I guess it was inevitable that I would contract COVID, just a matter of when. My lucky turn came this month. I woke up on Tuesday the 14th feeling like crap with a chest cough. As my wife can attest, I don’t handle cold symptoms well; she says I sound like a congested buffalo.
No mystery how I contracted COVID. I attended my 40th high school reunion the prior weekend in Virginia. Several hours of hugging and close talking among a hundred-fifty people was a great time but was akin to swimming in a large germ pool. I’m fairly certain I’m not the only Woodbridge High alumnus from the class of ’82 who had a bumpy time afterwards.
I’m all but over it except for an occasional cough that I’m told may linger for a while. Fortunately, there were no headaches, sore throat or loss of senses that so many others experienced with COVID. Feeling thankful for a doting wife, healthy lungs and the good fortune of not contracting the virus before vaccines were developed.
I haven’t missed four consecutive days of work in nearly twenty years, which led to a lot of channel surfing. I stumbled upon an extraordinary PBS special about the Bubonic Plague outbreak in San Francisco in 1900. It is a fascinating story about how perilously close the US came to a catastrophic nationwide pandemic with many parallels to the COVID pandemic.
The story even had its own Dr. Fauci, a military official charged with ordering quarantines and other public health mandates that became controversial, even politicized. Ring familiar?
Aside from me contracting COVID, the other major national news story is inflation, inflation, inflation. Rightly so, with the US inflation rate now setting forty-year highs. Generations of Americans have never experienced inflationary times before – and they don’t like it.
Inflation has inflicted financial pain at the gas pump, in the grocery aisle, at the car lot and inside investment portfolios in 2022.
From an investment perspective, in 2022, spiking inflation has occasioned the worst bond bear market in history. To be fair, it is actually the worst bond market since 1842, so let’s use “modern” history. US investment grade bonds, one of the most conservative asset classes around, are down double digits in 2022 – extraordinary.
Double digit losses in bond funds during a stock bear market is just unnatural. This double punch is frightening retirees, index investors and retirement plan participants heavily invested in target date funds.
Somehow, the out-of-control inflation spell that emerged in late 2021 caught the Fed Reserve by surprise. Now, the Fed is scrambling to catch up by rapidly raising short term interest rates to stem a repeat of the 1970s runaway inflation nightmare.
Bond investors are definitely spooked, evidenced by the sharp increase in longer-term Treasury yields in 2022. The bond market chaos has spilled into other markets, especially the stock market. US stocks are now mired in a serious bear market; tech stocks have been particularly routed by the inflation/interest rate spike. I’m fighting the urge to take a verbal victory lap from presciently predicting both the bond market and tech stock rout because so many investors are feeling pain. To be sure, runaway inflation was the assassin that finally killed the tech stock bull market.
Understandably, investors are looking for a safe harbor in this inflation storm. Two headline investments these days are inflation (“I”) savings bonds and Treasury Inflation Protected Securities (“TIPS”). Here’s some color commentary on these two alternative bond vehicles.
I-Bonds. Everyone’s talking about the fact you can purchase an I-Bond certificate and earn a 9.42% annualized interest rate for the next six months. Your principal is guaranteed by the US government and the interest is tax-deferred. What’s not to like?
First of all, you can only purchase $10,000 of I-Bonds each calendar year. Secondly, the interest rate, which is directly pegged to inflation (as measured by CPI), adjusts every six months. If inflation does subside, the interest rate can drop all the way to zero.
Over the long run, your investment objective should be to beat inflation, not to just tie it; an I-Bond guarantees a long-term inflation tie.
I-Bonds could play a beneficial role as part of your short-term financial reserves. It is issued with a thirty-year maturity but are not redeemable for one year and are subject to a modest penalty if redeemed within five years of purchase.
TIPS. TIPS have been around for a while but, with no measurable inflation, their investment returns have been dismal. The inflation onslaught of 2022 was a prime opportunity for TIPS to excel – and they’ve flopped.
TIPS are long-term treasury bond obligation with a twist: It pays a low interest rate but the principal is adjusted every six months based on the prevailing inflation rate to protect future purchasing power.
The problem with a TIPS bond it has a long “duration” – a fancy term for weighted maturity – and thus are hyper-sensitive to rising interest rates. In 2022, interest rate risk has dwarfed the inflation benefits and TIPS investments are performing badly, like all bonds.
Another problem is that investors price in expected inflation into the market value of TIPs. In other words, you only get compensated for unexpected inflation when purchasing a TIPS bond, which further erodes its investment value.
With all due respect, we don’t see redeeming value to investing in TIPS. In fact, we use other asset classes that possess better inflation fighting powers than I-bonds and TIPS.
When does this market madness stop you wonder? I like this comment I read the best: “When the bond market starts acting normally again, then other asset classes will follow suit”. We don’t see sustained runaway inflation because the Fed’s aggressive change in policy. Our chief concern is how deep of a recession is possible in 2023 due to the sudden change to super tight monetary policy. Stay tuned.
Until next time, don’t overreact to the bear market and stay well…Tim