9-8-26 What Higher Bond Yields Mean for Your Portfolio

0:00And that was something completely different. Forget everything you've been told by others before. John was laughing because I was having trouble getting up in my chair this morning. Get ready for the real deal. I did legs at the gym yesterday, right? So I train legs at the gym so that when I'm old, I can get off the toilet, right? The full story. The problem is that when you train legs, I can't get off the toilet for two days. So you know, it's the whole enchilada. There's a lot of data and homework that goes into it, but also, and our training. It's money, news and information you can use. Fun to middle. Lots of darks. Lots of darks. To grow financially healthy, wealthy, and wise. Like it's voted dark. Yeah, I just see where they land. Now welcome in the real deal. Look, bottom line never ever, ever, never ever, ever, never borrow against a full-length game land. The real investment show with Lance Roberts presented by RIA Advisors. And good morning, welcome to the show. Of course, it is Tuesday. That's right. It's Tuesday because Monday with holiday yesterday. I hope that yesterday you came by the show at the real investment show on YouTube and

1:04watch the interview with Oliver Rust on Truthlation. Oliver Rust is with Truthlation. We had a really great conversation yesterday about the Truthlation Index, what it measures, what it's looking at, what it's outlook is, those type of things. If you haven't had a chance to watch that interview yesterday, it's on the web. It's posted on the website now. Go to the real investment show on YouTube. Watch that interview. I think you'll really enjoy. He was a really, really good conversation. Okay, so let's talk a little about the markets this week. Not much going on today. We get some ADP numbers out today, but that's about it. On Thursday and Friday, we have PPI and CPI. Those are going to come in a little bit hot. I'm going to explain why here in just a minute when we do our before the bell segment. Those are going to come in a little bit higher than expected, most likely. And of course, this is going to reignite the debate about Fed rate hikes in the coming week. We've got the Fed meeting coming up just shortly after this week's announcements on inflation.

2:04The Fed's going into the meeting with a higher than expected employment report of 163,000 less Friday. Then, of course, we're going to probably have .3.4 on CPI on Friday. That's going to be higher than the .2. We're certainly going to bring a lot of headlines that the Fed should be hiking rates. But we've got to be a little bit cautious with that because, again, we had one good employment number after a string of bad ones. So again, one number doesn't make a trend. It was also back to school month for August. A lot of school workers going back to work, those type of things. So again, not surprising that we saw a little bit of an uptick in the employment report. The CPI report is going to be driven by oil prices and this recent kind of spat and oil prices higher over the last couple of months is now going to start to feed into inflation. So as we've said before, there's a lot of push from a PR standpoint that the Fed should hike rates just to show that they're taking inflation seriously.

3:06But the Fed's got to be a little bit more pragmatic about this and say, look, I understand that this push in inflation right now has come from oil prices. That's not sustainable. That is going to lead to demand destruction, which we are seeing in the economy. Oil prices will eventually come down. We get the situation that ran resolved. So if a hike rates now, I'm going to turn right around and start cutting them again. So again, from a monetary policy standpoint that they're a little bit tougher box than this just being pure wage growth driven inflation, which would require higher interest rates here, at least in short term, just try to keep the economy from overheating. We don't have an overheating economy by any stretch or measure. So we'll see what happens, look, anything's possible, and we'll see what the market reacts to. But again, Thursday and Friday are going to be the most important days this week, really, for that. Outside of that, we do have a couple of earnings coming in this week. We've got Oracle to look at this week. Again, we'll see what they say. There's going to be a lot of pressure on that for kind of what's happening within the AI space.

4:07Outside of that, it's going to be a pretty quiet week, though. Holiday Shorten Week, of course, because of yesterday, so we've got four trading days. We'll see what happens this morning. Futures are pointing a bit lower. Oil prices are up about $2. And that all brings us to what you need to know before the bell this morning. So on Friday, we closed right at the 20-day moving average again. Just, you know, as we've just talked about for the last couple of weeks. And really, this has been a structure we've been talking about for the last couple of months. We had this previous consolidation. Market just went nowhere here for like two months. It was very boring. And then we finally broke out, got a little bit of excitement. And then we're right back into a consolidation. So again, despite what this market's done, and we had a really good start to the year. We had the sell-off back in March. Then we had this really strong rally going into it to basically, you know, kind of April May. And then just I've gone really kind of nowhere since. It's just been a really kind of boring summer. And as we talked about last week, this is where you feel like you need to do something,

5:08but sometimes doing something is not necessarily the right move. And particularly in a market where we have such rapid rotations. One day it's technology. The next day it's not. The next day it's technology. The next day it's not. This morning, futures are pointing lower, but it looks like semiconductors are going to have a little bit of a bid today. So there you go. The Dow's down about 300 points this morning, Nasdaq's down 30, and the S-A-P's down about 30 as well. So it's going to be a little bit of weak opening. We'll see how things go. But again, we're just kind of sitting right on top of the 20 moving average. Nothing, you know, no bearish trends have been, or sorry, no bullish trends have been broken. The deviation from the 2nd day moving average still remains a bit of a concern. We are on a momentum cell signal still, but we've been kind of just slowly kind of working off some of this relative strength overbought condition. But the market's really just not set up right now for a big move higher for sure. And there's still that risk we've got coming up over that really this month and then in to October, we're really now gearing up for a lot of midterm elections.

