Inverted yield curve precedes many recessions

Inverted yield curve

The interest return is fixed for the bond's face value (let's say $100), the more the rate goes up, the more the real value of the bond will come down.

The FOMC rate decisions will have more  impact on short term bonds (2-yr, 5-yr, etc.) than the longer term bonds.. Eventually when short term bond rate > long term rates (10-yr, 30-yr) due to higher inflation, we enter a scenario called inverted yield curve.  

Historically, inversions of the yield curve have preceded many of the U.S. recessions. 

Official FOMC bond rate spread link. Please note, shaded areas are recessions.

Interest rate sources

• Bloomberg
• CNN Money
• Yahoo! Finance 
• Wall Street Journal

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All information and data on this blog site is for informational purposes only. I make no representations as to accuracy, completeness, suitability, or validity, of any information. I will not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. All information is provided AS IS with no warranties, and confers no rights.

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How to use IRA money more wisely & efficiently?

Tax on Capital Gain, Interest, & Dividend from regular $

(Please read the Disclaimer first. If you disagree, please stop reading my blog).

• We pay at least 30%~39% federal income tax.
• We pay 10% CA state income tax.

Conclusion

• So if we receive 13% interest return on promissory notes, we can keep only about 7.5% after taxes... There doesn't seem a way out to lower tax rate on the interest.

Solution1

• We can use regular money for long term (> 12 mo.) equity based investment. Long term capital gain is taxed at lower rate. 
• We can use regular money for CA municipal bond funds or ETFs (no tax). However, the Fed may raise the rate soon so every strong economic report will hurt the face value of CA muni. Otherwise it's relative stable. Generally speaking, bonds are two edged sword with the following characteristics:
• bonds are excellent weapon during contracting economy (recessions). Not only they offers high yields but the crashing stock market will push up bonds real value. Long bonds have the best value while short-term bond rates will drop along with the FOMC discount rate.
• Vice versa, bonds would come to bite the investors when the economy turns around and starts the expansion. The inflation picks up and the Fed raises the federal discount rate. The long bond rates are quite stable and the short-term bonds are more sensitive to FOMC's hikes.
• Inverted yield scenario

Solution2

We can invest with our IRA money. After we resign from one company, we don't necessary have to roll the old 401k plan to the new company's 401k. 

• We can opt out for a rollover IRA at a brokerage firm for trading stocks, ETFs, options, futures, etc... 
• If we don't feel we have the time, expertise, or the guts to play, we can convert to a Self-Directed IRA for real estate or other alternative investments. In SD-IRAs, we have the following options
• Residential real estate—including apartments, single family homes, and duplexes
• Commercial real estate
• Undeveloped or raw land
• Real estate notes (mortgages and deeds of trusts)
• Promissory notes
• Private limited partnerships, limited liability companies, and C corporations
• Tax lien certificates
• Foreign currencies
• Oil and gas investments
• Publicly traded stocks, bonds, mutual funds (see our Brokerage Information)
• Private stock offerings, private placements
• Judgments/structured settlements
• Gold bullion
• Automobile paper
• Factoring investments
• Equipment leasing
• Below is a service provider.

Provider Name	PROs	CONs	Comments
TrustETC			https://www.trustetc.com/about/fees

How FOMC's interest moves influence bonds and stock market

(Please read the Disclaimer first. If you disagree, please stop reading my blog).

Based on my decades of observation, FOMC (Federal Open Market Committee 联储会)

(03-06-2015) 今天二月份工作报告强劲,市场预期联储会可能六月而不是就加利息. 所有债券都倒下..CA muni也不例外. The reason is bonds' interest rate must maintain a spread over the Discount Rate.

• 在联储会加息 (Discount Rate) 的几年周期里, 股市涨债券跌黄金跌..Economy keeps expanding.
• Mild inflation is good for GDP expansion.
• There's no reason for FOMC to kill a growing economy.
• As long as the Discount Rate <= 3.5%, buy dip in stock market.
• 联储会加息前就是meat grinder. Stock market hates uncertainty ( +0.25% or + 0.5%), therefore it jumps up & down. The measurement is unemployment report, core producer price index (PPI @ wholesale level), core consumer price index (CPI).
• Because inflation is climbing, debtors will lose purchase power because no one can predict how far inflation can go. So the best weapon to beat inflation is stock equity market.
• Holding bonds will cause capital loss.
• Evidence: 
• FOMC pumped the Discount Rate all the way to 6.5% in early 2000. Then the economy ran out of steam. Nasdaq hit over 5,000 first time then fell under 1200 in Sep-2002
• In 2007, FOMC pumped the Rate until subprime issue rose. Then it rushed to slash rate.
• The Discount Rate history
  
• Comparison against 10-yr, 30-yr, mortgage rates. US Prime Rate=3% + Discount Rate.
  
