Bob’s Journal for 5/19/22

Capture Safe 9.62% Yield Now

The best deal in the investment world continues to be Series I Savings Bonds issued by the U.S. Treasury (known as I bonds).

A new I bond purchased today will carry a yield of 9.62%. You can buy I bonds at this rate through October 22, 2022.

The bonds carry such a high rate of interest because they are indexed for inflation. You receive the current treasury bond yield, plus the recent inflation rate each time the rate on the bonds is reset.

The major downside to I bonds is there is a limit to the amount you can buy. Buyers of paper bonds can purchase a maximum of $5,000 worth every 12 months. Buyers of electronic bonds can purchase up to $10,000 worth every 12 months.

It is worthwhile to open a TreasuryDirect account online to make it easy to purchase the bonds and qualify for the higher purchase limit. In addition, electronic bonds can be managed online through the TreasuryDirect account without any costs. You can purchase, manage and redeem the electronic bonds through the account without fees or expenses.

Once you create a TreasuryDirect account, money can be transferred easily between that account and one of your financial accounts. You can’t invest a lot in I bonds, but since there are no costs and an account is easy to set up, it’s worth grabbing the extra yield on $10,000 of your cash. Start investing with this link.

Take a Fresh Look at an IRA Conversion

You might have decided earlier this year not to convert any of your traditional IRA to a Roth IRA, or you might have decided to limit the amount you convert. This is a good time to reconsider.

After one or more assets in a traditional IRA decline in value, the conversion decision should be reviewed.

When all or part of a traditional IRA is converted to a Roth IRA, the current value of the amount converted is included in gross income as though it had been distributed. (The 10% early distribution penalty for distributions to those under age 59½ doesn’t apply to a conversion.)

You don’t have to turn investments into cash to do a conversion. You can have an asset, such as shares of stock or mutual fund, rolled over from the traditional IRA to the Roth IRA. The value of the shares on the date of the rollover will be the amount included in gross income.

After the recent declines in many investments, today you can roll over more shares than you could have a few months ago at the same tax cost.

When you’re holding investments that you expect to recover over time, consider a rollover at today’s prices. When you roll over shares and their price recovers, you’ve converted the appreciation into tax-free income.

My long-time advice is to monitor markets during the year and reconsider IRA conversion decisions after the prices of investments decline. Start that analysis now if you haven’t done it already.

China’s Approaching a Major Turning Point

China’s markets and economy have had a tough 12 months or so. Things are getting worse, and China’s leaders have to consider changing some policies.

Growth in China is much slower than it has been in many years, and stock prices of China’s companies are down. The International Monetary Fund (IMF) recently reduced its forecast for China’s economic growth in 2022 to 4.4%, and a number of private economists anticipate growth less than 4%. That’s a big decline from the 10% growth rate that was considered routine only a few years ago.

China’s turnabout started with the election of President Xi Jingping, who is ending is second term and seeking a third term this fall. Xi decided the co-existence of capitalism and communism in China favored capitalism too much. He began to exert more state control and authoritarianism.

In 2021 Xi accelerated the increase in state control. New restrictions were placed on technology companies and the use of technology. As a result, China’s 10 largest technology companies lost $2 trillion in market capitalization over the last 12 months.

At the same time, the government decided to reduce some of the debt and excess building in the property market. The most prominent result was real estate giant Evergrande. It made international headlines when it defaulted on some debt and reduced operations. Other large property developers followed suit.

Xi also imposed a zero-Covid policy under which entire cities and regions are locked down and closed when COVID-19 appears to be spreading. China thought it had contained COVID in 2021, but it now is suffering worse than most other countries. Recently, about 20% of the country was shutdown because of the zero-Covid policy (though I’ve seen higher estimates).

China recently reduced or suspended some of the technology crackdowns. It also is introducing some modest monetary and fiscal stimulus, primarily increased infrastructure spending.

For decades, capitalism and authoritarianism co-existed in China. That made investors comfortable with China. The policies of the last year reduced a lot of that confidence. It will take significant policy changes, and perhaps a change of leadership, to restore confidence in China’s markets and economy.

The Data

Retail sales increased for the fourth straight month, rising 0.9% in April.

That shows the tight labor market continues to give consumers the money and confidence to spend. The largest spending increases were at bars and restaurants.

Keep in mind that the retail sales numbers aren’t adjusted for inflation. Much of the higher retail sales numbers reflect higher prices, not increased consumption of goods and services.

The retail sales numbers could underestimate the strength of consumers and their spending. Retail sales report primarily sales of goods, not services. During the pandemic, consumers shifted spending from services to goods. They now appear to be shifting back to services and buying fewer goods. So, the rate of spending could be higher than revealed by looking only at the retail sales report.

The Producer Price Index (PPI) increased 0.5% in April from March’s level. April’s monthly increase was well below the 1.6% increase in March and also was the lowest monthly increase since September 2021.

Over 12 months, the PPI increased 11%. That’s down from the 11.5% 12-month increase reported for March, but it is the fifth consecutive month of double-digit-percentage increases.

Excluding food and energy, the PPI increased 0.6% in April, down from the 0.9% rise in March.

The Consumer Sentiment Index from the University of Michigan decreased to 59.1 in May, down from 65.2 in April.

That’s the lowest level for the index since 2011. The latest survey found optimism declined across all demographic groups instead of being isolated to a few groups as was the case in recent months.

The survey respondents’ assessment of current economic conditions declined to its lowest level since 2013. Expectations for the next six months also declined while inflation expectations were unchanged from April.

Those who said this was a good time to purchase durable goods (including homes and vehicles) hit its lowest level since the question first was asked in 1978. Most cited high prices for saying this was a bad time to make major purchases.

Manufacturing conditions tumbled in the New York area in May. The Empire State Manufacturing Index fell to a negative 11.6 from a positive 24.6 in April. The index has been volatile. The May reading is a little better than the March level.

Industrial Production increased 1.1% in April, following a 0.9% increase in March. That’s the fourth consecutive month of increases. Manufacturing production increased 0.8% in April after increasing 0.9% in March.

Optimism decreased sharply among home builders after holding fairly steady for months. The Housing Market Index from NAHB declined to 69 in May from 77 in April.

Home builders remain concerned about inflation and supply shortages and also believe the recent rise in mortgage interest rates will reduce sales.

New home starts declined 0.2% in April from March’s level. But starts in April were 14.6% higher than 12 months earlier. Single family home starts in April were 7.3% lower than in March but 3.7% higher than 12 months earlier.

Multi-family home starts in April were 40.5% higher than 12 months earlier.

New unemployment claims increased by 1,000 to 203,000 in the latest week. That’s the second consecutive week the number increased and the highest number of new claims since February. New claims still are well below the historic average.

Continuing claims declined to 1.3 million, the lowest level since January 1970. Continuing claims are reported with a one-week lag from new claims.

The Markets

The S&P 500 rose 2.31% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.64%. The Russell 2000 increased 4.40%. The All-Country World Index, excluding U.S. stocks, added 3.89%. Emerging market equities climbed 3.46%.

Long-term treasuries lost 1.08% for the week. Investment-grade bonds fell 0.46%. Treasury Inflation-Protected Securities (TIPS) added 0.82%. High-yield bonds decreased 0.75%.

On the currency front, the U.S. dollar declined 0.54%.

Energy-based commodities increased 7.05%. Broader-based commodities rose 6.59%. Gold declined 1.15%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

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