On November 2, 2022, I published this post when the S&P 500 was at 3,750. Based on the latest Series I Bond rate, I thought it was a bullish economic indicator. As a result, I bought stocks. Please review my thought process and how I think as an investor since 1995.
In a bear market, it's hard to find bullish economic indicators. We're always searching for silver linings to live better during difficult times. Thus, the good news is that I've found the most positive economic indicator yet!
This week, the Treasury Department announced Series I Bonds will pay an annualized interest from November 1, 2022 through April 2023 of 6.89%, down from the 9.62% rate offered since May 2022. A 2.73% decline is massive.
What does this really mean? Most people seeing the news will just look at the rate for what it is. However, as a Financial Samurai, you think in derivatives. You try to connect the dots to improve your finances.
The lower Series I Bond interest rate means the government believes inflation has peaked and is heading down. It is based on the historical CPI rate from the past six months, which is also gathered and reported by the government.
As a result, this is a bullish economic indicator for risk assets. But I don't think investors have fully recognized the significance of the I Bond rate decline just yet. A 2.73% decline shows how quickly both inflation and interest rates can move down in a six-month period.
Government Must Act Consistently With The Data
Given one of the goals of government is to be fiscally responsible. The government isn't willing to pay a higher interest than it has to. If you know inflation, and therefore interest rates are coming down, you aren't going to pay a higher interest rate for the next six months on your debt.
At the same time, the Series I Bond interest rate has to be competitive enough to attract capital over the next six months. If the interest rate is not high enough, then the government won't be able to meet its capital raising target from Series I Bonds to fund whatever it plans to fund.
The government has shown us its cards! Its action must be consistent with the data.
Can you imagine playing poker and seeing all your opponents' hole cards? You can make higher expected value bets as a result.
Bullish Economic Indicator And Its Implications
From the latest Series I Bond interest rate , we can assume inflation figures coming out on November 10, December 13, January 12, Feb 14, March 14, April 12, and May 10 will either be below inflation expectations or have a blended overall inflation rate below expectations.
Therefore, if inflation comes down quicker than current estimates, we should see an increase in risk appetitive for stocks, real estate, and other risk assets.
After all, the net present value of future cash flows increases when interest rates go down. So does the relative desirability of risk assets. When government bonds are high, it crowds out capital that would have gone to private companies.
The Bottom Has Been Reached For Stocks In This Cycle
Of course, nobody knows how well risk assets will perform in the future. One of the biggest challenges an investor has is figuring out exactly how much existing beliefs are baked into asset values.
However, the new Series I Bond interest rate makes me more confident the worst is over. In other words, 3,577 was most likely the bottom of the S&P 500 on October 17, 2022 during this bear market.
If the S&P 500 dips below 3,600 again I would be an aggressive buyer. I'm also going to be buying under 3,700 and nibbling under 3,800 as well.
Chances are higher now the Fed will begin to telegraph a moderation in future rate hikes within the next six months, if not by year end.
Time To Make Low-Ball Real Estate Offers Now
The other implication of a lower Series I Bond rate is that you want to strategically make low-ball real estate offers for 10% – 20% off now BEFORE mortgage rates start coming down by 2-3% by April 2023.
That's right, the Series I Bond interest rate offer is literally telling us mortgage rates will start heading south as well. The average 30-year fixed-rate mortgage may decline to 4.5% – 5% by April 2023. If so, the demand for real estate will pick back up.
If you get a new purchase mortgage in the short term, strategically, it is better to get an ARM at a lower rate and hopefully a lower fee. The reason why is because you expect to refinance to a lower rate within the next 12-24 months.
Winter is my favorite time of the year to hunt for real estate deals. Anybody listing during the holidays and difficult weather conditions is likely more motivated than those listing during the spring. Thus, if you can get a panic seller to sell for 10-20% below April 2022 comps, I think you are going to do great.
You don't have to buy an entire property and take on debt either. Instead, you can buy a public REIT, a private real estate fund, or invest in individual private real estate deals to more slowly leg in.
Personally, I like Fundrise for its focus on investing in Sunbelt single-family and multi-family real estate. Fundrise's CEO and investment committee have always been very cautious and opportunistic. The firm is looking for deals now before interest rates decline again.
