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The Dark Side of Student Loans
Issue #528, June 25, 2018

The Cost of Out-sourcing Convenience
Issue #527, June 18, 2018

Social Security: 66 or 70?
Issue #526, June 11, 2018

Student Loans: There’s (Unfortunately) a Lot More!
Issue #525, June 04, 2018

Co-signing a Note
Issue #524A, May 31, 2018

The Knight Frank Luxury Index and Collectables
Issue #524, May 28, 2018

The Importance of Diversification: The Myth of Diversification
Issue #523, May 21, 2018

How to Save Thousands on Your Food Bill
Issue #522, May 14, 2018

MoviePass and Other Things
Issue #521A, May 10, 2018

Degree Inflation, Long Training Periods, and “Certification”  Part III
Issue #521, May 07, 2018

Degree Inflation, Long Training Periods, and Certification” Part II of III
Issue #520, April 30, 2018

Follow-up on Several Things
Issue #519A, April 25, 2018

Degree Inflation, Long Training Periods, and “Certification”: Part I of II
Issue #519, April 23, 2018

The Kids Birthday Party Hustle
Issue #518A, April 18, 2018

A Pension Question: Part II of II
Issue #518, April 16, 2018

A Physician is an Executive
Issue #517A, April 11, 2018

A Pension Question: Part I of II
Issue #517, April 09, 2018

Is the Correction Over?
Issue #516A, April 05, 2018

Used Car Dealers, Student Loans, the Chinese, and Uncle George’s Rule
Issue #516, April 02, 2018

Starter Homes
Issue #515, March 26, 2018

Redecorating: Beware!
Issue #514, March 19, 2018

NASDAQ Closes at Record High
Issue #513, March 12, 2018

A 40% Chance
Issue #512, March 05, 2018

Several Things
Issue #511, February 27, 2018

Human Capital, Education and Wealth
Issue #510, February 19, 2018

Another Stock Market Update
Issue #509A, February 18, 2018

Some Thoughts on Savings
Issue #509, February 12, 2018

A Stock Market Upfate
Issue #508S, February 10, 2018

Who Can You Trust? Part II of II
Issue #508, February 05, 2018

The Christmas Decoration Pre-worn Jeans Hustle
Issue #Interim Bulletin #507A, February 03, 2018

2018 Outlook for Financial Markets
Issue #507, January 29, 2018

Who Can You Trust? Part I of II
Issue #506, January 22, 2018

Life Insurance Settlements
Issue #505, January 15, 2018

Commodities and Buying the Breakout
Issue #504, January 08, 2018

Buffett Wins His Bet
Issue #503A, January 04, 2018

Practice Real Estate and Free Agency
Issue #503, January 01, 2018

Outlook for 2018: Part III: Stocks and Bonds
Issue #502, December 25, 2017

My Outlook for 2018: Part Ii: Precious Metals
Issue #501A, December 21, 2017

Outlook for 2018: Hard Assets: Part I of III
Issue #501, December 18, 2017

More Thoughts on Bitcoin
Issue #500A, December 14, 2017

Fees and Good Relations with Bankers
Issue #500, December 11, 2017

Salvator Mundi
Issue #499A, December 07, 2017

Should You Rent or Own a Home?
Issue #499, December 04, 2017

A Gift Subscription
Issue #Interim Bulletin #498A, December 02, 2017

Stocks vs Real Estate: Asset Allocation: Part II of II
Issue #498, November 27, 2017

When Good Enough is Fine
Issue #497A, November 22, 2017

Stocks vs Real Estate: Asset Allocation. Part I of II
Issue #497, November 20, 2017

The Saudi Arrests and the Perils of Foreign Investing
Issue #496, November 13, 2017

Gambling and Las Vegas
Issue #495, November 06, 2017

Some Tips on Auto Insurance
Issue #494, October 31, 2017

Bitcoin and the Digital (Crypto) Currencies
Issue #493, October 23, 2017

The Coming Bear Market: Part II How to Prepare
Issue #492, October 16, 2017

Some Observations on Cemeteries
Issue #Interim Bulletin #491A, October 12, 2017

The Coming Bear Market: Part I: The Myth of Buy and Hold Forever
Issue #491, October 09, 2017

The Market makes New Highs
Issue #490, October 02, 2017

The Importance of a New High
Issue #489, September 25, 2017

A Little Insurance: Wealth, War and Wisdom
Issue #488, September 18, 2017

Some Observations
Issue #487, September 11, 2017

How to be Successful in Your Career
Issue #486A, September 07, 2017

How NOT to Buy a Home
Issue #486, September 04, 2017

This Week in the Market
Issue #485, August 28, 2017

Is the “Trump Bump” Running Out of Gas?
Issue #484, August 21, 2017

Gold is on the Move
Issue #483, August 14, 2017

The Importance of Estimation
Issue #482, August 07, 2017

Buying Art and Collecting: Part II of II
Issue #481, July 31, 2017

Buying Art and Collecting in General, Part I of II
Issue #480, July 24, 2017

Physicians need to be More Forceful: Follow-up
Issue #479, July 17, 2017

Physicians need to be More Forceful
Issue #478, July 10, 2017

Your First “Real” Investment
Issue #477, July 03, 2017

Leasing a Watch: Don’t
Issue #476, June 26, 2017

The Importance of Your Children having a Job
Issue #475, June 16, 2017

The Problem with Medical Student Debt is—the Med Schools
Issue #474, June 12, 2017

