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

DISCLAIMER

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.

I will not be responsible for any material that is found at the end of links that I may post on this blog site. Mistakes may happen from time to time. URLS and domains may change hands.

Because the information on this blog are based on my personal opinion and experience, it should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. My thoughts and opinions will also change from time to time as I learn and accumulate more knowledge.

Feel free to comment on my ideas or ask questions in the comments section for the blog entries. Please remember that this is a blog, and you do not need to agree with everything or anything I write. I reserve the right to delete any comment for any reason (abusive, profane, rude, etc.) so please keep the comments polite.

Please read the Copyright page.

If you do not agree with this disclaimer please stop reading this blog =P

Thank you

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.