For example, here rental-income property deal Fundrise purchased recently in Georgia. I'm confident Fundrise got a good deal compared to prices earlier in the year. It's focus on Sunbelt real estate and income is what I want as a San Francisco real estate owner.
Stay The Course With Your Investments
Remember, risk assets are priced off risk-free rates. And the Series I Bond can be considered a type of risk-free rate, albeit not the best one given the purchase limit per person. The best risk-free rate is the 10-year Treasury bond yield.
Higher Treasury bond yields crowd out private capital. Personally, I gladly bought Treasury bonds yielding between 4.2% – 4.6% at various durations. However, as Treasury yields come back down, the attractiveness of risk assets goes back up.
If you own stocks and real estate, I wouldn't sell now. If you aren't willing to nibble on risk assets now, I would at least hold on. Feel better knowing we are unlikely to fall into a similar abyss like the one during the 2008-2009 global financial crisis.
What's great about writing on Financial Samurai is that I can revisit my thesis in six months and see whether I was right or wrong! I understand most people aren't willing to publicly make forecasts out of fear of looking like an idiot.
However, I'm used to feeling and looking like an idiot, so it doesn't matter! What matters is that I take action based on my beliefs. Otherwise, many of my investing thoughts will be rendered pointless.
Related post: It's Easier To Generate More Passive Income In A Bear Market
Series I Bond Rate 2023 Update
On Friday, April 29, 2023, the Treasury raised the fixed interest rate for I bonds from 0.40% to 0.90% but dropped the semiannual inflation rate to 1.69%. This resulted in a combined interest rate of 4.3% for newly issued bonds. In other words, the Series I Bond rate is over.
[Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
Reader Questions
Readers, did you connect the dots about the latest Series I Bond rate and expectations for inflation and risk assets? Are there any other bullish economic indicators you are looking at that gives you hope for the future? What type of action are you taking today?
Loading ...Disclaimer: This article is not my investment advice to you. Please do your own due diligence and invest at your own risk. There are no guarantees when it comes to investing in risk assets.
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“A lower Series I Bond rate is a bullish indicator. Stocks will be higher by May 1, 2023, six months from now.”
Explaining “Other” vote:
I Bond portion driven by inflation (CPI-U in particular) is just it – historical inflation data and have almost noting to tell about regulators intentions and even less about stocks (you know “… past performance …”)
Fixed I Bond rate portion (.4% now) also not really good indicator on how desperate US need to attract financing… I believe all tricks on limiting amount per year to 10-15K per SSN\trust\etc kind of tells it meant to help individuals save a little safe, not big folks to invest nor finance next year multi-trillion sending.
I agree with general expectation on inflation going down and inverted yields pointing to expectation of rates going down as well… but
1. it’s expectations based on “no new black swan”
2. Stocks, in my understanding, whole another matter – I can see how rate might affect it (at least short-term), but would say it’s still opposite – decisions on rates change function of market\unemployment\inflation
Some interesting thoughts on here and many seem to tied to beliefs and feelings mores than fact. I find the I bond thesis compelling and we will see if it is accurate.
What we know is inaccurate is that simply stating govt. debt causes inflation is wrong. It is a component of money supply and cost of money. With Fed raising cost of money, slowing money supply. In turn, investments have been reallocated, (look at people leaving crypto) and lagging assets can become leading assets.
I am not suggesting that govt. debt does not pay a role in inflation, but clearly supply shocks (many of which were caused by just in time corporate ideology) have played an outsized role. Moreover, debt isn’t just spending – it is lack of revenue. And to complain that govt. is overspending without acknowledging that it may be undertaxing is disingenuous.
I see both debt spending and lower taxes as a reallocation of capital – which can be good for the economy long term. I am tired of all the rich doomsayers – only because like a broken clock they are eventually right and someone can say I told you so – but if life were compressed to a day – I’ll take the other 23 hours, 58 minutes of positivity, Cassandras be damned – or I will lose money
The thesis was spot on. The Oct inflation numbers on November 10 came in below expectations and the markets ripped higher. Biggest one-day gain since 2020.
I agree, this was a genius level analysis using data that market analysts for major firms didn’t see or realize or act on! Sam did you ever seriously consider starting your own investment fund? I’m sure you would get a fair amount of people wanting to invest in your fund!
