Uncle Sam’s Gift: A 5% Treasury Yield

Sooner or later, load up on 30-year Treasuries, an unintended gift from Uncle Sam. You’re not Uncle Sucker when a 5% coupon exceeds our inflation rate. 

If you expect Trump’s tariffs craziness to persist, inflation for the country could wax above 5%. Mortgage rates would escalate, too, and curtail demand for new homes. Not my forecast. I’m lower.

Never owned Treasury bonds over some 60 years of investing. Rather, I’m a player who has tapped margin capacity to its fullest. FRB Chairmen remain my enemies,  raising rates as high as 12% to confront inflation and inflationary expectations. I’ve paid 9% for deal money in the 1980s. Looking back on this move, it was insanity. I was caught up in deal craziness,  early eighties. 

I’m presently under 40% long equities, but, I wouldn’t link it to my advanced age.  I just dug a hole and whimpered into it. I’m 94. I was going to write “around 90” but that’s a cop out. 

Some of my capital rests in MLP’s, master limited partnerships that pass through almost all of their earnings to shareholders in dividends that yield aound 6%. Enterprise Products Partners is my pick. Remember, we are talking about flow through oil and gas in domestic pipelines that could function for 100 years. 

As for owning industrials with high dividend content, I am fearful of their long term dividend pay capacity, starting with Ford. I cannot find many industrials or energy plays yielding over 5% that are problem free. Big caps like Exxon Mobil show payout ratios of two-thirds of earnings. Dividends rachet up slowly because of the cyclical content in refined product margins. 

Banking and financial services where management needs attractive dividend payout ratios to keep shareholders in place are quite tight on dividend payout ratios to earnings. 

Banks always seem pressed for capital to expand outstanding loans, the heart of their business. The other major profit center is investment management. All our major banks stick pretty much to pie chart investment of 60/40 equities to debt. But the 40% of assets in fixed income properties is far from bulletproof. You could easily see both bonds and equities decline in tandem. 

Investors who believe their assets are conservatively managed live in a dream world of false security. And, yet, major banks control tons of other people’s money but nothing is forever. Maybe a 5% yield on 30-year Treasuries can prompt a migration by investors to a do-it-yourself construct. Why blindly agree to pay 1% for money management of one’s funds? This is really 20% of one’s investment return. 

Consider, early sixties when anyone worth a million was in the top 0.1% bracket, not the top 1% category of wealth. Net worth of $100 million then was rarified, super wealthy. Comparable with wealth of $10 billion today. The great fortunes made by technology honchos were yet to come. Microsoft went public in the eighties and today trades over $500 still making new highs. 

Late fifties and early sixties, sharp operators scored with Polaroid and Xerox. Then Syntex brilliantly put together their safe and effective birth control drug. I was in on this great discovery,  and bought calls that swept around the clock, unstoppable. 

The outside investor is disadvantaged in finding great management leverage, but it often is the pivotable variable such as Lou Gerstner taking the reins at IBM after it suffered from the over-committee construct of the Watsons. 

Net, net of the whole thing, you gotta be early.  

There is no such thing as a gilt-edged security. That term exists only in the minds of lawyers and bankers who  know better. On rereading  “ The Magic Mountain”, Thomas Mann notes solicitors in Germany were charging clients 2% for managing their capital. (Outrageous acts prevail everywhere) but nobody calls such robbery to account. Think of it this way: If you are paying a 1% fee on your bond portfolio, it’s 20% of interest income on a 5-year Treasury. Why not do-it-yourself?