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A New (Old) Model for Monetary Policy Throughout the COVID-19 era, comparisons to the 1918 influenza pandemic have often been drawn. From a fiscal standpoint, though, World War II bears a stronger resemblance. The massive defense expenditures of the mid-1940s are equivalent to today’s stimulus checks and Paycheck Protection Program (PPP) loans. According to the Federal Reserve Bank of St. Louis, today’s federal debt (as a percentage of GDP) sits just below its post-WWII peak. The monetary parallels to the 1940s are also striking. In order to reduce borrowing costs, the Federal Reserve created money to purchase Treasury bonds to keep interest rates down. Consequently, the Consumer Price Index rose by nearly 60% from 1942-1948, meaning that holders of cash lost almost 40% of their purchasing power. By 1951, the situation had become untenable. In March of that year, the Treasury and the Fed issued a statement which committed to “minimize monetization of the public debt. ....
Rethinking the Classic 60/40 Stock Portfolio When I started working in capital markets 20 years ago, an investor seeking a “safe haven” could purchase a 30-year Treasury bond yielding better than 5%. The high-quality corporate bonds that I bought for my employer (a major life insurance company) often paid more than 7%. Times have certainly changed. For much of 2020, 30-year Treasury bonds were paying in the mid-1% range, though they have since climbed to a “lofty” mid-2% level. A corporate bond buyer is lucky to get 4% today for lending money to an investment-grade American company. Today’s flat bond yields pose a two-fold problem for retirees and those approaching retirement. First, investors buy bonds to generate steady income to fund spending. Second, bonds serve as a means of hedging, or offsetting, the risks associated with stock ownership. That is, when stocks are flagging in a market downdraft, bonds generally tend to do wel ....