Thanks Andy. I have thought about running a fund before. But it requires so much work that it would be the antithesis of me trying to retire early and live a more free life.
I would have to do a lot of fundraising. Then I would have to report to my limited partners. That I would feel stress when I inevitably lose money at some point.
I would rather join a top-tier venture capital firm. It sounds like a much better life!
Actually, I would rather just invest my own money, write, and live more free.
Great Oct inflation numbers below expectations on November 10, 2022. Connecting the dots!
Oct Consumer Prices +0.4%; Consensus +0.6%
Oct CPI Ex-Food & Energy +0.3%; Consensus +0.5%
Oct Consumer Prices Increase 7.7% From Year Earlier; Core CPI Up 6.3% Over Year
Oct CPI Energy Prices +1.8%; Food Prices +0.6%
Credit where credit is Due, Sam, this post was very prescient. Long time reader, first time poster. Appreciate what you do!
Appreciate it Ben. It does feel kind of surreal the call came true so soon and the markets ripped higher.
It’s always a little nerve-racking to make a call in public. But it made sense to me at the time.
The drop in the 10 year bond yield from 4.2% to 3.8% was also a mass of move. It really goes to show how quickly inflation and interest rates can go down once it starts.
Some more thoughts in my latest podcast episode: https://podcasts.apple.com/us/podcast/the-financial-samurai-podcast/id1324765509?i=1000585880912
Thanks, will definitely check it out!
I agree with you, Sam: the I-Bond rate highlights market trends. Our thesis: decreasing inflation, evidenced by decreasing I-Bond rates, eases the flow of capital and allows companies (equities) to prosper. Unlike many, I’m skeptical about further economic deterioration after the next 6 month I-Bond cycle, but am not really concerned one way or the other.
To answer your question, neither the I-Bond rate (nor inflation) affects our investment decisions.
Rather, our financial plan’s asset allocation drives our portfolio on autopilot. At the same time, the Shiller PE market valuation sets our asset allocations. After today’s bell, the Shiller PE ratio is 27.8, or 7.2% higher than the 20-yr avg of 26, implying future equity returns of 4.9%. Our financial plan sets US equities at 30% & Int’l equities at 15% between Shiller PE ratios of 19-32. Above 32 we capture our gains lowering respective equity exposure to 20% US/10% Int’l with an assumption of lower implied future returns; below 19 raising equity exposure to 40% US/20% Int’l, the assumption of higher implied future returns.
Within the 30% US equity framework, we further allocate between Value/Growth/Small/Large/Dividends/Sectors. It’s much less complicated than it seems:) In brief, lagging asset classes receive all new capital.
We had not bought equities since April 2020, with new capital directed into Lending, Real Estate and Alternatives as the equity market climbed. Given the Bear correction starting in January 2022, we’ve been on an equity buying spree. More recently, our plan has directed new capital into Info Tech, Healthcare and Int’l.
But again, our financial plan automates investment decisions. In our mind, this simplifies portfolio mgt and avoids the tail chase of inflation, I Bond rates, and all other macro & micro economic trends.
I like the steady plan! I hope more folks stick to a risk-appropriate plan for the long term. Thanks for sharing.
Brian from clear value tax on youtube says that inflation will continue based off the federal reserve press conference . He has a huge following and is pretty accurate and sensible. His conclusion is the complete opposite of yours. What are your thoughts ??
Share with me what Brian’s thesis is. Thanks
Brian’s video segment (Nov 3) summarizes Jerome Powell statements/press conference on continuing the interest rate increases on Dec 14, 2022 and likely February 1st 2023. Per Brian, if inflation is at ~8 % and the interest rate is ~4%. Then we have a long ways to go before inflation will come down to the ~2% that is recommended. What are your thoughts?
Cool. The entire market believes the Fed will hike again in Dec 2022 through Feb 2023. That’s not a surprise.
I think if inflation gets down to 4% by May 2023, the stock market will do better. In other words, inflation doesn’t need to get to 2% for risk assets to rebound. What are your thoughts and how are you investing your money?
