in 2022 through June 16 for bonds [ii] and stocks [iii] :

  • Muni Bonds -10-15%
  • High Yield Bonds -10-15%
  • Nasdaq Index  -35%
  • SP Index -22%
  • Long Term Treasury Bonds -22%

Riskier assets have lost substantial value- some down 80-90%[iv] from their highs, a virtual permanent and total loss of capital.

While we view bitcoin and digital assets as beyond the most speculative and risky of “assets,” we can’t help but believe that the collective loss of nearly 2 trillion dollars in the last six months has caused great dislocation in the value of other assets. But we don’t think that is the true cause of all this…

Inflation and rising interest rates are the cause of nearly everything you are seeing with the incredible repricing of all asset classes substantially lower. If you owned a 20-year bond that paid 2% and now it should yield 4% based on the change in market rates, that value is going to decline roughly 20%. That is why long-term treasury bonds have had record declines in 2022. Interest rates stayed low from 2009 through 2021[v] as the Federal Reserve kept rates at near zero to support the US economy and buying 8 trillion of bond assets over the last 10 years.[vi]

Obviously, that game is over as inflation has forced the Federal Reserve to raise rates aggressively to combat inflation.

So here we are.

Our clients know how business works – sometimes you have a recession and you have lean times. Sometimes your investments provide negative returns. In the fixed income world, annual negative returns are very rare occurring maybe once or twice in any 10-year period. That is why we save. That is why we watch our borrowings and keep our annual costs under our annual income. We don’t get too high and, in times like this, we try not to get too low.

We are here to help you through this. Fixed income investments are normally mean reverting - interest rates go up, the economy slows down, we have a recession, things normalize and rates come back down. That cycle has repeated itself consistently over the last 100 years[vii]. We look to the 10 and 20-year annualized returns on all the asset classes we invest in - they all have compounded long term returns in the 4-6% range[viii]. But as we are seeing, there can be a wide range of outcomes on a 1-year basis. It is also important to restate that we invest in conservative asset classes, mostly because we try to lower volatility and variance on an annual basis. With the long-term treasury bond down 22%[ix], it is clear that all assets are caught up in this, even the most conservative.

Ok, what to do now?

Here’s what our client discussions have sounded like-

Client A - Do these funds ever stop going down? How much can I lose?

Before we answer…

Let’s take a common real life example. Client A has 2 million dollars in retirement and her portfolio generates 4% or $80,000 per year in income which she takes to supplement here $25,000 in social security and $40,000 of other outside income. That’s $145,000 gross income and she needs $110,000 per year to live. Her current portfolio is down 15% to $1,700,000.

We have said - “Forget what the market values your portfolio at every day. Your $80,000 will stay consistent over time and your income is unchanged. The market mechanism is valued as if you sold today. You have no reason to sell. Others selling are either desperate or panicked and are taking a very discounted price to get their money in cash. Don’t do that.”

Let us ask you a question: If you owned a rental property that paid you $80,000 per year, would you care what it was theoretically priced at every single day?

Of course not, that would be very silly. Just because your account is valued every day does not mean it is representative of its true value over a longer period or how it is valued in more normal market environments.

And yes, to finally answer the above question: The funds do stop going down. Nine months ago they were at all time highs. They will bounce around, but as soon as the recession hits and economic activity slows, rates with come back down and we will get a lot of value back. How much can you lose? Nothing if you don’t sell. History shows unequivocally that they will come back to fair value.

* Note: This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

Client B - Can all these assets default causing permanent losses?

Whoa, that’s a deep question. We are witnessing over 10 trillion dollars of losses in the equity and crypto markets and losses in the bond market from the rapid rise in rates[x]. Whether this becomes like the 2008 subprime bond default debacle, that is not clear. This has a different flavor, and all crises are different. The fact is that through 2007-2009, there were minimal muni bond defaults and the 2-3 years after the 2008 crisis, most conservative income asset classes recouped a lot of the 2008 losses, but the losses through the crisis were very steep. We had no clients sell at the bottom there, and we hope to have no one sell at the bottom now. The total returns from 2010 to 2020 compounded at closer to 6-7% in most of our conservative income funds, so longer term , there is a lot of money to be made back.[xi]

The maturity and equanimity of the vast majority of our clients has been amazing to us.

We have heard the following from many clients:

“We know what we own, and we have watched these income funds for over a decade - they go down and they go up. The investment and economic landscape with the Fed, crypto, the Ukraine war, crazy IPOs, $5 gas, 6% mortgage rates and high valuations on money losing companies is insane. There is pain to be had. We know our income streams underwrite our life and always have. It’s crazy the value drop, but it doesn’t make us think that we should be selling here. In fact, we KNOW we should never sell here.”

“It doesn’t feel good to look at declines like this, but in context of the huge losses in other asset classes, we understand the forced selling that has to take place. Plus the Fed should have raised rates sooner to make sure inflation stayed under control.” (This, we wholeheartedly agree with)

“Can you imagine someone taking out a 6% mortgage? I’m very happy to have my income every first of the month. I have no decisions to make. The values will come back over time.”

“We didn’t set up a conservative income based portfolio to sell it in times of stress. The reason we did that is so we don’t have to do anything no matter how extreme it gets.”

The fact is we are in record territory for losses on an annual basis. Losses in fixed income in any year are rare. Losses of 10 percent or more will set a record for fixed income losses in a year. Do 6% mortgages allow the US economy to function properly? We say no. How many cars can be sold with the interest cost being 8-10% per year? Very few. Economic activity is slowing substantially as we speak. Job losses are unfortunately coming soon too.

Rates will peak and they will come lower as the recession takes hold. The mutual fund managers showed themselves to be proficient in holding securities that were fine through the 2008 crisis. We are confident that defaults will not be significant in the conservative portfolios we are invested in.

That said, we are tuned in every day to see how this unfolds. Are we at the bottom? We don’t think it is helpful to be “hoping” for a turn in markets. But they will at some point bottom out. Soon? No idea. But the income will be the same no matter what. It will turn when it turns.

Call or email every time. Maybe we will use what you say in our next correspondence! Feedback always welcome.

Be well. Happy Summer!



The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.












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