E4: Fed Hikes & Market Impacts: Banks to Equities

Interest rates always seem to be in the news. Our listener question this episode states, "How have the interest rate hikes by the Fed affected the market? What is the impact on banks, mortgages, fixed income, and equities?" Let's dive in and talk about it.

We kick off each episode with our segment titled, "What's the Most Important Thing" where we offer our insights and perspective on a relevant and timely topic on our minds. This episode, it's real interest rates.

We hope you’ve gained some valuable insights or maybe even a fresh perspective on our topic today. We would love to hear from you with your questions or specific topics you would like us to cover. Simply email us your questions or suggestions to info@basepointwealth.com and who knows, your topic might be featured next.

Be sure to subscribe to be notified of upcoming episodes. Visit www.basepointwealth.com for more information and important disclosures.

We hope you’ve gained some valuable insights or maybe even a fresh perspective on our topic today. We would love to hear from you with your questions or specific topics you would like us to cover. Simply email us your questions or suggestions to info@basepointwealth.com and who knows, your topic might be featured next.

Be sure to subscribe to be notified of upcoming episodes. Visit www.basepointwealth.com for more information and important disclosures.

Transcript

The Point Podcast Episode 4 
Fed Hikes & Market Impacts

00:05

Welcome to The Point Podcast. We have informed, intelligent conversations about today's financial topics submitted by viewers like you.

00:13

These thoughts were originally recorded on October 20, 2023

00:18

Let's go ahead and get started. Here are your hosts, Landis Wiley and Allen Wallace.

00:24

Hello and welcome to today's episode of The Point. Thanks for joining us. As always. My name is Landis Wiley. I'm your host, sitting here with Allen Wallace, Chief Investment Officer. Appreciate you taking time out of your busy day to join us here on our podcast. If this is the first time that you've tuned in, we're just here to have a conversation about finance. Allen, I love doing that. We thought it'd be kind of a fun idea to invite you into the conversation, maybe demystify a topic that you're reading about in the news, watching on TV, or just talking about with friends or coworkers at work. So here, in a little bit, we're going to figure out what we're going to talk about. Truly, that's really kind of our game here on these podcasts. We don't know the topic of conversation. We'll draw it out of a hat, and we'll see how it goes from there. So, before we get into that, though, we like to kick off each episode here on The Point with a short snippet called The Most Important Thing. And as the title suggests, really what it's about is something of significant influence related to the world of finance that may be impacting your pocketbook, or it may just be impacting markets or the economy. And so without further ado, Allen, let's kick it over and talk about the most important thing.

01:35

The most important thing right now is real interest rates. Real interest rates tell us the net amount of interest that we earn after estimating inflation. It is important to note that longer-term real interest rates use expectations of future inflation, not actual inflation, since the future is still unknown. Typically, precious metals like gold and silver are sensitive to fluctuations in real rates of interest, as are inflation-adjusted bonds rising real rates are negative for both asset classes. The reasoning behind this correlation is that gold is similar to a perpetual zero-coupon inflation-adjusted bond. If investors can earn real interest above the rate of inflation, then they would prefer to utilize fixed income assets. When fixed income assets are paying negative real interest, investors would prefer to invest in asset classes that at least earn zero on a real basis and earn the inflation premium from asset price appreciation. Real rates have gone from minus 2% to positive 2% over the past two years. Surprisingly, the price of gold has broken its normal correlation with real rates and has continued to climb, even though the real rate of interest has increased by 400 basis points. When a long standing correlation like this breaks down, it warrants a careful examination of current circumstances to see if some other previously benign factor has increased in importance, or if perhaps the factors that we expect to dominate are somehow being misreported while demand for gold has increased significantly. We still think the latter is true. We think it is possible that gold is telling us that future inflation expectations are too low and that the real rate is much lower than currently reported. We also believe that current inflation is being under reported due to seasonal adjustments that will be revised away at a future date. For instance, in the most recent PPI release, actual gasoline price inflation was 6.3% but after seasonal adjustments, it was reported at minus 3.6% this means the way you paid at the pump was up over 6% but the BLS entered deflation into their calculations based on seasonality. Keep your eye on real rates and how they interact with asset classes that have long standing correlations that are telling us that inflation is not what we think. We continue to hold our goal position, even though real rates are telling us that it is time to trim

03:28

Today's episode is brought to you by Basepoint Wealth, a question for you to consider, is your present financial strategy working for you? Do you want another viewpoint? It may be time to talk to the experts at Basepoint Wealth, call 319-826-1898,

03:44

now for a complimentary financial consultation, take control of your financial future with Basepoint Wealth.