Related posts:
How I’m Investing $250,000 Today
Making More Passive Income Is Easier In A Bear Market
Hi Sam, I always enjoy the articles. Max bought ibonds for my wife and I last month before the rate decrease! Wondering if you are thinking the market is getting closer to a bottom? Seems like it from the article. I’m in an interesting situation. My wife is selling her business. 1M lump and 1M over the next 3 years. Meanwhile I just received a deal to shoot a movie next year which will bring in 700k for me. We are late 30s about to start a family and have a NW of 200k(not including our house) now so these two things are true wealth events for us. Not looking to FIRE–we love building teams and starting endeavors–but we are looking to change our relationship to money ie. believing work is to make money vs just enjoying building businesses and movies. We are a little worried plunging into the market given the current conditioins. We will pay off house–might upgrade and rent out our current as we are in a high rent market. Do we just plunge the rest into the market with at 60/40 or 80/20 split and forget about it for the next 10 years? This may all change if we win the 1.5 Billion lottery on Saturday……
Sorry, I won the $2 billion lottery. Just don’t tell anybody.
“Meanwhile I just received a deal to shoot a movie next year which will bring in 700k for me.”
Do you need actors? Sign me up if you are a Director or Producer. Need to check this off the bucket list.
As for how to invest, I just stick to an appropriate asset allocation framework and keep investing my cash flow. It generally works out in the long run.
There is strong argument that inflation reached the peak, but aren’t stock market deeped lower at least 6 month after peak in previous 2000/2008 bear markets?
Mentioned this in my newsletter. Depends on how much the Fed keeps tightening long after inflation peaks. The Fed could ruin the world.
Great post, Sam! I’m in agreement with your thesis. Mainly because I’ve been studying the historical charts. The dips/recessions of 2000, 2008,2020, and now 2022 have all been opportunities to pad your portfolio. “BE GREEDY ONLY WHEN OTHERS ARE FEARFUL”.
Even if your prediction is off by 6-12 or 24 months, I still believe the markets will rebound (I don’t need to start withdrawing for another 4 years). Now is the time to be aggressive. And if I’m wrong and the markets do NOT recover; but instead crashes for the long term? Then doesn’t that just mean that we’re ALL screwed?
Love the comment about how I bonds falling is a precursor for mortgage rates falling. I’m curious if anyone has been able to backtest this?
If so gives me a better feeling as I go out and house shop :)
I think we should also look at the Global Supply Change Pressure Index (GSCPI). The GSCPI is 1.0 for Oct-2022. in July-2022 it was 4.35, which means the supply chain issues have improved significantly, if the GSCPI falls further it will lower inflation. Given the trend in GSCPI over the last four months by next April-2023 it could be below .30 , rate hikes and fall in purchasing power, reopening after Covid all has an impact on GSCPI. Lastly, the Democrats losing Congress will impact funding the Ukraine war, if there is a ceasefire or some kind of peace treaty the GSCPI will fall further then by next year June-2023 we might end up having over supply. So considering multiple measurable factors I think Fed Rate might go down from Q2-2023. I agree with Sam’s assessment.
I’m not currently contributing money into the stock market (with exception of max contributing to 401K), rather private market bond purchases (construction of storage facilities). I have been receiving monthly distributions from these investments, some which mature within 12 months, others that mature in 3-4 years. I am hoping by the time I receive the principal payments back, I will have ridden out the recent market volatility. Hopefully it all works out in the end.
The govt. is just lying. They know inflation will be bad in 2023 because of the $3.4 t we printed this year. A reponsible fiscal p;olicy with the new republican congress will allow inflation to come down to 2-3% in 2024.
They are lying all day long, every last one of them. They plan to reset the system.
Sam – How does this change your previous real estate forecast? Has the timeline shortened?
“Therefore, the perfect time to upgrade your home may be at about 18 months after the peak. Basically, recognize when the peak was (takes 6 months to really know) and then wait 12 months. Today, we know that around March 2022 was the peak in recent home prices. Based on the framework above, the best time to upgrade your home may be between June 2023 through February 2024.”
It shortens it, because if mortgage rates do come down by 2-3% by May 1, 2023, demand for RE will pick back up. There is still overall undersupply. Things can turn quick.
Regardless of timing, if you can get a deal 10-20% off April 2022 pricing, you should be good.
Hi Sam. Assuming you are correct, now may be the time to buy government bonds with a longer term horizon to lock-in 4+% guaranteed income?
