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Podcast 4: Stock Market Behavior and Treasury Bonds

May 28, 2020

Listen below for our podcast update where we talk about stock market behavior and treasury bonds.

 

Script

Hi Everyone,

Today I want to discuss two topics. The first is about stock market behavior and the second is a new Treasury bond.

Before we get started, I’d like to define the term “black swan event.” The term originated in 1697. Previously, every single swan ever observed and recorded was white. Therefore, everyone presumed that only white swans existed.

An explorer, whose name I can’t pronounce discovered black swans in Australia. This was an unexpected zoological event that was so SURPRISING* that the phrase “black swan” was coined.  Later it became a metaphor for unanticipated events. It frequently refers to financial events but its use has broadened to mean anything that:

  1. The event was unpredictable
  2. Has widespread implications
  3. In hindsight, the event was predictable. Think of the phrase hindsight being 20-20 a play on words for vision not the year.

Benjamin Graham, the famed Value investor of which Warren Buffet of Berkshire Hathaway is a disciple, said: “in the short run, the market is a voting machine but in the long run it is a weighing machine.”

What he meant is in the short term, the market reacts to the media headlines but in the long-term it is the value of companies and their ability to return a profit for their shareholders that predicts the price movement of stocks and therefore the stock market.

This COVID-19 pandemic is being termed a Black Swan and the stock market reacted accordingly.

People tend to react emotionally to bad or good news although studies show people react more strongly to negative news. It is why we frequently see negative headlines. We pay less attention to good news which is a sad commentary.

On the other hand, investors sometimes ignore the headlines as many are doing right now. I’ve been participating in a two day-conference via webinar offered by the Financial Planning Association. One of the speakers was from Franklin Templeton – Dr. Michael Hasenstab, the Chief Investment Officer for their global macroeconomic analysis. He sees the stock market as going through the different phases of grief and right now the market is in denial. He feels a downturn is forthcoming as the reality of our predicament sinks in.

It is one of the reasons that a long-term perspective is needed to invest in the stock market. No one can accurately predict the short term interruptions but over time, the market moves beyond the disruptions and gets back to looking at a company’s value.

A main reason we ask that you let us know when and how much money you need to withdraw from your account is so we can adjust your portfolio accordingly.

Moving on to bonds, last week the Treasury sold bonds that haven’t been available since 1986 – the 20-year bond. Up until now the primary maturities were 2, 5, 10 and 30 years. The Treasury raised a lot of money for an extended period time at a very low interest rate. The yield was 1.22% though since last week, the yield is down to 1.12%. Recall that when yields decline, bond prices of existing bonds rise – an inverse relationship. So on the day I checked, here are the current interest rates on the various treasury bonds.

  • 2 year 0.17%
  • 5 year 0.34%
  • 10 year 0.66%
  • 20-year 1.12%
  • 30 year 1.37%

This is a far cry from the interest rate in 1990 when the 10 year yielded an average of 8.5%! For those of us recalling interest rates of the past, we need to adjust our thinking to a continued low interest rate environment.

So who bought these bonds? Insurance and pension plans were large buyers. This makes sense since these types of plans try to align their assets with their liabilities. 60% went to foreign central banks. This also makes sense because many of these countries have negative interest rates. Germany’s 20 year government bond is yielding a minus 0.155% so our 1+% looks attractive.

There is also discussion about selling a 50-year bond. Considering how much debt we started with before the pandemic and are now adding, selling a bond of this duration to finance our debt at low interest rates would be beneficial to the government.

Already, Britain, Canada and Italy offer a 50-year bond.

Now for some good news. In 2021, California will house the largest trash-to-hydrogen power plant in the world. The plant will convert such items as paper, old tires, textiles and plastic to produce cheap and green hydrogen.

Faculty at Israel’s Materials Science and Engineering developed a prototype for a self cleaning face mask that kills pathogens think COVID-19. The power will come using a smartphone charger. They have applied for a U.S. patent. The price of the self cleaning mask will be $1. I haven’t found anything that provides a timeline for this mask to come to market

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