03:55

Allen, well, thanks for that. And with that, welcome in again to The Point Landis Wiley, Allen Wallace, Chief Investment Officer, if this is your first time here, we're really

04:04

just here to have a conversation something to do with finance topics. We got lots of them in a hat. We draw them, we figure out what we want to banter about. Best part is, most of the topics have been submitted by our viewers, just like you and those that work at Basepoint. So as we're going along today, hopefully this is informative, but if you've got a question or topic you're curious about, feel free to send it in to us and maybe we'll talk about it on a future episode. So exciting, let's see what we got here. Always, the most important, most exciting part of this is figuring out the topic. So

04:41

All right. This is a short one. I see that easy to read. So how have interest rate hikes by the Fed affected the market? Could you please discuss the impact on banks, mortgages, fixed income and equities? So

04:56

there's a lot of ways we can go, yeah. So, you know, I think.

05:00

One thing that's fascinating to me that I've learned, you know, over the years of being in this industry is interest rates. And anything associated with interest rates tend to get overlooked by people. You know, it's just sort of the thing that we know about it, because we, you know, we pay interest on mortgages. We pay interest on our car loans. You know, for a long time there, you couldn't get any interest in banks. So we like to complain about that a lot. And so it's just, it's something that's there. But, you know, we really don't pay attention to it. But in actuality, interest rates are really probably the most important thing. A lot of times, they influence asset prices. They influence costs of money, influence what people can do, can't do, what they can afford, what they can't afford. So really an important topic, interest rates are the price of money and the price of time, right? They're a factor that we use to translate money from today into some point in the future. It's also what we earn by delaying gratification. So, we set aside some money. We could go out and buy a new boat, but we're not going to, so we expect to be paid for the inconvenience of not being able to spend our money today. So it's not only a translation factor, but it's also the price of time and money. So, Warren Buffett said that interest rates are like gravity. They affect every asset in the universe, right? So when interest rates rise, the price of assets decline, and when interest rates fall, the price of assets rise. And that's a that's a pretty significant and enduring correlation. So, we need to think about which interest rate we're talking about, because there's many of them. So, when we hear about interest rates on the news, they're talking about short term interest rates, and those are the interest rates that the Federal Reserve directly sets. They directly set overnight interest rates. We're at about five and a quarter right now, so the price of money until tomorrow is five and a quarter. There's also the price of money over any other period of time between now and 50 years.

06:58

The longest term US government bond is 30 years. So that's what we usually use as the long term bond. That's approaching 5% so what we have right now is that the price of money for tomorrow is less than the price of money for 30 years from now. And you have to ask yourself, why would that be? Why would it be more expensive to borrow money until tomorrow than it is to borrow money 30 years from now, and that's called the yield curve inversion, and that's typically what we see when we're heading into a recession. So

07:28

now, not always it's one of those things that has predicted 10 of the last 6 recessions, right? So, but it's one of the most enduring. It's one of the most consistent, I think, there's depending on which rates you look at. So if you look at the three month and 10 year ratio, it's one of the most it's one of the most consistent predictors of a recession. I think there's only been one false positive since the 1960s so typically, when that combination of rates inverts, it means that a recession is coming. Unfortunately, it doesn't tell us when. So typically that's somewhere between six months and two years from the time of the inversion. So we've been inverted now for several months, almost a year. And when, when we're heading into recession, what we typically see is that they own invert. So when the price of 30 years from now is back to being more expensive than the price of today or tomorrow, then that's typically when we see that that recession is about to start. And that's where we're at now. We're not quite uninverted yet, but the longer end of the curve has started to rise fairly quickly. This is one of the deepest inversions that we've ever had, one of the longest inversions that we've ever had, and now we have one of the fastest uninversions. Unfolding hasn't quite completed yet. So there's a lot of, there's a lot of superlatives going on right now in the interest rate market well. And as you alluded to, you know, the Fed obviously, has been the dominant narrative

08:52

that probably most people are familiar with over the last we're coming up, I guess in two years, really, that this has been going on. And you know, in that period of time, I think the focus has been on the Fed has raised its overnight rate, as you said, from 0% to, you know, north of five, right?

