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Another Amazing call....4Q 2021 to Jan 2022 Night and Day on the change in market's attitude in relation to financials and tech stocks. BTO has been taking off.....RIO is doing phenomenal.
Great article one year after the fact
The Fed Chairman has been touting "temporary inflation" due to the pandemic related supply chain disruptions, commodity/asset price escalation, etc. He seems to have forgotten his ECO 101 lesson about wage inflation being the most permanent, or least temporary, of all contributors to the inflation scourge. It's politically sensitive to discuss this since wage inflation is superficially perceived as beneficial to the working class. Businesses have been widely reported to offer sign on bonuses to the unskilled labor pool, and salary increases(compared to pre-pandemic levels) across the board. Unless the country wants a grassroots rebellion should employers demand salary reversals when the business cycle slows(or massive layoffs to maintain inflated salaries), you can bet salaries don't retreat. Besides, people need more inflated dollars to pay for inflated prices of goods and services. Would you prefer a 3% annual salary raise, in a 3% CPI environment; or a 8% raise in a 10% CPI environment? (I know CPI is understated by the gov't, but it's a used here as a common basis for comparison) Exclusive of potential higher personal income tax effects due to inflated income dollars, the 8% raise falls 2% below 10% CPI due to currency devaluation while the 3% raise keeps even with 3% CPI. The purchasing power of the dollar is likely to continue descending(escalating inflation), further impoverishing those in need. The trillions of unearned stimulus dollars printed immediately devalued the dollar...since it is not repaid debt. Going forward, the infrastructure expenditures will come from the firehose of Treasury Bills. The interest on this Treasury debt will become a significant burden to be paid by successive generations, but will likely be monetized(print our way out, vs. pay our way out) as it always has in the past. Read: more devalued dollars. The Fed is reluctant to apply the monetary restraint necessary(I consider the Fed's former dual mandate of unemployment and inflation regulation an artifact, MMT says just maximize employment) for fear of causing a recession/depression/market crash.
Robert NYC profile picture
@B172068 Powell is also under pressure from the people running the banks and politicians. His 'transitory inflation' spin is mostly crap. Others in The Fed are more concerned than he seems to be. Powell is just trying to talk down the problem while there is a lasting problem. Jawboning inflation does not work for long.

As for the dollar, it is in comparison to other currencies. The dollar was dropping in the early spring until the vaccination progress in all of Europe was found to be much less effective than in the USA. At that point, the dollar started to rise. This current variant and the fight against it is very powerful in the comparison value of the dollar. I watch the .DXY and has 6 major currencies comparatively.
@Robert NYC Pairing the dollar to any other global fiat currency given the dollar is the global reserve currency, while all fiat currencies are sinking together, is bound to show a marginally stronger dollar. But not due to monetary or fiscal restraint! Although we are halfway down the socialism road, everyone else is already there(or worse)! Read massive gov't entitlements, erosion of privately sponsored investment initiatives, pervasive civil service work ethics where efficiency and improving business practices conflict with job preservation, ad nauseam. China is experiencing a housing bubble said to dwarf our 2008 MBS fiasco. Here you can start with Amtrak and the USPS consistent massive annual deficits as a pathfinder to our soc ialist future. This mega trend, likely to continue in the US, shall make most Americans poorer.
Robert NYC profile picture
@B172068 Understood, but who cares about a Chinese housing bubble? There is no reason to compare the dollar to their managed currency. The CCP can do whatever they want.

The fact is, the .DXY affects gold and silver in dollars through the .DXY and all the other base metals as well. I am not here to talk about the USPS etc... I am here to make money in the market.

As far as socialism goes and incompetent Joe, that is a big problem. You and I do not deal the cards, we just play the hand.

PS - as I said in a previous comment, the .DXY is calculated by factoring in the exchange rates of six major world currencies, which include the Euro (EUR), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK), and Swiss franc (CHF). What major economies are not in the .DXY? Do you see China in there?

PSS - Currencies affect interest rates strongly.

PSSS - Powel never majored in economics. He is a lawyer. The other economists in The Fed are more worried about inflation. Surprise!
Robert NYC profile picture
The permanent inflation from the transportation costs of products shipped will not decline. Joe's first massive mistake of shutting down the Keystone pipeline will keep the prices of the shipping for any physical products in the USA and Canada higher than pre- 2021 and 2020.

Keystone had 5 designed legs and the first 4, fully completed were pumping crude to various refineries in places from Pennsylvania to Oklahoma. The 5th leg still to be built was to connect the entire system to the refinery ports in the Gulf. Noted by the 6 weeks later buyout offer to Kansas City Southern (KSU) and the following competing bids by other railways was motivated by the immediate increase of their profitability projections and the overall valuation of their transportation system.