Yes, I have been buying Treasury bonds in size at 3-month to 3-year durations with 4.2% to 4.6% guaranteed yields.
Did you read these recent posts?
https://www.financialsamurai.com/how-id-invest-250000-cash/
https://www.financialsamurai.com/treasury-bonds/
The indicator related to inflation that is alarming to me is diesel fuel costs. Trucks ship what we buy and they use diesel. The cost has been high all year. In the last month the cost went higher. Right now energy companies are warning diesel the costs are about go even higher this month.
Apparently, the fed does not agree with your analysis as the just raised the rate another.75% with no indication that they are ready to slow down.
The 75 bps was expected by everybody. So is another 50-75 bps in December. We’re talking about 3-6 months out into the future.
Long time reader first time comment. My question is how does the manipulation of the nations oil reserves play into the decreased levels of inflation? Oil prices were red hot in the spring driving the cost of consumer goods out of reach for many. This strategic release is set to expire within the next 20 days. Surely that will add to the cost of transportation and consumer goods?
Not sure. It’s hard to fill like our nations reserves really moves the needle on oil prices. We’re beholden to Russia, Ukraine, and OPEC.
I think you are right. It takes time to build consensus. But by the time consensus as built, stocks will have already moved accordingly. You’re onto something.
I hope you’re right, but like other comments suggest, I don’t credit this as the LEADING indicator of govt inflation forecasts. I suspect I-bonds were created to tie up cash, which would put downward pressure on demand since they lock finds for a year. Do you know how the govt is servicing this debt apart from printing more?
The leading indicator component (there is no true leading indicator that lasts very long b/c everything is efficient), is that not enough investors have connected the dots that a 2.7% I Bond rate decrease for the next six months means interest rates and inflation are likely also going to come down by a similar magnitude over the next 6 months.
Everything is interconnected. It has to be when it comes to risk-free rates. So as more people realize this connection, the market will turn. But at the moment, it isn’t, which is why there is so much debate.
I hope you’re right. I think the Fed is going to overplay this and we’ll see deflation again. The personal savings rate is nearly as low as its ever been in the last 60 years.
https://tradingeconomics.com/united-states/personal-savings
inflation isnt going down in the next 6 months. we printed 2t for the “infrastructure”, $380b for the computer chip company handout, and $500b-1t for student loan bailout [depending on litigation]. This money will hit the economy early to middle of next year
Total monetary supply has decreased over the last 8 months. I doubt the fed printed 100% new money for all those initiatives.
https://fred.stlouisfed.org/series/M2SL
“I suspect I-bonds were created to tie up cash, which would put downward pressure on demand since they lock finds for a year.”
So to clarify, you are saying that of the $1.38 TRILLION the federal gov raises via debt issuances just YTD…
(The federal government has spent $1.38 trillion more than it has collected in fiscal year (FY) 2022, resulting in a national deficit))
….that this super blockbuster year of ~$25 billion ytd in I Bonds issued
(More than $24 billion in I Bonds were sold via TreasuryDirect during this year through Oct. 14, according to the Treasury’s data. That was up from about $5 billion in 2021 and $364 million in 2020, according to the Treasury)
….that you think this is some sorta government scheme to lock up individual’s money for a year at $10,000 a clip?
If I had to pick one, I would say FALSE
PS, “Do you know how the govt is servicing this debt apart from printing more?”
In FY 2022 total government spending was $6.27 trillion and total revenue was $4.90 trillion, resulting in a deficit of $1.38 trillion,
So 22% “money printing” and 78% revenue (basically taxes)
all from: https://fiscaldata.treasury.gov/
I should clarify. I suspect the point of issuing I-bonds is to tie up an individual’s cash… not to freeze a large portion of the nation’s money supply. Removing $10k from a household’s discretionary spending budget for 12 months eliminates the possibility of it driving consumer demand.
But who knows.
Neither tax income nor present money printing (borrowing) could cover the interest on this. It’s probably just a govt Ponzi scheme.
Hi Sam – love your work! Your thesis might be off the market on this I Bond topic. The rate is set every 6 months and is 99% based on prevailing published CPI. The estimates have been out for some time on what this next CPI based calc would be, and therefore what the inferred I Bond rate would be.