09:09

For a while there, though, the interest rates that most people interact with didn't really change, right? I mean, there was, there was quite a period of time as the Fed was raising rates, you know, we were hearing from clients that were grousing about how their bank was still paying them zero, on savings, right, and CD rates were well below zero, unless you went out, you know, 3,4,5, years. So it seemed like there was kind of a lag time in there. You know, more recently, the focus has been on mortgages, car loans. You know, car loans are up north of 10% in a lot of places now, for, for new, you know, new vehicle purchases, mortgages north of seven and a half, 8% I saw 8% print this morning, right? Which is, you know, obviously that's a substantial change, but that seems like it's taken, taken a long time to get there. So, you know, the Fed started hiking in,

09:57

you know, 2022

09:59

really.

10:00

Pretty aggressively, and it seemed like maybe it took well into 2023 before the rates that people interact with responded. So why does it seem like there's that disconnect between when the Fed acts and maybe when things are happening that matter to people? So, the Fed dictates short term rates, the market determines long term rates, but the Fed has some influence, right? So you've got three buckets. You've got the things you can control, the things you can influence, and the things you can't control and the things that you can't influence,

10:29

right? So the overnight rates are bucket one, the Fed controls them. The longer-term rates are bucket two, the Fed influences them. There's supply and demand of bonds, there's supply and demand of mortgages, and then there's also the Fed's gigantic balance sheet that is sort of hanging out there, that is holding a lot of government mortgage into government and government securities. So the combination of those things is what determines what happens to the longer-term rates. The reason that longer-term rates have been below shorter-term rates is because people keep expecting us to hit a recession, and for the Fed to start dropping those shorter-term rates fairly quickly. And as that hope has faded, the longer-term rates have started to catch back up to the shorter-term rates. So if you look at six months ago, you were, you were getting, you know, let's say north of 4% on a

11:18

on a six-month treasury, you're getting less than 4% on a 10 year treasury, or let's say, a two year treasury. And the reason for that is because we expected that in two years the rates were going to be lower, because we're going to have a recession, the Fed's going to lower them, right? So we're trying to, the market is trying to predict where the rates are going to be in a couple years, right? And in a way, they're kind of fighting what the Fed has been doing, right? And, I mean, there's, there's an old saying, never fight the Fed. And it sort of seems like the bond markets have been sort of not believing some of the comments that have come out of the Fed, which is that they were prepared to hike until it hurts, right, or hike until they could get some of the bubbles that they perceived out of the asset markets, whether that's real estate, stock market, what have you?

12:03

Bond markets seem to not agree with that. They seem to be catching up. You know, stock market, in a way, has kind of been doing the same thing, right? I mean, the stock market generally, when you would think, well, higher rates should suppress asset prices. But yet we've sort of experienced, a run up at least in some parts of the stock market this year, in spite of rates being elevated. And I guess the question then becomes, if hiking rates slows our economies, in theory, combats inflation. And as you said earlier, oftentimes leads, leads us into a recessionary environment. Isn't that bad for stock? Isn't that bad for stocks and that bad for just asset prices in general? And if so, why? Why are they hanging on? Doesn't happen. That's another one of those granularity questions, right? So if you look at what's working this year, it's 10 stocks. So the equal weighted s p is negative for the year. And if you take out the top 10 stocks of the S&P, it's negative for the year. The Dow Jones is flat. The NASDAQ is up significantly. So that tells you something, that tells you that most of the increases in stock prices over the last nine months have been centered around technology stocks. A technology stock is a really long duration security. Imagine it being like a 50-year bond, right? So even further out on the risk curve than the 30-year bond, and there's typically a good relationship between long term interest rates, I'm sorry, inverse relationship between long term interest rates and the price of those type of securities that don't generate current income. And what we've seen is that last year, yields sort of peaked a little bit, stock prices went down significantly, and then through the beginning of this year, rates were actually dropping, and the price of those stocks was going up. Recently, that has shifted in rates of longer-term rates have started rising again almost concurrently with this recent decline in stock prices. So the correlation has been delayed, but it's still sort of been present and, well, it's not in the Fed. It's not the Fed number, right? Because when you say rates declined, obviously the longer-term rates, we're talking the longer term, which is being more market price, right? Yeah, that's exactly right. So the longer end of the curve has been rising like the last couple months or last month six weeks, and it was declining when the market dropped last year, right? Because typically what happens is, when the market drops, people sell their stocks and they buy bonds. Okay? When people buy bonds, that causes the rates to drop. Okay. Now we've gotten into this period of time where people are starting to realize, hey, maybe the Fed isn't going to cut rates by 300 basis points in the next in the next six months, and so those longer-term rates have started to become a little bit stickier. And I don't know if I'm telling anyone anything they don't know, but bond prices are inversely correlated to interest rates, right? So when interest rates rise, the price of your bonds goes down, and when interest rates drop, the price of your bonds goes up.