6:11And of course, we're getting all the poll races in, all the polls coming in about, you know, who's going to win, who's not going to win. And you know, our Democrats are going to sweep the House and the Senate this year, or as the GOB going to pull the rabbit out the hat, what does this mean for policy? Bank of America talking about this morning that if the Democrat sweep, that's higher taxes and more spending, which will potentially be, you know, negative for economic growth. So again, the market's not to price all this stuff in. The Bank of America survey was suggesting if the DIM sweep, we're getting 10% correction. Historically speaking, we tend to get gridlocked more than anything else. That tends to be positive for markets. So again, you throw the ball up in the air and see where it lands and we'll talk about it when it happens. So about two other things real quick. And as I said, coming up this week, we're going to get this CPI report and that's really going to be a function of what's been going on with oil prices. And as we've talked about here recently, this spurt in oil prices is going to translate over to inflation. If you look at a chart of oil prices, overlay that on the innovative change of inflation.

7:14They're very correlated. Again, on a buy signal here, oil prices pushing up or challenging previous highs here that went back to really kind of mid July. If we can break above that, then there's more resistance up around 100 and 110. So there is some overhead resistance here. We are extremely overbought. So my expectation is at some point here over the next week or so, we're going to get some type of comment coming out of the Iran situation and oil prices are going to pull back just that kind of new slow typically tends to drive that. A decent correction probably back down into the low 80s would not be surprising. So if you're long oil and energy, maybe want to just think about taking a little bit of risk off the table and just rebalance your risk, taking some gains. You'll have another good decent trading opportunity potentially back in that mid 80 range here. And we'll see what happens here, but there's a good bit of support being built around that $80 level right now. And then lastly, volatility continues to remain despite having this kind of corrective consolidation phase. Valtteri remains extremely compressive.

8:16We talked about this as very unusual for this time of year. Typically, September, October, we see higher rates of volatility going in, and particularly in the midterm elections cycle years. Valtteri tends to pick up. This has not been one of those years. Valtteri remains extremely compressed. Nothing going on there. No concern. Puts remain exceptionally cheap. So if you want to hedge your portfolio, this is really kind of a good time to do it. Anyway, that's what you need to know before the bell is spring. We'll come back, pick up a John Penn for two dads on money, talk a little bit. We got so many questions this week about interest rates. We're going to talk a little bit about that this morning. Don't go away. Get daily investment news you can use. Get delivered at the speed of the internet at realinvestmentadvice.com. What if your money runs out before you do? Join Richard Rosso and Jonathan McCarty for our next RIA Retirement Income Workshop. Saturday, September 19th at the Embassy, Switzerland.

9:18Discover why the traditional 4% rule may fail you. The costly retirement income mistakes you need to avoid and strategies designed to create a paycheck you can't outlive. Your retirement deserves more than guesswork. We'll start today at realinvestmentadvice.com for this exclusive in-person retirement income workshop. Realinvestmentadvice.com. You're listening to The Real Investment Show. And good morning and welcome back to The Real Investment Show. Of course, it is Tuesday. Like I said, that means it's two debts on money. Good morning this morning. How are you? Good. Good. Nice weekend. It was nice. Yeah. Quick. You can for three days. It was too fast. Yeah, no. My daughter came into town, rated my pantry, spent all my money, and then finally left on Monday. So that was good. You had nothing left in the pantry or your wallet. Yeah, yeah. That's exactly what you're completely empty.

10:18It's funny how that works. I know. It's like she comes in like one bag, leaves like 20. Right? Of course. My wife facilitating this. So just understand that. Anyway, so what we talked about this morning, we got lots of questions this past week over interest rates in particular. So yeah, it seems like there's a common theme out there right now. It's very interest rates. And what does that mean for not just the economy, but also how does that just affect somebody's portfolio overall? And you touched on this a little bit even just in your before the bell. Just looking at higher rates as a blade. I think folks have a lot of questions around you. What's really driving this? Is it purely the price of oil or are there other just economic reasons that your rates are rising here? Is it primarily oil? It's right now. It's a lot of oil. Well, because oil feeds into so many different things. So whether it's the price of food or transportation, whatever that is. So when you break down CPI, right?

11:20When you start looking at it's transportation, it's food and beverage, it's clothing, it's all these other things. And then a big chunk of it's housing. Homeowner's equivalent rent, right? So homeowner's equivalent rent's been under some pressure. We took it real-time rental indexes, multifamily index, et cetera. Those are all showing that the trend on rent and in fact, this was part of our conversation yesterday with Oliver Russ for a translation. And again, if you haven't had a chance to watch that interview, it certainly encourage you to do it. But talking about that if you look at real-time rent indexes, what CPI reports and one thing that's been holding up CPI has been that homeowner's equivalent rent has not come down to match what's actually happening in the economy. So there's a part of the problem with CPI is how homeowner's equivalent rent is measured. But then the other side of that is the input of oil into that. But there's no doubt about it that there's some other inflationary pressures in the economy, right? Wages have been decent. Economic growth is doing well.

