The Usual Suspects.

Bill Parrott |

The Usual Suspects is one of the most creative films ever made.  Kevin Spacey’s character, Verbal, narrates the story for us as he sits in the detective’s office detailing the horrors of Kaiser Soze.  We’re gripped with suspense as we try to figure out who Kaiser Soze is.  The movie is full of plot twists and turns.  At the end of the movie we realize Verbal has been fabricating the story of Kaiser Soze the entire time.  As Verbal walks down the street we see him transform before our eyes and we’re left wondering if he’s actually Kaiser Soze.   As the detective looks around his office he realizes he may have had Kaiser Soze in front of him the entire time.   Are Verbal and Kaiser Soze one in the same?  We may never know because we see what we want to see.

Today we’re trying to figure out what a Trump Presidency means for interest rates and inflation as one of the key components of his campaign is to fix our nation’s infrastructure.  The initial price projections for these projects is $1 Trillion.  As one who has crisscrossed the country by planes, trains and automobiles I’m all for improving our nation’s public transportation system.  

Interest rates have soared since the election as investors anticipate mounting inflation due to an increase in government spending.  Investors have sold bonds by the billions as a result.  The yield on the ten-year U.S. Treasury has risen from 1.37% to 2.6% a rise of 89% since Mr. Trump was elected to office.  At this current pace, the yield will be 4.9% by his inauguration and 33% by the end of his first 100 days in office.   Of course, this rate of change can’t last.  Regardless, investors have been selling bonds and buying stocks at a furious rate.  

We have seen this movie before as investors sell one asset class in mass to buy another.  This happened in January of this year when investors sold billions of dollars’ worth of stock funds to buy billions of dollars’ worth of bond funds.   What happened after this January trade?  The stock market went on a tear to the upside leaving bond holders in their wake.

Will building and spending start on day one of his presidency? Are projects shovel ready?  I doubt it.  It will take years before we see the completion for many of these projects.  If you need proof, look no further than the Big Dig in Boston.  The Big Dig was one of our country’s largest infrastructure projects.  It started during Reagan’s administration in 1982 and was not completed until 2007, a period of 25 years.[1]  If a new project starts today and follows the same path as the Big Dig, we’ll have six more presidential elections before the projects are completed so don’t be in such a rush to make major portfolio changes.

What to make of obvious observations?  Here are a few thoughts.

·         Don’t be in a hurry to sell your bond holdings.  Bonds complete the asset allocation pie and will play a big part in preserving your household wealth.  Bonds should be bought for safety and income. 

·         If you’re concerned interest rates will rise, hoard your money in a money market fund as it will eventually offer you a higher rate of interest.

·         Invest in a short-term bond ladder with U.S. Treasury Bills and Certificates of Deposits.  You can create a ladder with investments coming due every three months: 3 month, 6 month, 9 month and 12 month.  This short-term ladder will give you liquidity with the ability to pounce on higher rates if they come.

·         January is a great time to rebalance your investment accounts.  Rebalancing will help reduce risk.  For example, if you started the year with 50% in stocks and 50% in bonds by the end of the year your mix may be 70% in stocks and 30% in bonds.  Your risk exposure has risen above your original allocation.  In this example, you sell 20% of your stocks and buy 20% of your bonds to realign your portfolio back to the original 50%/50%.

·         Align your investments to your goals.   Buying a second home, paying for college or funding retirement will have different time horizons so make sure your investments are linked accordingly.  Goals with a short-term focus should invest in bonds while long-term goals ought to be funded with stocks.

·         Follow your financial plan. Your financial plan will give you the necessary clues for a successful investment future.

 Verbal had a plan and it appeared to work well.  His strategy allowed him to live another day.

“There is nothing more deceptive than an obvious fact.”  ~ Arthur Conan Doyle

Bill Parrott is the President and CEO of Parrott Wealth Management.

December 18, 2016



[1], website accessed December 18, 2016.