Critters and Varmints in your Home and Yard
Issue #473A, June 07, 2017

Leveraged ETFs
Issue #472, May 29, 2017

Leasing a Vehicle: Don’t!
Issue #471, May 22, 2017

Issue #470, May 15, 2017

More on Buying Jewelry
Issue #469, May 08, 2017

Buying Jewelry: Gold, Diamonds and Pearls
Issue #468, April 30, 2017

Thomas Sowell: Part III of III
Issue #467, April 24, 2017

Thomas Sowell: Pat II of III
Issue #466, April 17, 2017

Live Close to Where You Work
Issue #465, April 10, 2017

Medtronic in Hospital Management
Issue #Interim Bulletin #464A, April 07, 2017

Thomas Sowell: Part I of II
Issue #464, April 03, 2017

A Political Contribution a an Investment: Part II of II
Issue #463, March 27, 2017

A Political Contribution as an Investment: Part I of II
Issue #462, March 20, 2017

Buffett Selling Vacation Home
Issue #461, March 13, 2017

Advanced Placement (AP) ourses
Issue #460, March 06, 2017

The Importance of a Credit History
Issue #459A, March 02, 2017

A Credit Card Scam
Issue #459, February 27, 2017

The Electronic Health Reord
Issue #458, February 20, 2017

Issue #457, February 13, 2017

Platinum and Palladium
Issue #456, February 06, 2017

Economic Outlook for 2017: Part II of II
Issue #455A, February 02, 2017

Economic Outlook for 2017: Part I of II
Issue #455, January 30, 2017

A Story From Vegas
Issue #454A, January 25, 2017

Land Donation Deals and the IRS
Issue #454, January 23, 2017

The Theory of Gambler’s Ruin
Issue #453, January 16, 2017

Student Loans: But Wait, There’s More!
Issue #452, January 13, 2017

A Second Home
Issue #Interim Bulletin #451A, January 04, 2017

The Consumer Confidence Index
Issue #451, January 02, 2017


By Robert M. Doroghazi, M.D., F.A.C.C.