12:21CapEx spending is feeding through. We're seeing through the manufacturing indexes a lot of push into the economy and economic activity. If you just look at the employment report on Friday, a lot of health care workers but also a lot of construction workers. Those are higher paying jobs in a lot of cases. And so that all feeds into economic activity, which is pushing inflation to some degree. But again, inflation is a function of economic activity is okay. There's nothing as serious about that. And I think there's some confusion or some misunderstanding around. You have the opposite ends of the yield curve. You have short-term debt instruments, short-term treasuries, longer-term treasuries, 10, 20, 30 years. Some interest rates on the opposite ends of the yield curve, they move for different reasons. So the Fed really controls what we call the short end of the yield curve.

13:22That's all they control. The Fed only control, in fact, Kevin Morse was talking about this recently, is that the Fed only controls really up to about a two-year treasury. If you look at the two-year treasury and you're overly in charge of the two-year treasury interest rate over the Fed's fund rate, they're almost identical. Right? I mean, within very small basis points, but they have a very high correlation. Outside of that, once you get past really about seven years in duration, that's all economic growth. That's economic growth. That's wages. And that's what's happening with inflation. Those three factors pretty much determine the fundamental interest rate level. Because again, that's what the bonds are being priced on. If I'm going to borrow, if I'm going to lend money to somebody, I want to make sure I'm outpacing economic growth inflation and wages, because wages feed into economic activity.

14:24So if I look at those, in fact, we wrote an article on our website, if you type in the word wages on our website, right there at the top, our wrote an article just recently, there's a 72% correlation between wage growth and inflation growth. Because it just makes sense, right? Wages pass through. If I'm getting paid more, then I feed in, I buy more at the store, whatever it is, and that's that demand. And all inflation is, so all inflation is just a measure of supply and demand. In fact, this is a really good point. There's good inflation, there's bad inflation. So, and we've experienced both. Good inflation is when you have a lot of economic activity that's going on that's producing higher wages. And we're getting paid more, right? There are any more income. Start markets doing well, et cetera, so people spend more money in the economy. And so, prices rise because there's demand in the economy. That's good inflation. That means economic prosperity is improving, right, across the board. Bad inflation, which we've now all experienced, is when you shut down an economy and throw

15:26money at it, right? And then you've got no production, right, no supply, but you have a lot of demand. So you have this massive spike in inflationary pressures. That's bad inflation. That's the inflation you don't want, right? But as long as money supply, which, and this is the case right now, as long as money supply is growing slower than the rate of economic growth, any inflation that you get from that is actually, okay, that just means the economy's growing. Yeah. So I think, so some takeaways I have there. I think, I think folks are very concerned about rising yields, but rising yields can be rising because maybe the economy is strong. It has strength to it, right? You know, yields could be rising because inflation expectations are increasing, right? Or maybe, maybe I think there's a part of it too, or there's, I get a lot of questions around, hey, yields are rising because we as investors are demanding, you know, just greater compensation, higher rates for just maybe the increased fiscal or deficit risk. Is that part of it too? I'm getting a lot of questions around that lately.

16:27Yeah. The interest rates have nothing to do with debts or deficits, right? There's no correlation between those. All right. And we, and it's a popular, you know, kind of topic, right? Because popular theme and question, right? Right, right. So it's just, and again, because everybody wants to, you know, right here's this, the headlines is like, oh my gosh, it's the debts. It's 40 trillion of debt. That's why rates are going up. Really has nothing to do with that. At the end of the day, when people are loaning money into the economy, right, or borrow, and again, when the government comes, so the government comes to auction, they say, okay, I'm going to, I'm going to sell some debt, okay? We've got 20 primary dealers that are lining up to basically buy that debt. And so they're going, okay, well, if I'm going to buy that debt, I've got to make sure that the rate I'm getting compensated for to own that debt is outpacing other opportunities, right? So economic growth, inflation, wages. It is long, and that's what is, is ultimately going to, I've got spike in oil, I've got other things feeding into that inflation number, right? So as long as I'm getting a rate of return to compensate for the inflation risk in the

17:28economy, I'm okay with that. You know, I put on a bit of a term premium because I don't want to get, I don't want my money sitting there in a 30 year treasury only getting the rate of inflation, right? That would make no sense. I need a bit of a profit, if I'm going to do that. I need to make some money above the rate of inflation. You can add more. Yeah, and it may add a little bit more to that. That's called term premium. Now, there's no mathematical formula for term premium. That's just the differential between what the fundamentals say, right? So here, let's do some real quick math. Let's say that economic growth is 2% and inflation is 2%. So I add those two together, that's 4%. So on a fundamental basis, this is real simple. This is a simple model. But on a fundamental basis, the interest rate on the tenure treasury should be 4%. Because I'm getting compensated for opportunity cost, economic growth, and I'm getting compensated for inflation, 2%. So 2 and 2 is 4. But I want to make a little bit more than that, right? So I charge half a point. That half a point, that 4 and a half, is that half a percentage increase is the term premium.

