To our clients and friends:
As we referenced in our Monday missive,
the Federal Reserve is focused on solving our current inflation problem with the only tool they have available - increasing short term rates which in turns slows growth in credit availability and economic growth.
Furthermore, in their latest press conference, the Fed Chairman, Jerome Powell, stated that the Fed understands this will cause great pain to the economy and to investors but is committed to this plan.
The markets reacted swiftly this week such that the fixed income market is providing interest rates at levels we have not seen in 12-15 years.
The 2 year Treasury is at the time of this note yielding 4.167% and the 10 year is yielding 3.74%.
Not only are we at decade highs in yields, the inversion in the yield curve (in other words, the 2 year Treasury yield higher than the 10 year) points strongly to a pending recession. This recession (which we warned about in March) will be one of many pain points we are likely going to feel over the next 12-24 months.
As we reconsider investment options to help minimize the damage the Fed is likely to cause in our portfolios, and amending the position in our Monday note about avoiding fixed income,
We will be adding Treasuries to portfolios to provide a degree of safety and return.
We will be buying individual bonds with maturities of 6 months, 12 months and 2 years to lock in the attractive interest returns with laddered maturities to provide cash flow in these periods of time.
Our approach to equities going forward continues to be very cautious. We will likely get excited again once the rate of unemployment rises to 5% or the inflation rate falls below 5%.
More to come as markets evolve. Don’t hesitate to connect with us with questions and suggestions.
Jeff and Biff
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