Higher Interest Rates

Issue #446, November 28, 2016

    It appears that the 35 year bull market in bonds is over, and interest rates are headed higher. Since the financial panic of 2008/9, interest rates have been manipulated and abnormally suppressed by the central banks. Any previous inkling that rates were headed higher caused the market to swoon.
    Now they have headed higher. Why? To say this is due to an anticipated increase in spending and borrowing by the Federal government is only part of the picture. The other part is that improved business conditions cause an increased demand for money, pushing interest rates higher. With a Republican President, Senate and House, business is more optimistic, with the potential for regulatory reform, more common sense energy policies, international tax reform and the possibility of corporate and individual tax reform.
    1) Keep the duration of your bond portfolio short. If interest rates continue to rise, the 30-year Bond will be crushed.
    2) Consider TIPS (Treasury Inflation Protected Securities). Right now the 10-year Treasury is paying about 2.3%. The 10-year TIPS is paying about 1.9%. One, or both, of those is wrong! Consider: if you believe inflation will be 1.9% (as suggested by the TIPS), then the 10-year Treasury is offering a “real” yield of only 0.4%. That’s basically dead money for a decade. You should receive a return of 3-4% above inflation. If you think inflation is higher (it probably is. Remember, the Fed has a stated inflation target of (at least) 2%), then you will lose money, year in and year out, for the next decade.
    Jeff Gundlach, who I respect a lot, feels the 10-year Treasury could hit 6% within the next 5 years. If so, the TIPS are underpricing this and regular Treasuries will show why Warren Buffett refers to them as “Certificates of Confiscation”.
    3) Some good things will happen from rising interest rates.
    A) Savers and all of those dependent upon fixed-income, such as pension funds, insurance companies and foundations, will finally catch a break.
    B) Banks will profit, because they can charge more on loans. Note that the financial stocks have outperformed the market.
    C) The easy money allowed people to do things—financial engineering—that they wouldn’t under more normal conditions, such as borrow to pay a dividend or buy back stock. It will restore some sanity.
    4) Higher rates make the US Dollar more attractive. For some time our 10-year Treasury has been about 170 basis points (1.7%) higher than the German 10-year bond. With the increase in US rates, that has been stretched to 200 basis points. If our rates continue to rise, will it pull the other rates along, or will there be a disconnect? Either way, money should continue to flow into the US in search of a higher return.
    A strong dollar hurts the precious metals, as we are seeing now. What counts in the long term are real interest rates, rates relative to inflation. A strong dollar also hurts emerging markets, because they are the commodity producers
    5) The Federal Reserve has a bond portfolio of $4T. When interest rates rise, a bond loses value. Will the Fed mark their bonds to market? What happens when the Fed starts to unwind the portfolio, to sell the bonds back into the market? Will they take a loss? I don’t know, nor have I seen it discussed yet.
    6) How about housing? I don’t think it will hurt nearly as much as many might think. There is currently a big pent up demand for housing in the US, so the basic driver is there. Prof Robert Shiller has shown that over the long term, the main driver of housing is increasing real wages. If people make more money, they can spend more on housing. As one who took a 16% mortgage when I moved from Boston to St. Louis in 1980, and an 18% mortgage when I moved from St. Louis to Columbia in 1982, an increase in rates from 3.5% to 4.5% doesn’t impress me that much. If somebody wants to buy a home, they can cut back on their cable/Internet spending, or how often they go to the movies, or how often they buy a sub as compared to preparing their own meal, to find another $100 per month for the mortgage.
    In fact, if a young couple is looking to buy their first home, or they are looking to move up, do it now—and take a fixed-rate note. Also, have a 20% down payment, as PMI (Private Mortgage Insurance) is a total waste. 
    7) Debtors are hurt by higher rates. If interest rates “normalize”, and the US government continues to borrow, or borrows even more, the debt service for Uncle Sam could go up 50% over the next 5 years. Unless we get entitlement reform, there will be trouble. Unfortunately, few have the ability to confront problems that will occur in the future, especially when things are going well now. It’s like Wimpy (real name J. Wellington Wimpy) on Popeye: “I’ll gladly pay you Tuesday for a hamburger today”.
    8) Eventually, higher rates have the potential to dampen business activity, but that’s a long way off. In the meantime, stay with stocks. Although this is an old bull, the market rally has broadened out, suggesting there may still be considerable room for stocks to run.
    At the Barron’s Conference in October, Scott Black mentioned Ares Capital (ARCC). The company is involved in corporate loans, high-yield bonds, institutional credit, and asset-backed direct lending in the US and Europe. It pays a 10% dividend (that’s not a misprint: ten percent). On Friday, ARCC broke out to a new multi-year high. This is bullish action. I bought a position.

    The US balance of trade deficit was $62B in October.
    RMD comment: that’s a lot of money, almost three-quarters of a trillion dollars per year. The world makes things, and we send them our paper money (Treasury Bills). When the world was on the gold standard, such deficits were self-correcting. You ran out of gold, you couldn’t buy anything more.
    I am really disturbed by the loss of civility, common decency and respect, in our society. Our law enforcement officials are literally being hunted and ambushed. If I interrupted even half as much as Trump did during the debates, my mother would have come on the stage and sent me to my room. I believe in free speech, but I wouldn’t pay $200 for tickets to a Broadway show and expect to be entertained and have a good time and end up being brow-beaten by the cast. It was not the time or the place.
    I again recommend Custer’s Trials (Stiles, Vintage Books). Immediately after the Civil War, blacks were treated as bad (or worse) in the South than before the War. Although people from the North fought and died to abolish slavery, not many considered blacks their equal. The Army was one of the few places a black man could receive respect (You’re not going to treat someone badly if 10 minutes later your life might depend on them). The re-enlistment rates for black (“buffalo”) soldiers was higher and the desertion rate lower than white troops. Many made the Army a career. 13 enlisted men and 7 officers from the Colored Regiments received the Medal of Honor during the Indian Wars.     
    Ellen DeGeneres was awarded the Presidential Medal of Freedom. She was initially denied entrance to the White House because she forgot her ID, but was then admitted in time for the ceremony.
    My mom’s best friend in the Marines in WW II was a girl from Pittsburg who joined after her husband joined. He was a Sgt. pulling guard duty at a facility in the Wash. DC area. A limo pulls up. One of the people forgot their ID. “Sorry Sir, I can’t let you in”. “I’m James Roosevelt, the President’s son”. “Yes Sir, can I see your ID please?” “Don’t you recognize me”? “Yes Sir, can I see your ID please?” They had to go back to the White House to fetch his ID before the Marine would let him in.
    Two weeks later, the Sgt. received a letter from Marine Corps Commandant Alexander Vandegrift complimenting him on doing his duty.
    RMD comment: the guard at the White House who did their duty should be complimented, and whoever leaned on them to let DeGeneres in without appropriate ID should be reprimanded.
    A favor: if you have used PayPal in the past to pay for this newsletter, please go to the website  and make sure you are not set up for automatic payments. I encourage you to use PayPal if you wish, but the automatic payments cause more problems than it’s worth.  Thank you.       

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