18:34All that is is just the premium being charged over the rate of inflation. Now we get into some areas of the markets where we have some excess risk that are going on, right? So right now you've got oil prices or spiking. I really don't know what's going on with Iran. We've got a lot of other things that are having around. We've got this build out in the economy. So maybe I've pushed that term premium up a little bit more. And this was really what's got best that it was talking about recently when they started it on, I think it was Friday, they started the actual buybacks. And the reason that they were starting that buyback is because that term premium was getting too large over the underlying fundamentals. So they wanted to compress that term premium back into reality simply because you just have all these other temporary dynamics from the Iran crisis and everything else going on right now that was causing that spread and term premium to really get the money. So that's really become a bit too large. Well and the buybacks that you're mentioning, those are not uncommon. So that is a common practice and it's just that the, really the buyback amount was increased.

19:36Yeah, right. And actually there was, it was increased to 4 billion for 2 billion which is coming off at an exceptionally low level. So, but again, yeah, we wrote about this I think last weekend. But that's just, that's a program that the Treasury runs on a consistent basis. And so that's not by any stretch of the imagination anything. Yeah, well there's, so I appreciate you going over that narrative because that's just been a common concern or common questions that I've been receiving a lot of lately. And I get the question of, is there a concern out there with all of the treasuries out there? Is there enough demand for them? Can the market absorb all of the treasuries that are being issued or out there? Is there any risk for treasuries not being bought? No, no. Well, first of all, all that's happening right now is when a Treasury matures, okay, so think about this. In the economy, in the financial markets, right? We have primary dealers. Let's just start there.

20:37Primary dealers, when the US government comes to auction, the primary dealers, they're either half to buy the auction. If you don't buy the auction, you're no longer a primary dealer, okay? So the bonds will always be bought. The only difference is, is whether they're bought at a small premium or a small discount. That's all that matters. But what's happening overall is there's a lot of concern about this, like, well, this year we've got $8 trillion worth of bonds, ensuring whatever the number is. There's no way we're going to be able to refinance all that debt. Absolutely, they're going to refinance it. Because all that's happening is, that $8 trillion is owned by pension funds, hedge funds, mutual funds, retirement funds, insurance companies. When that debt comes due, all those companies that have to own that debt, they don't have a choice. They have to own the Treasury debt on their books to offset their liability demands for withdrawals

21:37except for pensions, insurance companies, etc. They hold those Treasuries. All that's happening is, is one Treasury is coming due, and the insurance company gets their money back, and then they have to turn right around and buy another Treasury to replace it. All that's happening is just basically, you're just refinancing a house over and over again. That's it. This isn't like there's a bunch of bonds coming due and nobody has any money to buy anything with, right? Everybody's getting their money back when those bonds come due, and they want to replace that with the next bond being issued, and now they're also getting higher rates on top of it. Yeah, you're getting better rates. Exactly. Right? So, looking at the level of rates, another question I'm getting is, I think there's a lot of focus just on the interest rate on the 10-year. I think as of the... Yeah, because of what's the immediate aspect. Yeah, I mean, they're all over. It's as of this morning, it's around 4.79, 4.8, and I think the question out there is, is there a certain point, or is there a certain interest rate on the 10-year where that really becomes disruptive to equity markets? Yeah, you're just getting to normal, right?

22:41So, so, so, a dorsch of bank just did a really... I think it was dorsch of bank this morning, just did a whole piece of analysis, talking about this and saying, look, you know, rates are just returning to normalization after 15 years of repression, right? And so, everybody's... So, yes, the rise in interest rates certainly seems large because you're coming up off exceptionally low levels. But, you know, if you look at the historical normality of where interest rates should trade, again, we go back, what's economic growth at, right? We just got an ISM manufacturing in, pretty strong. ISM services is pretty strong. Kind of is doing well on multiple fronts. Employment, right? So, you're seeing a lot of economic activity that's happening that is pulling up rates, and the feds no longer at zero, the feds at 3.75. So, you've got this increase in rates across the board on the book that's short in and the long end, but if you look back historically, you're just coming back to long-term averages of where you should be...

23:42This is where you should be getting paid. And so, we've talked about before, you know, we've covered this a lot on the show, is that... In fact, I just wrote an article about rate normalization just a couple of weeks ago. Yeah, just August 21st. Yeah. Go to the blog. And there's a... So, you know, I've got it. So, it's a lot of interest rates. What the debt panic gets wrong. It's a great piece. Thank you. So, but that's just where we are right now. And again, look, it seems like interest rates are really high. And then this feeds into... But now, to answer your question specifically, when does this impact the market? So, two things that are going on in the markets. First of all, a lot of your really big corporations financed their debt back in 2020 at exceptionally low rates. So, they've locked in a low interest rate environment on a lot of their debt. And something... Now, that debt will come due eventually. And when that debt comes due, they are going to have to find refinance at higher rates. Or just go live in cash, one of the two. They'll have that choice.

24:42But interest rates are coming up. So, there is a point. And there's no doubt about this. That interest rates are going to impact... If rates keep going up, right? So, if we get to five, five and a half, six on the tenured treasury. At what point does that disrupt equities? Let's start with why it would disrupt equities. It's not just the level of rates. And this is where everybody is trying to say, oh, this level of rates is going to cause the market to crash. It's not just the level of rates. If I'm a company, so think about it this way. Think about your own situation right now. Let's say that you have an investment opportunity available to you. Some guy comes to you and says, I've got a deal for you. It's all guaranteed. It's absolutely 100% sure-fire. Now, there's no investment that does this. But just for our example, purposes this morning bear with me. I've got an investment, not me personally. This is an example, right?