• Long bonds vs. the gold 
  
• Vice versa, when FOMC senses an imminent rececssion 3 months ahead, it will cut the rates to start the contraction cycle.股市跌涨债券涨黄金涨..Economy keeps shrinking.

Bond vs. Fixed-income Stocks vs. Stocks & tax implications

Bond and Fixed-income Stocks

(Please read the Disclaimer first. If you disagree, please stop reading my blog).

GENERAL OBLIGATION BOND – GO BOND

• General obligation bonds are issued with the belief that a municipality will be able to repay its debt obligation through taxation or revenue from projects. No assets are used as collateral.
• Moderate fixed dividend at 4.5-5.5% per year depending upon the bond you bought
• GO bond dividend is tax-exempt for both Fed and State
• Buy GO bond directly through the broker, not public market, higher commission
• Buy GO bond ETF which is the same as the stock trading at much lower commission
• stock symbols for Muni bond: BFZ, PZC, (fed and state tax exempt), MHD and MCA (may not be 100% state tax free) 5.5-6% dividend per year, buy and sell easily

Fixed-income stocks

• 6.5-8% dividend per year
• Regular stock purchase commission, buy and sell easily
• pay the dividend tax
• stock symbols: HPS, HTD

Stock Investment

• Buying individual stocks is risky and time-consuming to trace and do the research
• Risk management is hard to control
• Buying some ETFs and mutual fund is either lower return or not diversified
• A good stock investment model is proved successful by the history data:
• 50% TLT + 50% QQQ (some people may add GLD)
• More than 10% annual return in the past 10 years

Tax on capital gains, dividends, and interests.

	Capital gains	Others
Stocks	·          ·         Short-term capital gains are taxed at the investor's ordinary income tax rate. ·         Long-term capital gain: Tax rate is 0% for the 10%–15% brackets; 15% for the 25%–35% brackets; and 20% for the 39.6% bracket.	Qualified dividend: Tax rate is 0% for the 10%–15% brackets; 15% for the 25%–35% brackets; and 20% for the 39.6% bracket.
Bonds	Bonds’ capital gains are treated same as stocks’ capital gains.	The income from taxable bond funds is generally taxed at the federal and state level at ordinary income tax rates in the year it was earned.

Protect large stock investment (options, RSU, ESPP, ipo) and lower your tax

Protect large stock investment

(Please read the Disclaimer first. If you disagree, please stop reading my blog).
to be worked on

California Municipal Bonds

Investing in Municipal Bonds

(Please read the Disclaimer first. If you disagree, please stop reading my blog).

In a nutshell: 

The US tax law is complex and confusing. In Bay Area, most of us have high income so our highest tax federal tax bracket is easily > 35%, plus CA state income tax 10% + sales tax, we would easily pay 50% for additional income. This additional income includes stock investments, dividends, interests, ESPP, RSU, options, etc. outside your normal w-2 wages.

Solutions: 

• You max out pre-tax deduction in 401K or 403B plan. I think it's $17,500/yr for one person. A couple can deduct $35k before federal + state tax get you. You may also deduct $5k/yr child credit.
• As Chinese, we always save extra money for investment vhecles like stock, bond, or real estate but we will be taxed for capital gains, interests (债券利息), dividends(股票红利) at our highest tax bracket.
• CA municipal bonds are one excellent tax-free (fed & state) solution. However, you may face many choices for state bonds, city bonds, or utility bonds. Then the easiest way is to buy them in the form of mutual fund ( https://investments.pimco.com/Products/pages/632.aspx) or ETFs like  AKP, BFZ, PZC (6.65%). Remember, they are for your regular accounts. Based on my exp, I work hard to earn > 10% return a year, then I have to pay so much tax. It's so frustrating.

Motives:

• Stock market is always volatile.
• Even if we beat the S&P 500 performance, we have to pay tax. This easily sinks our annual return.
• When the stock goes against us, we try to cut loss quickly (< 30 days) but this triggers wash-sale easily. Therefore I cannot deduct the loss from my other capital gains. Keep holding it would trigger more loss.
• Long bonds are volatile too. The longer the bond is, the more volatile its. TLT (20-yr) > SHY (2-yr) but with higher returns. 
• Low quality bonds are volatile too. The riskier the bond is, the more volatile its. Think of corporate junk bonds, Greek bonds, etc. You may earn a high annual ROI but lose the principal instead (保利不保本).
• Bonds are negatively correlate to inflation, and hence the S&P movement. We can use TIP to stay ahead of inflation.
• Most of bond interests are taxable but CA muni bonds are exempted. 

How to purchase

• Call your broker for specific state, city, local bonds,
• Buy mutual funds intended for CA muni bonds.
• Buy ETFs intended for CA muni bonds in your brokerage accounts.