FT Alphaville had a post yesterday that recapped a paper that explored whether or not there is actually enough investment capital in existence to buy amount of debt the US treasury will have to issue in the coming years. We've all heard the rhetorical question of who is going to buy all that debt but this is a little more interesting.
Per the FT post;
By the authors’ calculations, the large increase in foreign official holdings implied by the base case would require those investments to rise to about 19 per cent of rest-of-world GDP, up from less than 5 per cent in recent history. That’s a big change but not, technically, impossible.
The number may or may not be exactly right but the direction, when framed this way, should not surprise anyone. There has been a sentiment of stimulate now no matter the cost and worry about it later. Later will come eventually. Maybe you could correctly predict when or maybe not but at some point. My hunch is that the consequence will not be a violent disruption as the current disruption has not been violent but more like the markets demanding a higher interest rate from from such an over extended borrower. Personally I have no sense of when this might occur as I would have thought that rates would be higher be now. For now however deflation (whether it is the real deal or just a threat) is helping keep rates lower and this could last for quite a while longer.
No matter anyone's ability to predict anything here, hopefully it is obvious that the bond market is distorted and that prices are very high. I have made this point many times that prices are high but could stay high for a long time. But prices are high, the Fed has kept rates at zero for a long time and will keep them at zero for a long while yet and treasuries are being bought by the Fed which means the market is distorted. I'd rather participate as little as possible in an expensive and distorted market.
The muni bond market seems to be getting a lot of positive attention of late and I don't know why. The last time I checked only Montana and South Dakota did not have budget deficits and we have all learned much more about the extent to which state and other municipal pensions are underfunded. I had a conversation yesterday with a friend in the business who relayed a comment from a mutual fund wholesaler. Essentially this fund company is of the belief that the ratings companies don't have the time to provide ongoing analysis to rated muni bonds which means there are many issues out there that should have been downgraded but have not been.
If you go through the archives from people like Mish and Edward Harrison you can find all sorts of charts and tables with details about the extent to which deficits are up, pensions are underfunded, sales tax receipts are down, income tax revenue is down and so on. For people who do not want to be aggressive with the fixed income portion of their portfolios I would simply avoid these segments of the bond market.
Most clients have two-four individual corporate issues that are investment grade maturing from 2012-2014, two-three individual foreign sovereign issues, the TIP ETF, one incredibly unvolatile closed end fund, a GNMA fund and one or two bank preferred stocks. My hope is that these don't move a lot and pay some interest into the portfolio, I am not looking for meaningful capital gains from this part of the portfolio.
Finally this little working in retirement nugget. One time Red Sox Bill "Spaceman" Lee has signed a contract with the Brockton Rox of the Can-Am League, which is an independent league. Lee is 63 and per the news release has kept active.
No doubt Lee was concerned about the paltry interest rates available for his portfolio but was not willing to chase yield. Surely the Spaceman lives below his means so the couple of hundred bucks he might get per start (this is a professional league) will go a long way to covering his expenses and reduce the burden off of his portfolio for a little while.
Being a little more serious this league has six teams, plays more 100 games over five months which means plenty of jobs for the 50plus home games each team has and there are other leagues like this as well. At 50 games with each game day being six hours, if the the pay is $10/hour that works out to $3000 for 50 days of seasonal work which for someone who loves sports is pretty good. While not a lot of money, it should cover car insurance for the year and some of the utilities. If the same sports fan can find something similar for a winter sport then maybe the rest of the utilities are covered with another 265 days off during the year.
Some might think this is stupid which is fine but I think this is a reasonable example of part time work that someone might enjoy versus staying in a full time job they hate until they're 70.