25:42I don't want you to say, well, Lance said... The chat's coming alive. Exactly. There's an investment opportunity for you. Guaranteed, you will make 12% on your money. But you don't have any money. But you have good credit. And the guy says, minimum investment is $250,000. So you have a house. So you go to the bank and you borrow from the bank $250,000 against your house. I'm just making all these numbers up. So the bank says, OK, great. I'm going to loan you the money at 7% because that's what the going rate is right now. OK, so that's crazy. Why would you take out a 7% mortgage? Because you're going to make 12% on the deal. Arbitrage. Right, it's all in the trash. So you're going to make an additional 5% return on that mortgage. You still got your house. You're going to make the 5%. When the deal comes due, you're going to pay off the mortgage on your house, take the interest tax deduction on your benefit,

26:45which is going to increase your return to probably around 6, 6, and 1,5%. OK, so it's easy math. So the question now, let's bring this back to the markets. So the question is, is when does interest rates begin to impact the net return that companies are making a broader money? If I can borrow money to build a data center, again, hypothetical. If I can borrow money at 4 1,5 or 5, 10 year treasury, and go invest in data center that makes me 8, 10, 12, I'll do that all day long. That's leverage. All that is is leverage. If I'm borrowing at 5 or 7 to make 2, that's not a good deal. So when that number inverts, and the interest rates are to a level to where borrowing money no longer makes sense, because the cost of capital is higher than my rate of return, that impacts the markets. Now, there's one other factor to this, which is the discount rate. So when you start doing your fundamental analysis on stocks and you're looking at earnings growth and those type of things,

27:46you can do a discount rate. You take the risk-free rate of return and that factors into your discount rate on equities. When that becomes unbalanced, then you get market corrections as well. We're not there yet. We're not there yet. If you take a look at earnings growth, profit growth, those type of things, those things are well ahead of what interest rates are currently sporting. So that discount rate is still at a level that's not hurting you. If you begin to see a reversion in earnings forecast with interest rates elevated, then that's going to matter. Or if interest rates went spiking off to the moon. Also, wait, one last piece. What's important about interest rates when it comes to equities is also the rate of change in interest rates. We've been stuck now at 4, 4 1,5%, 4.7% for two years. I don't know how long it's been now. It's been a long time. We've been here for a long time. The rate of change of interest rates is being absorbed by the markets because interest rates aren't going to wear it. This is becoming normality.

28:48Interest rates at these levels are just becoming a normal process. The markets are getting used to them. Equity companies are getting used to them. They're saying, OK, that's what the rate is. This is what my rate of return is. I can work around that. If interest rates would spike sharply, where your rate of change is very sharp, all of a sudden, markets can't digest that rate of change. So let's say something happens tomorrow and interest rates jump to 6% from 4.7%. Immediately, the markets are going to revolt over that because they can't absorb that rate of change. It's such a shock. It's a shock. Yeah. But as long as rates can increase very slowly over time, 4.5, 4.6, 4.7, 4.8, stagnate there, 4.9, the markets can absorb that. And that's OK. So again, rate of change, discount rate, and then borrowing costs. That and rate of return. Those are really the factors that are going to feed into the overall market. Yeah. I mean, so many great points there, especially from just looking at this,

29:49if you're a corporation just running your business, but then I think investors are just concerned out there that, hey, when Treasury yields were 1% to 2%, there wasn't a lot of competition. Folks didn't have a lot of other alternatives. If someone's like, you had to almost become an equity investor because yields are so low, now that rates are getting higher or more attractive, it's giving folks more options. And I think folks are just concerned that, hey, is there a point here where rates get so attractive on Treasuries that doesn't even make sense to what happens through the equity market? Or what happens to the equity side of my portfolio? Yeah. Well, there's certainly a point to where, again, this is going to go with mean reversion in earnings. In fact, I just wrote an article over this weekend. I'll publish in probably about two weeks talking about earnings reversions. But yeah, I mean, you're getting to the point where if I could get a Treasury bond paying 5.5 or 6, then why would I take equity risk? Yeah. Especially when your equity risk premium is near zero. So in other words, owning equity is right now

30:50because of valuations. You're not really being paid to take the equity risk, but you can get paid to take for safety. Right. That is going to become more attractive at some point. And if you do get to the point that there's some type of hiccup or downturn in the markets, the flight of capital out of the markets will go into Treasuries. And that will be kind of that shift that drives your larger correction in the markets. Because the equity risk premium doesn't justify being in equities. And now I've got some event that's causing a downturn in equities. I'll go sit over here and get paid 5%. Yeah. Yeah, I think that's a real driver or I've been getting a lot of questions around that as a late. It's also two just for folks that own bonds currently. And with the rise and race and they're seeing downward pressure on the prices, is this, for lack of better words, is this time to panic about bonds or to freak out about higher yields just for the bond side of a portfolio?