Treasury Direct: “The composite rate combines a fixed rate of return with the annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U).”
This decline in I Bond rate is more likely from a lower base affects from the prior high rate to this newer rate (less inflation rate of change) over the most recent 6mo window.
I don’t think this I Bond rate announcement is revelatory nor necessarily indicative of what is to come especially compared to the yield curve out to 30yr…
Also, “the Series I Bond interest rate has to be competitive enough to attract capital over the next six months. If the interest rate is not high enough, then the government won’t be able to meet its capital raising target from Series I Bonds to fund whatever it plans to fund.”
The gov historically has not relied on I Bonds to fund much as it usually doesn’t have many buyers compared to other issuances plus it is limited and cumbersome to buy as an individual (though congress is considering raising the purchase limits). It is only these last two years, with this year in particular, that there has been some notable buying yet it is still a fraction vs. other gov debt types.
Keep up the greatness! -Captn Cash Flow
My thesis could definitely be off. But I am wondering, with such a large drop in the I bond rate, it doesn’t seem like investors are connecting the dots and accepting that inflation has indeed peaked and is heading down.
If there was a greater acceptance that inflation is heading down, as the latest I Bond rate is indicating, why aren’t Treasury bond yields coming down and stock prices rebounding even more? I think we are right now in murky waters and everybody is waiting to see what the Fed will say. But by the time we hear definitive answers, the markets will have moved.
Are you taking any investment action today? I’m curious to know how you and other readers are deploying capital now. Thanks
We are very similar! I have been laddering 3-24mo treasuries since May out of the large amount of cash in my Bread HY savings account currently paying 3% (and likely going higher in the coming days after the new hike).
I have also been nibbling on best breed dividend growth blue chips as I like the mental hack of when I have div reinvestment turned on, it can help automatically buy lower to help dig me out of potential bad luck with market timing faster. Case in point, CSCO. I also do this in near equal net amounts with div etf’s and VTI, such as SCHD, VYM, VIGI, VYMI, SDY, and VIG.
-Captn Cash Flow
Not sure how you can say to invest in stocks now when everyone anticipates a recession within 6 months. Stocks will not be higher 6 months from today. Saving cash for 2023 recession.
Its possible inflation may have peaked but it will be a long while before we can get it down to the fed target of ~2%. The most likely path forward is that inflation stays in the 4-6% for several years in near future (inspite of fed rate at 4+%)
Yes. I don’t expect 2% inflation for a while again, and neither does the market.
If we get down to 4-5% in a year, the market should be pleased in the progress
Why would the Fed start cutting its fed rate if its comparable to inflation ?
The discount rate for valuing the stock market will not go lower vs what is being used today
But who gathers the inflation data and reports it? The Fed/government. They can create and report anything and the majority of investors will agree.
A 2.7% I Bond rate decline is big. And it is likely inflation will decline faster in 2023 than expected. But as Sam said, we shall see.
I think 3,600 on the S&P 500 is a good target as well to buy aggressively.
FYI – the inflation portion of the I-bond rate is purely a function of the CPI over a historical 6 month period. When the September CPI number was released in October, all I-bond watchers had the data to be able to calculate the 6.4%. There is no government thinking behind that number; it’s purely mathematical.
On the other hand, the “fixed” component, which has been 0% for a very long time has been increased to 0.4%. This rate is set at the discretion of the treasury, and there has been a lot of speculation about it. Many thought they would keep it at 0% since I-bond demand was high enough already; others thought the treasury might want to make it > 0% to sort of match the real yield of TIPS which is set by the market (these are currently ~1.6% depending on maturity).
Great points. Thank you. But what do think the government knows that we don’t and how will they massage the data to get what they want?
I don’t think investors are putting together how much the historical CPI figure has declined as reflected by the I bond rate, yet.
What investment actions are you taking right now, if any questions thanks
Came here to say this. It is not forward looking. Therefore, entire premise of the article that “the government believes inflation has peaked and is heading down” is not true. On the other hand, the fact that CPI-U has decreased from the peak is good news…assuming it doesn’t head back up again.
From the FS Publication 0039 (revised September 2022) Questions and Answers about Series I Savings Bonds:
Question: What is the inflation rate?