All of that crude Keystone was pumping, or would be pumping, now has to go by rail and truck. This is overloading the transportation system and anything put on a truck or in a train costs will increase. Buffet owns the largest railway system in North America. Why do you think he supported Joe? Money. KSU's operational geographical area is where the expected 5th leg of Keystone would pump crude. Guess who gets that biz now and/or is not expected to lose?

Mike Kucharski, the owner of Summit, Illinois-based JKC Trucking:

Indeed, freight trucking costs that had been on the downswing from mid-2018 until the pandemic have soared at record levels since. The rate for a long-distance truckload jumped 28.5% from a year ago in May, easily the highest ever in data going back to December 2004, and was rising at a still-astronomical 20.5% pace in July, according to Labor Department data.

Those are the kinds of expenses that ultimately find their way to store shelves.

“All the extra costs that we get passed onto us, we have to pass down to the customers,” Kucharski said. “Our margins are very small.”

NOTES: A) 2004 US population 292 million. 2021 333 Million. B) online orders for products produced further away have increased massively since 2004. C) price of gasoline.

Robert NYC profile picture
Banner Headline on WSJ 8/28:

White House More Than Doubles Its Inflation Forecast in New Update
Administration expects consumer prices to rise 4.8% in the fourth quarter from a year earlier, lifts projections for growth this year
I'm not sure why the focus on financials to capture increased profits during an inflationary period. It is likely that any stock representing goods, services, utilities, natural resources, travel, hospitality and any of a number of other sectors will appreciate with inflationary pressures. Should the longer term projection of inflation prove incorrect, some of these financial stocks will cause pain to one's portfolio. Some other sectors are far less volatile, yet still inflationary-worthy stocks.
@WCM Investments Rising rates may benefit banks for a while as their net interest margin income will rise. Eventually, though, sharply higher rates result in defaults and loan losses. We saw that in the 70s and 80s, for those of us with long memories. A two-edged sword.
Great explanation of yield spreads for those of us not as experienced! Thanks you for taking the time
I own JPM and GS. Bought 5 years ago…

I wouldn’t be adding to any banks here…

Rates look like they are about to roll over
Why couldn't FED be buying longer term bonds and also manipulating long term interest rates?
Lance Brofman profile picture
@mendo More recently the Federal Reserve has adopted a new more direct, method of propping up interest rates. The Federal Reserve has established a reverse repurchase facility, in which counterparties like money-market funds can place cash with the central bank. Over $1.04 trillion has been placed in that facility at times. Thus, even though the Federal Reserve bought $ trillions in its quantitative easing programs, where the Federal Reserve was effectively a lender, it has acted as a borrower with the reverse repurchase facility. The rate that the Federal Reserve pays banks on reserves provides a minimum interest rate for banks investments, since it would be illogical for a bank to lend to any entity at any rate below that which the bank can obtain from risk-free deposits at the Federal Reserve. Likewise, the rate the Federal Reserve pays non-bank financial institutions in its’ reverse repurchase facility provides a minimum interest rate for non-banks’ investments and lending.

The existence of more than $1 trillion in the Federal Reserve’s reverse repurchase facility could also mitigate the effects any actual tapering, on a flow-of-funds basis. If the Federal Reserve reduces its’ holdings of Treasury securities and of agency mortgage-backed securities, by a given amount below what the size of the holdings would have been had there not been any tapering, but then adjusts the Federal Reserve’s reverse repurchase facility interest rate down to a level that causes that same amount to flow out of the Federal Reserve’s reverse repurchase facility, the total amount of securities held by the Federal Reserve would not change. ..”seekingalpha.com/...
Scared Bear profile picture
I think is a mistake to analyze the economy with our old paradigmas because we are in a completely new scenario. It is true that some prices are going up in some places, but if you remove the governments intervention (stimulus) the economy will automatically go into deflation and depression. I don’t think that interest rates are going to go up significantly. Maybe a bit to correct some disfuntions and stop some bubble formation, but this is not a free market economy no longer, since 2008 the governments intervene money prices, subsidizing certain parts of the economy and created a huge imbalance that now nobody knows how to exit. More, it is so complicated, that everybody stop thinking in exiting this centralized interest rate setting and are trying to find better ways to manage it, but they ate making the problem more and more complicated. Doing monetary policy with short term rates, Greenspan style, was fine. QE Bernanke style was a mistake because you can’t come back from that. And now, fiscal stimulus Trump-Biden style, is comfortable I admit, but made things even more complicated. So I don’t know if one can say that there is inflation, I think there ate disruptions, that made some prices rise a lot, but old fashion inflation, there isn’t.
Robert NYC profile picture
@Scared Bear Stop trying to overthink this. You flood the economy with trillions on top of trillions of newly printed dollars while The Fed plays games until they have no games to play means real inflation is coming.

