Posted September 06, 2023
By Matt Insley
Cash Like Clockwork
Readers are still responding to our August 25 issue: “Oil’s Hateful Six.”
David H. shares his opinion: “Having been there (Saudi Arabia, UAE, Bahrain) and having interacted with businessmen and a couple Saudi princes, I agree with the feeling of ‘smile to your face but loathe you behind your back.’”
And reader John P. responds to our statement: “I hate to state the obvious… but what do these six countries have in common? (Okay, five. For now, we’ll leave Brazil off the list.)”
“You can leave Brazil on the list,” he says, “if not the country, then the president and his Workers’ Party (PT).
“Lula recently stated that he would be proud to be called a communist. He increasingly calls for one world government. His allies in the supreme court (many of whom never served as judges before being appointed to the court) freed him from prison for his crimes, essentially claiming that he was tried in the wrong zip code!
“Recall that, under Lula and another PT president, billions in USD were pilfered from Petrobras, the oil company.
“Under the current regime, freedom of the press is essentially dead and political prisoners have been thrown in jail. Justice is even more selective and politicized than in the U.S. So, no need to exclude Brazil from your list.”
Thanks to our readers for their opinions… Now, to a topic that’ll impact your retirement portfolio.
“If you invest in the opportunity we'll be covering today,” says our retirement authority Zach Scheidt, “I'm very confident you'll be in great shape to build your retirement wealth over time…
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Your Rundown for Wednesday, September 6, 2023...
“Boring” Bonds Are Back
“It's time to buy a retirement investment that will pay plenty of income and grow in value over the next few years,” Zach says.
“Now, the opinion I'm about to share with you may be a bit controversial, and, I'll also admit, it might be a bit early.
“But the surge in interest rates, specifically long-term interest rates, has been the big news this week for a few reasons…
- “Inflation continues to be a significant concern
- The Fed minutes showed that some members continue to be hawkish
- The U.S. Treasury must sell bonds (including long-term bonds) to fund America's debt.
“All of these factors are driving interest rates higher, which, in turn, sends the price of long-term Treasury bonds lower.
“Just take a look at the action for the iShares 20+ Year Treasury Fund (TLT) which tracks the prices of long-term Treasury bonds:
Source: Rich Retirement Letter
“When you buy a Treasury bond, you're buying a guarantee backed by the full credit of the United States, which pays you as an investor based on a predetermined schedule,” Zach notes.
“For instance, a 20-year Treasury bond with a 2% coupon would send you a 1% (or $10) payment twice a year and give you back $1,000 at the end of the 20 years.
“This schedule is fixed, which is why bonds and similar investments are considered fixed-income assets.
“No matter what happens to interest rates, the existing bond will still pay 2% every year and still mature at $1,000.
“If long-term interest rates are near 2%, you'll probably be able to buy the bond somewhere close to $1,000,” Zach adds.
“That's a fair price because you'll receive 2% payments for 20 years. And you'll get your $1,000 back when the bond matures in 20 years. In other words, pretty standard.
“But what happens when long-term interest rates increase, say to 5%? How do existing long-term bonds perform then?
“Since bonds don't change their payment schedule, the only thing that can change is the market price for the bond.
“In this case, the bond price would have to drop substantially.
“That way, a new buyer would get a payment twice a year, the $1,000 payment when the bond matures, and a total annualized return of 5%.
“For long-term bonds, the price can decline substantially to adjust for a much higher long-term yield. And therein lies the opportunity…
“Now that long-term interest rates have moved sharply higher, investors like me and you can get great discounts buying long-term Treasury bonds.
“My recommendation for a long-term retirement play is to start accumulating some long-term Treasury bonds,” Zach says. “Most brokerage platforms allow you to buy individual Treasury bonds at current market prices.
“I prefer the actual bonds compared to a fund, that way you'll know exactly what your coupon payments will be and when your bonds will mature.
“With interest rates now above the rate of inflation, you're getting a great deal on the investment. And the potential for lower interest rates” — at some point, the Fed will start cutting rates — “means that your bond could quickly surge higher when rates start falling.
“This would give you a chance to sell early at a higher price and reinvest the money into other opportunities that the market gives us.
Zach concludes: “Three years ago, I was pounding the table about how you should sell Treasury bonds and steer clear of this area of the market.
“But now it's time to start buying these wealth-building tools as long-term (and possibly very lucrative) retirement investments,” he says.
Market Rundown for Wednesday, Sept. 6, 2023
The S&P 500 is down 0.30% to 4,480.
Oil has pulled back slightly to $86.64 for a barrel of WTI.
Gold’s down 0.30% to $1,920.50 per ounce, according to Kitco.
And Bitcoin is down 0.10% to $25,680.
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