Aug 21, 2019

Cory Diary : Ever lowering Yield Reality

To Cory, every lowering yield has been a key phenomenon for decades as i blogged earlier. Looks at this chart 1. Federal Fund Rate has been going on since 1980s. That's almost 40 years of trend. Recessions precipitates whenever there is locality inflation (not shown in chart).

Chart 1 : FFR, Treasury Yield and SP500

Let's look at another interesting chart 2. What happen with increasing effective federal fund rate. We probably have yields inversion.

Chart 2: Effective FFR and Treasury Yields

From read above, Interest rate is closely tied to managing inflation. With increasing rate, there is potential of recession. The overall trend for the past 40 years have been decreasing rate as long we keep inflation in checks. Ever lowering rates have been driving SP 500 direction up generally. 

This could explain why there is no rational reason for Fed to raise rates unless we see high inflation. Low rate means money to fund cost of business is low therefore driving employment I think ! So who want to go against that ? Will we see even lower yield (meaning high reits prices is here to stay ? ). Why not ? I aren't going to bet against a 40 years trend.

What this mean is that the more we delay in investing yield income asset, the income we have will be lesser in the future. So do we still want to take profit or should we let our investments continue to fund us ? The only time I think is practical to get out is when we really have major recession like 2008. This is like lifetime event. However, even if we didn't sell, is still a small beep on the ever lower yield trend and high stock prices after.

Key takeaway from my read

1. Ever lowering yield is the trend. Meaning lesser dividend income if we invest later.
2. Inflation drives Interest rate
3. Low Interest rate drives economy

Let me know your thoughts


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