The Week in Charts (5/14/24)
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The most important charts and themes in markets and investing…
1) “Don’t Let Them Sell You a Bond Fund.”
Bill Gross, the one-time manager of the world’s largest bond fund (PIMCO Total Return), is now saying that “Total Return is dead … don’t let them sell you a bond fund.”
Why is he saying this?
He thinks that the interest rate on 10-Year Treasuries will rise above 5% within the next 12 months, which would cause bond prices to go further south.
Will that happen?
Who knows. Forecasting the short-term direction of interest rates is akin to predicting where stock prices will go in the next year. Which is to say that nobody can do it with any consistency whatsoever, even the “Bond King.”
But a better time to deliver such a message would unquestionably have been four years ago when the 10-Year Treasury yield was hitting record lows (0.52% in 2020). Back then, bond investors weren’t being compensated at all for interest rate risk and were earning a negative yield when factoring in expected inflation.
Today, after the longest and deepest bond bear market in history, we’re in a very different place.
10-Year Treasury yields are over 4 percentage points higher on a nominal basis and 3 percentage points higher on a real basis (adjusted for expected inflation).
As for the concept of total return, I would argue that “capital appreciation” is not the reason why you should be buying high quality bonds in the first place.
Instead, it should be in order to clip the boring coupon. For it is that coupon which will dictate your future returns. Not necessarily over the next seven weeks or seven months (in the short run, the direction of interest rates matters most), but over the next seven years. With a correlation of 97%, nothing is more important to long-term bond returns than that starting yield. And with much higher starting yields today, the next seven years should be much, much better than the last seven.
If you don’t have seven years to wait, then a standard bond fund may not be for you, especially if you can’t stomach a drawdown along the way. Find the vehicle that best matches your risk tolerance and duration as an investor.
2) Saving Social Security
More people are receiving Social Security benefits than are paying in, and if nothing is done the trust fund will run dry in 2035 at which point benefits will have to be cut.
Is this inevitable?
Not at all. The list of things we can do to save social security is a mile long, including:
- Raising the payroll tax (currently 6.2% each for employer/employee).
- Lifting the cap on earnings subject to the payroll tax (in 2024, only the first $168,600 is taxed)
- Increasing the full retirement age (currently 67)
- Reducing the benefits of higher income earners
- Slowing the growth rate in benefits (lower the COLA adjustment)
- Cutting spending elsewhere and diverting that money to social security (my preferred option)
So why aren’t we doing any of these things?
Because 2035 is a long time from now, and the main goal of most politicians is to stay in power. And the best way to stay in power is to not go anywhere near the “third rail of politics.” Which means that the most likely scenario is the continuation of the status quo until a crisis is imminent.
3) Is the US Consumer Finally Pulling Back?
Persistent inflation appears to be taking its toll on the American consumer.
We’ve seen a renewed decline in the Personal Savings Rate, which moved down to 3.2% last month. That’s the lowest rate since October 2022 and well below the average savings rate over the last 30 years (5.8%).
Consumer confidence is also turning down again, which according to the Conference Board is now at its lowest level since July 2022. Their biggest concerns: “elevated prices, especially for food and gas.”
A number of recent earnings reports have illustrated consumer weakness as well:
- Starbucks ($SBUX) Revenue fell 2% over the last year. Since its IPO in 1992, the only periods with a bigger revenue decline than today: 2008-09 and 2020.
- Home Depot ($HD) revenues fell 2% over the last year, the 5th straight quarter of negative YoY growth. That’s the longest stretch of negative revenue growth since 2009-10.
- Nike ($NKE) Revenues were up less than 1% over the last year, the slowest growth rate since 2022.
4) Falling Fertility Rates
3.59 million babies were born in the US in 2023, the fewest since 1979.
The total Fertility Rate in the US moved down to 1.62 births per woman in 2023, an all-time low.
We’re in May and you know what that means: the return of the ominous slogan “sell in May and go away.”
Very catchy indeed but there’s only one problem: the data doesn’t support it.
While lower than then the November-April 6-month period, the S&P 500’s total return from May-October is still positive: +6.7% annualized on average. Not exactly something you would want to “go away” from.
And the percentage of positive returns from May-October (72%) is only 1% lower than the November-April period.
Which is why you should always ignore headlines telling you to sell based on the calendar. If you’re a long-term investor, every month is a good month to start investing…
6) The Single-Stock Casino
Charlie Munger once said that Wall Street will “sell sh*t as long as sh*t can be sold.”
The latest example: the proliferation of leveraged single-stock ETFs. Assets in these vehicles hit a record $7.1 billion in the first quarter of this year, more than doubling from the prior quarter.
What’s the most popular single-stock fund?
You probably guessed it: the 2x long Nvidia ETF ($NVDL), which grew its asset under management to over $2 billion at the end of Q1, a 9x increase from where it started the year.
Why are people pouring money into this vehicle?
A story as old as time: chasing performance. The 2x long Nvidia ETF has gained 418% over the last year versus 207% for Nvidia common stock ($NVDA).
What will happen when Nvidia suffers the inevitable drawdown that all big winners have at some point in time?
The downside of leverage will be revealed and outflows will commence, with many traders booking a permanent loss.
Will that stop Wall Street from coming up with new products like this?
Unfortunately, no. As long as there’s demand for casino-like products, Wall Street will be more than happy to generate the supply.
7) A Few Interesting Stats…
a) 63% of US workers are satisfied with their jobs today, the highest percentage on record with survey data going back to 1987 (see video discussion).
b) Total Returns over the last 20 years…
- Berkshire Hathaway $BRK/B: +572%
- S&P 500 $SPY: +593%
- Nasdaq 100 $QQQ: +1,180%
c) The interest rate on new federal student loans is expected to rise to 6.5% in July, up from 5.5% currently and the highest level we’ve seen since 2008.
d) S&P 500 stock buybacks are projected to hit a record $1.075 trillion in 2025, a 16% increase from this year’s total.
e) The Interest Expense on US Public Debt hit $1.05 trillion over the last 12 months, another record high. With debt levels spiraling upward and interest rates set to remain higher for longer, this will continue to escalate (see video discussion).
f) US Federal Government Spending as % of GDP (see video discussion)…
- 1950s: 17%
- 1960s: 18%
- 1970s: 21%
- 1980s: 22%
- 1990s: 21%
- 2000s: 20%
- 2010s: 23%
- 2020s: 27%
And that’s all for this week. Have a great week!
-Charlie
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