15:00

Teeter totter effect, exactly, right? And that same relationship works sort of

15:06

a little bit with stocks, not. It's not as direct, because you have unknown cash flows with the bond. You know exactly what you're getting, okay? You know exactly when the payments are going to be made, and you know exactly when you're going to get your money back. So that's sort of an instant correction in the price when, when interest rates fluctuate. Stocks don't operate that way. You have a really long, dated cash flow. You have no idea when you're going to receive it. You have no idea how much it's going to be. You're trying to sort of guess. So they have a tendency to be a little bit less directly correlated with interest rates, but they're still moving, you know, in a similar direction, right? So, I mean, that's an interesting relationship then. And I guess, you know, as as people maybe are getting tired of market volatility. I mean, we're coming up on almost two years of seemingly this never ending sideways movement, movement in the broad stock market.

15:57

You know, there's a tendency when that happens that that people say, Well, I'm afraid I'm missing, missing the upside, and they want to jump in, right? Oh, I've been too conservative. I'm missing out on the up. Well, again, what's the up? Is it the whole market, or is it just a handful of things and, you know, are those appropriately priced, I guess,

16:17

as you look at sort of the trajectory of what's happening with rates. The Fed, you know, has been out and been fairly vocal here in recent months that they intend to keep rates high for longer, short term rates, short term rates, which seems to have triggered the markets to reprice the longer end of the yield curve, right? Obviously, the headlines don't talk as much about, you know, the 10, the 20, and the 30 year, right? They tend to talk about the Fed. So is there a risk here that investors could be getting sucked into the tail end of, maybe a, a last gasp of the equity markets that may get negatively impacted as these longer rates adjust? I think that's how it always works. I mean, if you, if you, if you look at when a stock market corrects, it's typically once the long end starts rising back above the short end. I mean, that's when your recession starts a couple months after that. And you know, previous to that, that's when the stock market starts to go down. The market usually goes up until the Fed is done raising rates. And again, this is historical. It's not necessarily predictive, but it's how things have usually happened. And how it's usually happened is that the market continues to rise until the Fed is done, raising rates, and then when they're done, then the market corrects, and then the recession starts. Right? That's just how it's happened over the last 50 or so years, maybe 60 years, and that's kind of what we're seeing play out right now. Now is it always going to be the same as it has been in the past. No, I mean the future, the future doesn't isn't necessarily the same as the past, but it rhymes right now, as Mark Twain is

17:53

purported to have said. And so we're in a in a position to be careful. I think

17:59

so for people out there, you know, probably one of the most maybe common things that that, you know, folks should experience relative interest rates is what they're paying on a mortgage, right or what they're paying on a cart loan. You know, we've seen a really rapid rise in mortgage interest rates. You know, you only have to go back, what, two and a half years ago, and you could go get a 30-year fixed rate below 3% right now, it's up in the high sevens, maybe low eights. You know, as you said earlier, doubling the monthly cost for most folks with the mortgage.

