3 Things 9-21-26

 Thing One

Should You Invest in Bonds Now That Interest Rates Are Up?

For much of the last decade, this was a pretty easy question to answer.

Owning bonds paying 2% when stock returns were substantially higher didn't make much sense.

But as of September 18, the U.S. Treasury yield curve looked roughly like this:

1-Year Treasury: 4.44%2-Year Treasury: 4.76%5-Year Treasury: 4.86%10-Year Treasury: 5.01%30-Year Treasury: 5.34%

Those are meaningful yields, particularly for an investment backed by the U.S. government. So does that mean you should suddenly start loading up on bonds? Not necessarily.

The better question is: What job do you need bonds to do in your portfolio? If you are 35 years old, investing for retirement 30 years from now and comfortable watching the stock market move up and down, a 5% Treasury yield doesn't suddenly make bonds a better long-term growth investment than stocks. Stocks represent ownership in businesses. Those businesses can grow their earnings, raise prices, pay dividends and increase in value over decades. Bonds generally don't have that same growth engine.

But suppose you're 65, approaching retirement and have money you'll need over the next several years. Now a bond paying around 4½% to 5% becomes much more compelling. You aren't necessarily buying it because you think it will outperform stocks. You're buying it because you can earn a reasonable return while taking considerably less risk with money you may soon need.

And there is another part of the bond story that people sometimes miss.

When interest rates rise, existing bond prices generally fall. When interest rates fall, existing bond prices generally rise.

Imagine you own a bond paying 5%, and a year from now comparable new bonds are only paying 4%. Your 5% bond just became more attractive. That's why bonds can potentially provide two sources of return: the interest they pay and, depending on what happens to rates, changes in their market value.

Of course, the opposite is also true. If you buy a longer-term bond today and rates rise substantially from here, its market value can fall. If you hold an individual Treasury to maturity, those interim price movements may matter much less because you know the amount you'll receive at maturity, assuming the U.S. government meets its obligations.

So rather than making your investing decision solely on the level of interest rates you might ask: How much of my money needs growth, and how much needs stability and income?

For money with a long time horizon, stocks are still likely the best choice but for money that needs to be more predictable, today's bond yields make fixed income far more useful than it was when yields were near historic lows.

Thing Two  

Milton Friedman Makes A Point About Healthcare

The following excerpt from an interview Milton Friedman did with Peter Robinson on Uncommon Knowledge in 2000 is worthy of a read:

Robinson Medical care: now that’s something that you may say the federal government ought not to be in, but it’s in it. And we have this peculiar paradox that in recent decades we’ve seen one miraculous medical breakthrough after another, and yet at the same time, increasing dissatisfaction with health care in this country.

Friedman And an enormous increase in spending. In the period 1929–1950, spending on medical care in the United States was 3–5 percent of national income. Today, it’s 14 percent. Today the nation is spending more on medical care than on all the food, alcohol, and tobacco they put in their mouth. We’ve had an absolutely tremendous increase. And what’s more, U.S. spending on medical care is way out of line with other countries.

Robinson Oh, so you’re suggesting then that this is out of whack. It’s not just due payment for all these marvelous breakthroughs we’ve had?

Friedman All these other countries have had these marvelous breakthroughs. The second-highest country is now Germany at 10 percent. We’re over 14, they’re 10.

Robinson So we should of course socialize our medical system the way Germany has.

Friedman That’s one answer, but it’s not the right answer. If we really socialize the medical system, costs would go down because government would ration medicine.

Robinson So the right answer is?

Friedman Let me go back. The fundamental reason we have high expenses and trouble is because everything is a third-party payment. The insurance company pays, the government pays, but if you’re my physician and I come to you, there is no payment between us. As a result, everybody is spending everybody else’s money, and nobody spends somebody else’s money as carefully as he spends his own.

Why should people have to get their medical care in that way? Why shouldn’t they be able to arrange for it themselves? Why shouldn’t they be able to pay for it directly?

The problem really resolves itself into catastrophe versus ordinary. With respect to ordinary medical care expenses, they are relatively modest; there is no reason why people can’t pay for it on their own.

Robinson Ordinary would be, I have a cold, my kids get the flu, that sort of thing.

Friedman You have an annual examination. You take your kids in for a regular examination. Those are the ordinary expenses. Catastrophic expenses arise when you have a major thing.

And in most areas, we buy insurance only for catastrophic expenses. You don’t insure your car in such a way that if you buy gasoline, you get repaid by the insurance company.

But in medical care we’ve gotten almost to that point. Where medical insurance is provided by the employer, if you have to get some aspirins, you have to get approval and it’s paid for. That’s a little exaggeration, because there are deductibles, but the deductibles are relatively small.

And so the system that should have developed, it seems to me, is a system under which people would buy insurance for catastrophic expenses with a very high deductible—say $5,000 a year. But with employer-provided medical care, that of course is not what you’re going to have.

Robinson Right. As in any tax exemption, there’s a huge incentive to push as much under the exemption as you can.

Friedman So in addition to the problem of third-party payments, the current system also causes you to spend more on medical care than you would spend if you were free to dispose of your after-tax income as you wish.

So the right solution is again to privatize. And there are two ways to do that. You can either eliminate the tax exemption, which I think is politically not feasible; or you can spread the tax exemption, and say it will apply to expenses paid by you.

The medical care expenses you pay now out of your own pocket are after taxes. But with medical savings accounts, you set it up so that you put untaxed money into the account. When you pay your medical care from that, it’s not subject to tax. So that would extend the tax exemption, but permit the elimination of employer-provided care, or at least the substitution of personally provided medical care.

Robinson And would you phase out Medicaid and Medicare somehow?

Friedman In my ideal situation, I would phase out Medicare and Medicaid, but I would have government provide catastrophic insurance. Voucherize it.

Robinson You would keep the location of catastrophic insurance in the government?

Friedman The government is committed to paying for a certain part of my medical care. Let them give me a voucher, which I can use to buy a catastrophic insurance policy equal to the amount that they’re committed to spend on me.

Regardless of what the money is used for, most government spending projects do harm, not good.

Robinson The position becomes more that of the individual in the marketplace?

Friedman And let the market work.

Thing Three

Just A Thought  

“One of the great mistakes is to judge policies and programs by their intentions rather than their results.” - Milton Friedman