Answer: The inflation rate is the percent change in the CPI-U over a six-month period ending prior to May 1 and November 1 of each year. For example, the earnings rate announced on May 1 reflects an inflation rate from the previous October through March.
Actual DATA (didn’t paste well)
Year Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
2021 274.31 276.589 277.948 278.802
Rate 0.8% 0.5% 0.3%
2022 281.148 283.716 287.504 289.109 292.296 296.311 296.276 296.171 296.808
Rate 0.8% 0.9% 1.3% 0.6% 1.1% 1.4% 0.0% 0.0% 0.2%
Prior Current
6m variable 4.81% 3.24%
x2 x2
2x 6m variable 9.62% 6.47%
fixed 0.00% 0.40%
fixed x 6m variable 0.00% 0.01%
Composite Rate 9.62% 6.89%
Interestingly, last 3 months have been basically 0% (0.0%/0.0%/0.2%). If that keeps up, inflation according to this measure has been vanquished.
I will argue the Fed and the federal government knows things the public doesn’t know. And as the creators of the formulas and the gathering of the economic data, they know things before the public knows. It’s one of the reasons why there was such a big outcry about the Fed trading so much to their benefit, and why they were ultimately banned.
My thesis is that as more people realize the significant drop in the I bond rate, the more people will accept that inflation has peaked. The more people who accept this, the more pressure there will be on the Fed to slow down, stop, and eventually cut. It’s a dynamic situation where investors need to forecast the future of what other people might think, in order to make money.
So my question to you and to readers is, what do you think will happen over the next 6 months? And how are you investing?
I think Powell will continue to raise rates into Q1 and then pause to see what happens with inflation and what happens during a most likely recession. He will only lower rates if the recession starts to get out of hand and assuming he believes inflation is trending in the right direction, even if it is still far from his target. I really don’t think 2023 is going to be strong for equities. More likely some time in 2024 and 2025 will be a better environment for equities.
Personally, I’m going into short-term T-bonds and Agency bonds with money currently on the sideline and then starting to ladder back into equities in the 2H of 2023 and 1H of 2024.
Got to love risk-free, 3-month treasury bills at 4.2% or so. Just keep rolling!
Hi I’m wondering if you’ve read Ray Dalio’s changing world order book and how macroeconomics are likely going to turn worse in coming years, and how that blends in with the sentiment you have in this current post? It seems like Ray paints a gloomier viewpoint than what th series I bond rate is implying.
Sure. Feel free to share Ray’s thesis and how it compares. I’ve noticed the more money you have, the more bearish you can afford to be. Similar to Jeremy Grantham. Thanks.
I too have read this book plus nearly all of Ray’s other works. I will admit it is scary and yet somewhat prophetic so far.
The animated vid. he produced, largely based on the book, is a great synopsis and I highly
recommend it. It got some serious traction a few months ago and I see now has over 23 million views: https://youtu.be/xguam0TKMw8
“Feel free to share Ray’s thesis and how it compares” – Ray has applied his resources to build a roadmap for the rise and fall of great world powers over the last 500 years. He has isolated the key factors that produce the rise, lead to prosperity, and then decay of great powers (countries). The punchline? The US’ wealth divide has grown too great, the luxury of being liberal is now very attractive, we are more likely to go to a hot war with an up and coming power (China) than not, we are at the end of our rope tap dancing around our obligations, and the last 50 years and definitely not going to be like the next 50 years. We just don’t know it yet because we haven’t gone through a major macro cycle like this in any of our lifetimes (as they tend to happen every 75-250 years).
-CaptnCashFlow
Dalio tells a captivating story that makes sense of recurring patterns over the vast sweep of history. But I have some reservations:
1. Given the present Information Age has accelerated communication exponentially on an unprecedented scale (and likely will continue to do so), we would expect history, and therefore his cycles, to accelerate proportionally too.
2. More significantly, I’m not sure how actionable his theory is. It seems only to make sense of the past in retrospect. If it has no predictive power, then what’s the actual utility?
Where would you invest $10-20k cash that’s sitting in checking losing value? I-bonds, treasure bills, or Fundrise? At your suggestion, I bought $10k of I-bonds in late December ‘21 and $10k more in late January ‘22. I’m thinking Fundrise now. Thank you.