31:50Well, let me ask you this question. Well, you deal with clients every day of bonds. So what's their opinion? So I think they're more comfortable when they actually own the individual bonds themselves. Because they know if they hold that individual bond until it matures, that they're going to get their principal back. But I think folks that have some long duration bond exposure in their portfolio, I think they're concerned that, well, what if longer term rates is higher than new normal? What if rates don't decrease? Right. Rates may not decrease. Right. And then the dilemma is should we just should they hold the bond? Especially if I get the concern more around folks that are investing in longer duration bond funds, where they've had some pretty significant erosion to principal, and they're concerned that they're not going to be able to get that back. So you're talking about two different things.

32:51So do I own this asset for capital appreciation or frank income? So that's your first answer. So if I'm only owning it for capital appreciation, then you may want to rethink why you own bonds. In other words, you're trading bonds. So don't buy long duration bonds in an environment like this where you should be on the shorter end of the curve. Because if you're looking for solely capital appreciation, you want to be on the shorter end of the curve. If you're looking for income and capital preservation, you want to be on the long end of the curve. And you should probably barbell your portfolio, right? Like right now, we just wrote an article we came before last. And I laid out basically a bond allocation in the portfolio. And I said, look, here's how to weight this. So out of your 40% in bonds, 5% were long duration. The rest of it was all short duration, corporates, tips, those type of things. So just because you own bonds, A, doesn't mean

33:52you have to own everything being 10 years or more. You can own the belly of the curve five to seven years, three to five years, one to three years. In fact, the large chunk of our portfolio is one to seven years. That's where most of the bonds are in our 60, 40, 70, 30s, 80, 20s type of models, right? It's OK to own long end of the curve as long as you understand why you own the long end of the curve. Right? There's nothing wrong with it. You know, own a 10-year treasury. There's nothing wrong with it. And also, too, by the way, this is important. I can buy a 10-year treasury with a two-year maturity. Think about that for a second, right? Just because you buy a long duration bond doesn't mean you have to buy the full duration of the bond. There's plenty of 10-year treasuries out there that are going to mature in six months, a year, a year, and a half, two years. Now you're going to pay for that. But just because you buy a 10-year treasury doesn't mean you have to buy a 10-year durations.

34:52We talked about many times here on the show before. Make sure that if I need money within a year or two or three, whatever I need it for, income, travel, home repairs, whatever it is, buy a bond with a matching duration. So I can still buy a 10-year treasury. I just buy one that's going to mature in a year. Yeah. Yeah. And I appreciate you going into just maybe kind of a lay of the land or how you went, how you laid out the structure of the bond portfolio where you don't, it doesn't have to be all or nothing. There's nothing wrong with having some long duration bonds as part of the portfolio. But then you also have short duration and you're somewhat in the belly of the curve as well. So you're kind of spread across the yield curve or taking that barbell approach, right? And right now, look, you get paid a decent yield for shorter duration bonds. I mean, it's not, you know, the yield you're getting off, one, three, five, and seven-year bonds, is not bad. Yeah. Yeah. Well, so you're talking about, you know,

35:52even if you have a short-term need, right? So we discussed that a lot, especially when we get to the financial planning aspect of things, and looking at a cash reserve, and making sure that folks have an adequate financial reserve off to the side. So that way, if equity markets do become more volatile to the downside, and it's always easy to raise cash, you just don't want to raise cash from your equities at an inopportune time. Which is usually at the point where you're going, I need to raise cash as usually at the worst possible time. Absolutely. So, you know, keep, you know, depending on your situation, a good year, 18 months, maybe 24 months of money set off to the side, you know, if you're working, you've got a, you know, predictable income, you're in your prime earning years, maybe you don't need to keep 18 to 24 months of cash set off to the side. But if you're, maybe you're working less or you're in more retirement mode, you know, that's where you want to have a bigger cash cushion off to the side, that way you can just weather that market volatility. But now, you know, you're, you're getting paid pretty nicely on that

36:52cash reserve, right? So we like to plan out, like if you have, you know, some, some short-term expenses over the next, you know, two, two years, you know, maybe you keep, you know, year one of your liquidity need in just a regular money market fund, where you can pull from that on a regular basis, but then maybe year two, or maybe you have even 36 months of a, of a cash reserve out there. Maybe year two and three is an up, is just an a short-term tea bill ladder, where you're just taking advantages of higher rates. As those tea bills mature, if you need the cash for a short-term need, you can use it. Maybe who knows? Maybe equities have pulled out at that time, and when that tea bill matures, that might be a great time to put a little bit more money to work. It just gives you a lot more flexibility, but I can't tell you how long ago folks were just craving, you know, tax risk-free, a risk-free investment where they could earn maybe three to four percent on their money, interest rates were so low at the time, you couldn't find it, but now you can. Yeah, and it's always, this is always the, the irony of all this.