18:30

But yet, when you look at that yield curve, as you said, you know, the overnight rate is, you know, five, five and a quarter, our 10 year, which is really what mortgages are basically priced off of, still remains below that. So is, I mean, if you're sitting there and somebody and, you know, if a client comes in and says, Well, you know, where do you think mortgage rates are going to be, right? We're thinking about moving, or we're thinking about downsizing, or we're thinking about whatever, you know, where do you think rates are going to be in six or 12 months, just in order to get a flat interest rate curve, not even a normalized one, where your longer rates are above your low end. Wouldn't you have to say to a person that you would expect mortgage rates to continue to climb, irrespective of what the Fed does, at least for some period. Here, what I would typically say is mortgage rates will either be higher or lower,

19:19

because I have no idea, right? I mean, I can't predict where rates will go, but I do know that banks like to make money, and so the mortgage rate should be priced higher than the than the Treasury rate. And one of the things that that's going on right now, there's two things, the Federal Reserve and banks hold a lot of bonds, and they hold a lot of the longer-term bonds. And so when you're holding 30 year bonds, the duration, which is a fancy word for how much your bond, will go up or down for a 1% rise or fall in interest rates is extraordinary, right? The longer, the longer the maturity of a bond, the higher the duration, and the lower the rate, the higher the duration. And we had 30.

20:00

Year treasuries at 1.665 a couple years ago now we're approaching 5% so if you bought, if you bought a 30-year bond two years ago, you've lost over half of your money. A lot of those are not permanently. You'll get that back as the bond matures, but it's going to take you 30 years, right? So which, if you're 60 years old, right? That's pretty much forever, right? But banks like the Fed and the big money center banks, they don't necessarily mark those the market on the balance sheet. So there's something like $650 billion in losses out there in bonds on bank balance sheets, just sort of lurking. And also the Federal Reserve doesn't report. They don't show losses, but they call them a deferred asset. So they go on their balance sheet. So the Fed lost money, they put it on their balance sheet. We call that a deferred asset. And then as we make money, we write that deferred asset down. And then when we go back to positive, then we start sending money to the Treasury again. So one dirty little secret is that when the Federal Reserve makes money, they send, they send it to the Treasury, and the Treasury uses that to fund it, to fund our, our government spending. Well, now that all of those bonds have gone down and depreciated so much, and they're paying banks more

21:21

to hold deposits with them than they're receiving, they're actually in the negative. They used to send about $100 billion a year to the Treasury that would reduce our deficit. Well, now we're at one and a half trillion dollar deficits. In the 100 billion dollars that the Fed used to send them is gone. So that what you know, what that does, that makes the government issue more bonds, right? And when the government issues more bonds, it causes rates to go up. So one thing that we're seeing here is that demand is being increased for government funding, because the Fed's no longer sending them that 100 billion dollars a year, and they're not going to for a long time, because they're showing a significant amount of losses, and then you have all these losses sitting on bank balance sheets, a huge amount, $650

22:05

billion that are just sitting on bank balance sheets and not being marked to market.

22:13

Sounds kind of scary, it does. Yeah. No, we saw what happens earlier in the year when Silicon Valley Bank went under. And the reason for that was because they had so much money and long dated securities that there wasn't enough assets to pay for the deposits. You know, bank banks use fractional reserve, which means that for every dollar that you deposit, they lend out a lot more, you know, $5 so that you send them $1 they lend out $5 and that means everyone can't come and try to take all their money out at the same time. And what happened with those the bank in Silicon Valley is that they had too many people trying to take their money out in relationship to how much they actually had, because their balance sheet was so compromised from the losses that they had taken in their in their bonds, most banks are not in that situation. The securities that they hold on their balance sheets are significantly lower in proportion to their total assets. Silicon Valley Bank had something like 60% of their outstanding assets sitting in, you know, government securities taking these big losses so and then also, we had sort of a networking effect where a lot of their customers were, kind of internet savvy, and they started sending messages to each other on social media, saying, hey, the bank's running out of money. So everyone sort of went and tried to take their money out at the same time. Cool fashion, bank run exactly right? And it was sort of a self fulfilling prophecy, right? But it's something to keep an eye on in that there's a significant amount of losses just sitting out there that aren't being properly reported. So you talk a little bit about how, you know, the deficit spending and which is being exacerbated by the fact that the Fed isn't kicking any money over the Treasury. So we're having to issue more bonds, which you know now we need more people to buy the bonds. You know, it's been known for several years that that many of the traditional large buyers of us, Treasury debt, so China, Japan, European Union,

