Reader Mailbag: Inflation, Debt, and Trading Turkey
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The TradeSmith Daily feedback inbox is always full of thoughtful feedback and important questions. So full, it becomes clearer each day that I need to catch up on sharing and answering them.
So today, I’ll answer a few of my favorite emails we’ve received since the start of the year…
Thanks for your thoughts on the interest rates considerations.
One aspect you didn’t discuss is the effects on people on (mostly) fixed income.
I don’t know what the demographics are for your readers, but retired folks tend to have fixed income as a major source of revenue, for which inflation can be a significant problem, even forcing some to go back to work.
Since inflation and interest rates correlate, interest rates would ideally be zero from that vantage point. I have no idea of the best balance point and it likely varies for every person, but I’m not sure you can say or imply that higher interest rates (and therefore inflation rates) are better. Perhaps I’m missing something…
— Ken C., Platinum member
One aspect you didn’t discuss is the effects on people on (mostly) fixed income.
I don’t know what the demographics are for your readers, but retired folks tend to have fixed income as a major source of revenue, for which inflation can be a significant problem, even forcing some to go back to work.
Since inflation and interest rates correlate, interest rates would ideally be zero from that vantage point. I have no idea of the best balance point and it likely varies for every person, but I’m not sure you can say or imply that higher interest rates (and therefore inflation rates) are better. Perhaps I’m missing something…
— Ken C., Platinum member
Hi Ken, thank you so much for writing in. And thanks especially for being a TradeSmith Platinum member.
High inflation certainly does sting those on fixed income, and especially those on Social Security. While recipients do receive an annual cost of living adjustment — 3.2% this year and 8.7% last year — it’s often not enough to make up for higher prices.
Additionally, those raises come on a lag from the official data… something like three to 12 months. By the time the hikes come in, most are already struggling and inflation may have risen more.
The piece you responded to, though, had an important point at the core of it.
There’s nothing we as investors can do to prevent high inflation… nor high interest rates. We’re at the mercy of the decisions of the Federal Reserve.
So we must, as I said, learn to live with them. Like all things in life we’re forced to live with, it’s helpful to try to find the silver lining. And if one is willing to put in a little extra work, there are plenty of ways to use high interests so we can mitigate inflation — some of it risk-free.
After paying off high-interest debt, one next step could be buying Series I savings bonds from the U.S. Treasury. These bonds adjust to the inflation rate every six months, more or less guaranteeing you’re safeguarded from inflation.
These are nice but have some drawbacks. You can only invest up to $10,000 each year, have to hold them for at least one year, and cashing them out before five years incurs a penalty of three months of interest. They’re a place for savings you won’t touch.
When I bought them a couple years ago, they paid out more than 9.6% — higher than the official inflation rate ever was. It’s paying out a lot less today: 5.27%. That makes them less attractive than, say, 3-month Treasuries paying 5.45% annualized.
You can buy as much of these as you want and only have to hold them for three months before getting your payout. It’s also much more than the current rate of inflation at 3.4% a year. For conservative investors on fixed income, it doesn’t get much better than that.
Of course, there are plenty more not-risk-free options out there. There are high-quality, blue chip, dividend-paying stocks like the kind we talk about here in TradeSmith Daily. Walmart (WMT), as just one example, is a fairly low-risk name that rose about 11% in 2023 and paid out a 1.35% dividend yield. (Disclosure, I own WMT.)
Ratings by TradeSmith is a great, simple way to help you find stocks exactly like that.
Another, higher-risk-still idea would be to trade options for income, something our recent survey showed is quite popular among our readers. For that, I’d recommend checking out Infinite Income Loop or Constant Cash Flow — both based on a strategy designed to draw regular cash from the market by selling options.
And of course, because you’re a Platinum member with TradeSmith, you already have access to all three of these valuable resources. Simply log in to your TradeSmith Finance account to get started.
My final note is that, if inflation is high, you definitely don’t want interest rates to be zero. That guarantees you’ll get no risk-free real return.
Inflation can and has been much higher than the yield from Treasuries. Even when inflation was low in the 2010s, the real yield from 10-year Treasuries was often null or negative.
I hope this was helpful. Thanks again for writing in.
Here’s one from Keith B. on the Free Cash Flow Yield screener, now exclusive to TradeSmith Platinum members…
Please help me understand something about this new FCF Yield indicator.
You mention it is calculated based on Enterprise Value, which is calculated as Market Cap minus debt being the denominator. Doesn’t that mean that companies with high debt are “rewarded” because the EV (denominator) gets reduced?
As a “fundamental value” indicator, this seems off, or at least one has to consider the level of debt before proclaiming a company has a good “fundamental value” score. Maybe I’m missing something here?
— Keith B.
You mention it is calculated based on Enterprise Value, which is calculated as Market Cap minus debt being the denominator. Doesn’t that mean that companies with high debt are “rewarded” because the EV (denominator) gets reduced?
As a “fundamental value” indicator, this seems off, or at least one has to consider the level of debt before proclaiming a company has a good “fundamental value” score. Maybe I’m missing something here?