37:52Yeah. Everybody's fretting about higher interest rates. Yeah. Right, so back in 2000, a bank was issuing 8% CDs, and I could not sell those to any of my clients. They didn't want them. All they wanted was stocks, right? Why would I want an 8% CD when the stock market's yielding 15% a year, right? A couple of years later, they were begging for that 8%. Yeah, you can get it. You know, it's interesting now we're back in this point. Everybody's fretting about higher interest rates. For the first time in 15 years, you can actually get paid to have safety and paid well to have safety. And nobody wants it because it's like, well, you know, I'd rather be in equity because look what equity markets are doing. Or, you know, interest rates are so high, the whole world's going to crash. No, that's not the case. And you're being paid for safety. And you're being paid for income. And a lot of these other narratives out there don't have a lot of support to them. Factually or in reality, they're great narratives to scare the bejebors out of people.

38:55But again, once, and this is why we write so much about this stuff. And if you just spend 20 minutes on our website just in the search bar at the top, type in debt deficits, all this. We've written articles and all this stuff. And just if you go through history, go what's going on, there's certainly some damaging aspects to hide debts and deficits. I'm not denying that off-act. I'm writing an article right now. I'll have it out in the next couple of weeks called the 3Ds, which are debts deficits and demographics. We just did an interview with Bill King, who's a research fellow at Rice University on demographics, the demographic trends in the US, and what that means for economics. There are very deleterious effects of hide debts and deficits in an aging demographic population with a low birth rate. And that's where we're headed. We're headed down that Japan pathway and theory in a lot of directions. So there's certainly some impact she needs to be aware of. But the end of the world, the sky was over the weekend. On the X talking about the great financial reset.

39:57I love this line. He's talking about at some point the government is just going to step in and just revalue everything. Just going to wake up one morning and everything's going to be revalue. It's the great financial reset. And then he says, I have no idea when it happens. It may be 10 years from now, maybe 20 years from now, maybe 30 years from now. But it's going to happen. Crisis is without a clock or useless in terms of investing. And managing your money and doing your financial planning. That's great for headlines. It's great for watches. It's great for views. It's not based in the type of reality for the most part. And it's certainly not going to be anything that happens in the next six months a year or five years. So again, just want to manage your money to make sure you're doing the right thing for you and your family and what your outcomes are, what your needs are. Leave all those narratives on the sideline and just focus on what you can control, which are the things that are right in front of you. Yeah, so many times, Lance, I see I think there are many of us as investors out there. We were afraid to put money to work for what might happen. And then that what might happen.

40:58Well, I thought that was going to happen 10 years ago, five years ago. And then you're kind of sitting on the sideline really. And you're actually giving up or for going a lot of other great opportunities in the fear of something may or may not happen. I see it all the time still. Good example is Ray Dalio. Yeah. Ray Dalio has been all over the media lately talking about the coming debt crisis. He was talking about the coming debt crisis in 1982. He's been talking about the coming debt crisis since 1982. He's a very smart man. Very smart man. Great hedge fund manager has done exceptionally well for himself. I am not poo pooing his financial acumen at all. I like listening to him too. He's very smart guy. But he's been predicting a debt crisis since 1982. And things keep happening that keep it from happening. And because the markets are dynamic, economics are dynamic. The world is dynamic. Things change. And so when we get to a point of quote unquote no return, we change.

42:01We do something. We adapt. The market changes. Something happens. Oh, like an AI Industrial Revolution comes along. And changes the whole dynamics of the economy. That happens and that delays that in pending and inevitable economic doom that was right around the corner. Yeah. Right. So here's a great question in chat this morning. Thank you, Scott. Makes a comment. I wanted to change my allocation, but I'm stuck with upside down bonds. Who cares? And now what do I do? Scott, it doesn't matter your bonds are upside down. Okay. So first of all, if they're upside down, that's fine. So if you're going to have a lot of interest rates have gone up, sell the bond, take the loss, buy the new bond at a higher income to you. Offset your losses against gains and other parts of your portfolio. Okay. So again, manage your, don't get the loss of version. Right. This is your trap. You're facing loss of version right now. And you're going, oh, I don't want to take a loss on that.

43:01Right. I'm just trying to avert that loss. When it gets back to even, I'll sell it. Okay. I'll say the bond you own right now is at 2% and you're down 5% in the bond, whatever it is. Well, first of all, make sure and calculate back in how much income you've received off that bond to start with to see really what your losses are. But the second thing is, is that if I can sell that 2% bond for a 5% bond, why wouldn't I? Just refinance your house. That's all you're doing. Take the loss, write it off on your taxes, buy your new debt. All right. And then you've made gains elsewhere in your portfolio. So offset that. Look at your portfolio as a whole, not as an isolated independent cost. I've got, you know, my 60% by equity allocation is now 70%. I've got bonds that are running at a loss. Sell the losses, rebalance your portfolio, take the gains off the stocks that have gains. Reduce that, 70% back to 60% rebalance your bond portfolio and you're fine. Focus on your portfolio, not the individual items.