24:08

that normally have been the ones to buy our government bonds. You know, they've actually been reducing what they've been buying. So, you know, back to the mechanic of the more bonds we issue, the higher rates go. Well, it's because we need a buyer, right? And so we have to hire offer a higher rate in order to entice people to come in. You know, there's been some discussion in recent months about

24:28

the amount of US debt, 33 trillion or something and counting, and how much of that is going to mature over the next few years, which obviously will need to be re upped in the form of new bonds being issued, and you know how the Fed may actually have an incentive here to trigger a recession, to be able to allow them to institute more easy money policy in an effort to push interest rates lower, so that when we have to refinance all this debt, the government.

25:00

Minutes and financing it at five or 6% they can do it at, you know, two, three or 4% think there's any merit to, well, I

25:08

wouldn't put anything past them, you know, but I don't know specifically about them trying to, you know, cause a recession in order to drop interest rates. But I can comment a little bit on what you said about China. You know, China has been trying to defend their currency over the over the past few months, and in order to do that, they're trying, they're selling US Treasuries, right? And they're not just defending their currency against the US dollar. They're defending their currency against 23 different currencies. So they are dropping their treasury holdings, and they're one of the larger holders of treasuries out there. So as these economies start to circle the wagons to defend their currency, then

25:48

that's going to put more pressure on our interest rates, cause our interest rates to rise. Which should cause our dollar to go down in value as well? Right? The reason that I the reason I believe, and I don't know this for a fact, the reason I believe that they're, they want a strong currency right now is because they're trying to buy physical commodities, and when you're selling cheap things to people, it's good to have a weak currency because it makes it a lot cheaper in their dollars. But when you're trying to buy things like oil and copper and rare earth metals and all these other things that China's sort of stockpiling, then you want to have a strong currency because it commands more power in the marketplace. So there's been some currency defense going on there, and that is putting pressure on the longer end of our interest rate curve. So, I mean, so everything we're talking about here is, it seems like it's, it's maybe supporting the idea that some of these longer maturity bonds, the 10, the 20, the 30 year, that those rates may continue to rise, irrespective of what the Fed does, which you know, as far as it goes for the average consumer out there, may drive our borrowing costs higher, at least in the short run. For a person who's trying to figure out, well, what do I do with my portfolio, you know, to position to deal with that. I mean, what? What's the appropriate response, if, if, if you do believe that there's so many of these individual little elements, all of which, in their own way, are contributing to perhaps, at least for in the near term, a rise in these longer-term rates. What do you tell an investor? Well, I tell them to only buy long term interest rates if it satisfies your needs. So if you need a 6% rate of return for your money to last the rest of your life. Don't buy 30-year treasuries at one and a half. And I think we've done a good job of implementing that over the last five years.

27:29

We sidestepped a lot of the losses in fixed income last year because we were very short term, and we're very high credit quality. We're mostly cash from government bonds, and these are two or three year bonds, right? We didn't have 30-year treasuries in our portfolio. If you had those sort of things in, let's say, just a plain vanilla, 60/40, portfolio, that's aggregate bond and S&P 500, you were down something like 20% last year. You know, we were down closer to 6 or 8% and most of that is because we avoided technology stocks and we avoided longer term bonds. And I think that the point in time where you want to lock in rates is when you're earning the amount that you need to reach your goals. So if we could get 6%