— Keith B.
Hey Keith, thanks for writing in.
I was in error when writing about enterprise value in that article. Let’s set the record straight.
Enterprise value is not, as I wrote in that article, market capitalization minus debt. It’s market cap, plus debt, and minus cash.
That’s because a company’s enterprise value reflects the cost of buying the business outright. You would pay the company’s shareholders (the market cap) and the lenders (the debt), but you would receive the total cash the company has on hand, subtracting it from what you pay.
With this corrected, you can see how it’s both a better gauge of a company’s value from an investment perspective, and how it’s a better picture of the ratio. We’re measuring a company’s cash flow against its total shareholder value, as well as the value of its liabilities. Counting debt and removing cash on hand becomes a “penalty,” not a reward.
We’ve corrected the web post for this piece. Thanks for pointing that out.
Finally, a few comments we’ve received since I shared my top pick for 2024 — non-U.S. stocks:
I happen to share your belief that VXUS is an ETF that must be a substantial part of any portfolio in general and a U.S. centered portfolio in particular.
It helps to keep in mind that the U.S. economy is less than 25% of the world GDP and that the same logic that dictates a mix of equity and fixed-income holdings applies when it comes to U.S. and international holdings.
— Ghassan K.
It helps to keep in mind that the U.S. economy is less than 25% of the world GDP and that the same logic that dictates a mix of equity and fixed-income holdings applies when it comes to U.S. and international holdings.
— Ghassan K.
Thanks for yesterday “Hill to Die or Thrive On”! It was excellent.
— Christopher R.
— Christopher R.
Just a comment: My experience with dividends and international stocks is that you have to devote much more time and attention to them.
I won’t say you get “ripped off,” but in some cases their “rules” are more lax than what we (I am Canadian) are used to:
I won’t say you get “ripped off,” but in some cases their “rules” are more lax than what we (I am Canadian) are used to:
- Some pay dividends only annually, and can cancel them in a heartbeat.
- In one case I bought a stock a full month before the ex-dividend date, and still didn’t get the dividend – their handling time is excessive.
- Their pay dates are iffy – dividends can drift in weeks later. Be prepared for lots of “due diligence”!
In any case I would avoid the Turkish stock market.
The reason is very simple for me (Austrian). The Turkish president, which controls the central bank, did not allow the last 2 years to increase interest rates. Therefore, currency inflation last year, 2023, hit 70%.
Just take a look to the forex chart USDTRY from 2020 to 2023.
Would be interested to hear what you think about my comment.
— Josef P.
The reason is very simple for me (Austrian). The Turkish president, which controls the central bank, did not allow the last 2 years to increase interest rates. Therefore, currency inflation last year, 2023, hit 70%.
Just take a look to the forex chart USDTRY from 2020 to 2023.
Would be interested to hear what you think about my comment.
— Josef P.
Thanks to everyone for writing in. And Josef, I’ll take you up on that comment about Turkish stocks…
I agree that the Turkish economy isn’t a place you go looking for stability. The chart of the lira against the dollar makes our inflation problem in the U.S. seem like a speed bump. It’s lost about 420% of its value against the dollar in just four years.
However, recent developments do make Turkey attractive purely as a speculation. Here’s why…
First off, the Turkish central bank began raising interest rates in May 2023. Since then, it’s raised rates by 3,650 basis points, putting its key rate at about 45%.
This is a significant policy shift from before, when Turkish president Recep Erdogan pushed for easy monetary policy in pursuit of growth and at the expense of high inflation.
And that marked a major change in investment inflows into its stock market, the BIST 100. Since those lows, the BIST 100 has returned nearly 110%… and Turkish 10-year government bond yields have risen 180%, to just under a 25% yield.
Understand, I’m not the kind of investor to go speculating on Turkish debt. I’m also not overweighting my portfolio with Turkish stocks.
Quite simply, the momentum picture for Turkey’s stock market is undeniable… with it rising 21% in 2024 to a new all-time high.
As David says above, investing directly in foreign markets — especially unstable ones — requires a whole lot of due diligence. Most often, they’re better as short-term trades than they are as long-term holdings.
Turkey, with its aggressive efforts to bring down inflation, is worthy of this kind of speculation with a small part of your active trading portfolio. Trading high-quality, U.S.-listed Turkish stocks — and yes, they’re out there — is how I’d recommend doing that.
As I mentioned to Ken above, Ratings by TradeSmith is an excellent way to see if a stock you’re eyeing is moving in the right direction in a fundamental or technical sense. I recommend checking it out on your TradeSmith Finance dashboard. (Note that some American Depository Receipts or ADRs are currently not able to receive a Business Quality Score, but will rate on the Ratings gauge.)
That’ll do it for this belated edition of Reader Mailbag. Thank you all so much for your questions.
Of course, I invite you to keep writing in to [email protected] with anything that’s on your mind.
To your health and wealth,
Michael Salvatore
Editor, TradeSmith Daily