44:01So the trap you get yourself into is focusing on that red. The reds are relevant. It's just, it's just what it is. It's the value of the portfolio today. If you need to make a change, make a change. Yeah, it's, and it's a great question, Scott. And I appreciate you putting that in the chat because that is, that's a question that I'm getting a lot of lately where folks they feel trapped in some of these. Yeah, psychological. That's all behavior. They feel trapped and I get it. And I like how you mentioned, you know, our, our game loss pages on all of our very, as custodians really just don't do us any favors because they're not taking into consideration total return. And so you have to go back, maybe, maybe you're not, you know, Scott, maybe, maybe you're not as upside down in those bonds is what you think. You know, go back and factor in all those cash flows. Maybe your break even or slightly positive or slightly negative. And if that just helps you with your decision of, hey, I'm going to cut these loose and, you know, maybe reallocate my, my, my bond portfolio into bonds that are now paying a higher rate. You know, if that just helps you from an emotional standpoint, I'd take a look at your total return.

45:01Maybe you've already done that, but if not, I could back and look at all those cash flows to see truly what your total return on those bond positions are. Exactly. And look, and again, worrying about a loss is, again, is psycho, that's one of the, the most significant psychological mistakes and investors make over time that impair the returns. Yeah. Right. I can't sell it now. I want to sell it because I want to do this with my money, right, whatever it is. And they hang onto that loss and it sits there, it sits there, it sits there, think about it this way. If I could take that, that loss and take that capital and put it to work that grow, let's say, let's say I'm down 5% in a position, just picking a number. Yeah. I'm down 5% in a position, but I can buy another position that makes me 5% over the next six months. Who cares, right? It doesn't, nobody said you had to recover the loss in that position. You can sell at a loss and then buy something else to make up that loss, elsewhere in your portfolio. Also, just because you take a loss in something, I sell X on mobile at a loss.

46:05Just because I sell X on mobile at a loss today doesn't mean I am forever precluded from ever buying X on mobile back again. People get into this thing too. Well, I lost money on that. I'm never buying that company again. Or I'm never buying that stock again. I'm not buying that bond again because I lost money in it. That's ridiculous. Just because you took a loss on something today just means you bought it wrong. That's all it means. Loss of version just means you bought it wrong. That's just means you're trying to avoid admitting to yourself that you made a mistake or that you bought something at the wrong price, whatever it is. So the market just moved, maybe your thesis was absolutely 100% correct when you bought it and the market just moved against you because markets are dynamics. So, rebalance the portfolio, take the loss, re-put that money, put that capital to work so that it's working for you wherever you need it to be working. Yeah, chances are if you have equity exposure in your portfolio, probably the equity side of the portfolio has participated in the market this year. So even at the bond side is slightly flat or if you're taking a loss here, it's very easy as investors to focus on this where if you take a step back and look at, well here's what the equity side is done, here's what the bond side, here's what the total return is.

47:15Even if you sell those bond positions at a loss, your overall total return looking at your complete picture, complete portfolio for the year, you're probably just fine. Well, there's just another thing that just to the point, if you look at, if you have two items on your portfolio, just two, right, you've got one item that's down 5%, and you've got one item that's up 70%. All you pay attention to is the item that's down 5%, but right, right, but you only pay attention to that, what you're not watching because you look at it, it's green, right, you don't pay attention to it, the 70% gain went to 50% gain. You're like, I'm still up in it though, but you lost 20% of your gain, and you only down 5% in your loser position, you're only down 5%, but you lost 20% off your game, right, so where you actually losing more money, right, in terms of your, but see, we don't pay attention to the green, because the green is like, I don't worry about that. I'm only going to focus on that red number, don't focus on the numbers, focus on how the portfolio is performing overall, right, it's just, you know, this is where we make all of our mistakes that are all psychological and behavioral, and this is why I'm writing this 5 part series.

48:26We had part 4 of the series come out yesterday, it's on the website now, but investor psychology, why losses matter, crashes, all these type of things, read that 5 part series, because again, a lot of the stuff that Scott's asking in the chat right now, or that Joller maybe thinking about in the chat, is covered in those things, and all those mistakes that we make are consistently the things that drag on our returns over time. Yeah, we kind of be our own worst enemy at times, and Scott, I really, like I said, I really appreciate the question, not picking on it at all, because it's a very fair question, and I'm getting this question from a lot of folks, so I appreciate you putting that out there, because I know that very question that you asked is on the mind of many at this time. Yeah, so there you go. All right, that wraps up the show for today. Two dads on money, of course, we're back tomorrow with live Q&A with Danny Ratliffe, so if you had some questions from today, jump in the chat tomorrow, we'll answer those with Danny as well. Be sure and get by the website. Yesterday I did post part four of our five part series, the final chapter, we'll cut the final chapter, all the rules for trading. We'll come out on Monday this coming week, and then I've got an e-book that we'll compile from all of this, an expanded version of this five part series, that are really kind of getting to a lot of the weeds about managing your money over the long term cycles, and how to win that game.

49:46There'll be something also too that you can share with your kids and anybody else that you know that there's trying to invest, manage your money, and running into these very same pitfalls that we all run into, we're all human. The reason I write this stuff is because I make the same mistakes, just like everybody else, we just have to learn to take the hits and keep on moving, because that's how we become successful over time. Anyway, that's on the website now, realinvestmentadvice.com, and we'll be back tomorrow for live Q&A. Be sure and like and subscribe to the channel, we certainly appreciate it very much, that thumbs up means a lot more to us than you actually realize, and we do appreciate it very much. We'll see you back here tomorrow for the next edition of the Real Investments Show.