When inflation gets legs, stopping it is very difficult.
@Robert NYC current inflation is overstated due to the 12 month comparator, which falls within the lockdown period.

If you look back to 2019 instead of the depressed 2020 economy, inflation is only 3.1%. And a large portion of that is due to temporary supply chain bottlenecks like the chip shortage.

Sure, it could take off, but more likely it will gradually come down over the next 18 months.
@Robert NYC I think there will also be inflation, but a lot of things have been falling from gold and silver to lumber. Lumber and copper, steel you name it it has fallen in price. Hog prices. Oil is around 65.

I am not ruling out the tech stocks will once again be the winners over this next decade. Long gold and silver, utilities, banks but also very long FAANG and the QQQ’s
24 Aug. 2021
Look at BANX as well.
Rida Morwa profile picture
@Mitch BANX is interesting owning debt for smaller and regional banks
My MS Morgan Stanley has done the best.
Rida Morwa profile picture
@Jimghad I'm very happy for you.
Francis Schutte profile picture
You REALLY have to be out of your mind to buy Financials now...out of your mind!!! a pro with 45+ years of experience.
Rida Morwa profile picture
@Francis Schutte I appreciate your opinion. Do you care to expound on it?
@Francis Schutte You have to be out of your mind NOT to buy them now!
With inflation and interest rates rising so will their profits rise due to their floating rate loans.
I would only say that one should buy higher yielding financials such as OXLC and FSK with 11% yields to give real inflation protection.
BTO looks like a well managed CEF, but the 2% management fee seems high. Over the past 10 years, XLF, which has a 0.12% management fee, has generated a slightly higher total return than BTO. If you need immediate income, BTO's 5% dividend makes it a good choice, but unless its fund managers can magically produce higher returns to justify their 2% bite, I'll stick with XLF.
Rida Morwa profile picture
@MoreBacon BTO meets my goals of income first. I am an immediate income investor as many know, so I'm willing to take more cash now and reinvest it than bank on capital gains. Furthermore with rising inflation, cash now is more valuable than cash later.
Steve Fischer profile picture
I took profits on RF and Wells Fargo but still hold shares in BOLB an extremely thinly-traded stock which is the holding company for The Bank of Louisiana and is selling for half book value. It’s not easy to get info about them however.
salyer1105 profile picture
I sold all my cyclical financials.
PendragonY profile picture

Why would you do that?
BTO up over 6% today? That's some serious herd behavior.
Nice call Rida 👍
Would never buy a fund that is 15% over NAV, much less one with a 2+% management fee. This is nothing more than a leveraged financial services ETF with an overinflated fee structure. Sure, the leverage has worked for it over the past few years; but if the sector goes south that leverage becomes an anchor. The advice here is to buy high, hoping the market goes even higher. That's hope, not a strategy.
PendragonY profile picture

Sorry, but a CEF is quite a bit different than an ETF. And BTO beats KBE and KRE anyway.
@PendragonY yea but long term it isn't beating Vanguard's low cost financials Index ETF. Only over the last 8 months. Go farther out than that and it loses every time. Of course I'm not factoring in the dividends. But with an expense ratio like that does it really matter. I agree this isn't a good fund.
@johngonole Keep in mind I'm not disagreeing with your assertion that financial stocks might be a good play here or that the yield curve will increase. Just think there might be better ways to play it.
According to John Hancock website, BTO is selling at 11.79% premium to NAV. It is 15.6% levered, and the net expense ratio charged is 2.08% (referred to "what you pay" on the website. You have to scroll all the way to the bottom to find this!) Not difficult to do better than that.

Best hedges against inflation would be: energy and mining companies, REITs including timber REITs, fertilizer producers, gold, and some banks. Canadian banks are arguably among the best in the world for investment. Long all of these.

@ahimsaka why fertilizer producers specifically?
PendragonY profile picture

First, a CEF is more than just a basket of passively held securities. So NAV isn't the entire value of the fund. 2nd, since the stated yield is NET of the fees, the fees are much less important. Fees get a lot of coverage because in passively managed funds, that is what drives the fund's performance compared to similar funds. But that just isn't the case in actively managed funds.
Bill Gates and other billionaires are said to be buying farmland, since I'm not a billionaire, I include fertilizer producers in my basket of commodity producers.
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