28:10

after costs on a 10-year treasury, we'd probably want to buy some of those regardless of what happens to future interest rates, because that's going to be your return over the holding period. The journey might be a little bit windy. It could go up and it could go down over time, but the fact is, if you hold a 10 year bond from the day it's issued to the data matures, you're going to make exactly 6% assuming you could reinvest the coupons at the same rate, which is a completely different mathematical discussion, but you're going to earn about 6% over that period of time. So if you need 6% that's your target, right? If you need 8% you might want to reevaluate your goals. You know, if you need 4% then you might have a little bit higher tolerance for lower rates, even though you're going to have fluctuations. The main thing we need to do is we need to be careful about focusing on average annual returns in a rising interest rate environment, because we know what the return is going to be over the holding period, but we have no idea what it's going to be over a year. It's going to be over a year. So if you have a year like last year where your 30 year bonds dropped 50% you showed a pretty big loss on an average annual basis, but you're going to make that money back up over the next 29 years as that bond gets closer and closer to the price that you paid for it. The point is you locked in a rate, and that's the rate you're going to earn over time. And if rates rise, then your return is coming from your bond getting closer to what you paid for it, right? So we have to be real careful about just looking at a single year like that with a big loss, and say, Hey, we need to change our fixed income strategy. You're locked in. You need to hold that, and that's going to be the rate of return that you've earned over that period of time. Well? And that brings up an interesting point, because obviously a lot of the ways that our industry nowadays reports is, you know, quarterly returns, annual returns, and everything's mark to market. It hasn't always been that way, right? If you go back decades and decades ago, there wasn't so much emphasis on the annual reporting period in.

30:00

Like that's a relatively new invention, right? So if you go back to 1911 a guy named Lawrence Chamberlain wrote a book called Principles of bond investing, and in that he said, anything other than a bond or a loan is a speculative operation. But in Lawrence Chamberlain's day, they didn't mark their securities and market. They took out a ledger book. They wrote down bond $1,000

30:19

and then if it paid 5%

30:21

every year they would log $50 interest, $50 interest until it matured, and then they would say bond minus $1,000 because they got their money back right. Well, today we convert it into what we can unload it for on a minute by minute basis. And that's not the way a conservative investment should be held. If you think about bonds in terms of their fluctuations, they can be just as risky as a stock, but if you think about them in terms of holding period return, they're obviously very safe because you know what you're going to get over a given period of time. So average annual returns are a poor methodology, I think, for calculating, especially fixed income returns, but equity returns as well. Sometime in the 60s and 70s, we decided to start to mark everything to market every day,

31:05

because it gives you information. It tells you how much things are worth, and I think that if it's collateral, then that's important, right? If you, if you owe a million dollars and you have a million dollar bond portfolio, it's probably pretty important to know how much of that liability is covered by your bond portfolio at any given time. But if you're retired, and you're taking the 6% interest in spending it, and what do you care? What that is convertible into cash at any given moment, right? Because you're not selling it off today, you have no plans on selling it, yeah, you're taking your interest payment, and that's what you're living on, right? So for our average retired client, they really shouldn't be paying as much attention to the bond price fluctuations, unless there's credit quality issues, right? So we're talking purely about interest rate risk. Here you can, you can add things like credit risk or other types of risk that you really should be monitoring over time to make sure that your credit quality isn't deteriorating. But if you, if you own US Treasury securities, you should buy them, collect the interest and then collect the, you know, collect your money back when they mature, and stop worrying so much about the annual fluctuations, right? Okay, I think that's kind of a good place maybe, to draw this to a close. I mean, obviously, you know, interest rates, as we kick us off, you know, they're one of the most important factors that drive so much of finance, so much of the economy. They're really complicated. I mean, well, they're simple, but not easy, right? Good, good way of putting that. So with that, I think we'll draw us to a close. So again, appreciate you tuning in today and joining us here on the point. Hopefully this was enlightening. I think fundamentally, the messages as we look at interest rates is nobody knows that they're going to go up or down from here, but there's caution that's warranted in anything that you do when you invest. So we appreciate you tuning in again. If you have a topic or a question that you'd like to maybe hear us discuss or banter about here on the point, feel free to visit our website, basepoint wealth.com or send us an email info@basepointwealth.com and who knows, it might be the thing we draw the hat next time. So look forward to that. Appreciate you tuning in today and until next time. Take care.

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Thank you for joining us for this episode of The Point Podcast, sponsored by Basepoint Wealth. As always, you can submit questions or topics you'd like to hear discussed to info@basepointwealth.com be sure to subscribe so you don't miss any future episodes. Basepoint Wealth LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments or investment strategies. Investments involve risk, and unless otherwise stated, are not guaranteed Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.