​Before we get to the worst investment mistake you can make in 2024, let's discuss the structural change in the market and our economy that can cause us to stumble and make that mistake.

The most prominent change in our economy and the stock market in the last year or so has been the rapid interest rate hikes by the Fed. We all know that! The interest rate hikes swept the stock market out of cash, created a massive scare, and shifted investors away from risky, high-growth stocks. 

But the stock market wasn't the only one that structurally changed. The bond market was also drastically altered due to the interest rate hikes. 

​As the rates went up, so did the yield on new bonds issued by the government and corporations. For example, the 10-year treasury bond yield rate reached almost 5%. You may have heard that bond prices move in the reverse direction of interest rates and yields. As the interest rates and yields go up, the price of previously issued bonds at lower yields goes down because investors now have the option of buying higher-yield bonds. 

That's what happened in 2022 and early 2023, and it is part of the context we need to know to discuss the first part of the worst mistake we can make in 2024, which is ignoring the bond market and staying invested in the stock market only. 

Sure, the stock market is more fun, and there is so much to do and learn. But, when you can buy government-issued bonds at 4% to 5%, such a return on investment is comparable to an average return of the stock market, especially if you consider that for the capital gain on your government bonds, you don't have to pay state or local taxes. Even if the bond prices go down, you can hold on to your bonds until their maturity date, and you'd get paid all your money and cash in all your interest checks, too. 
Let's continue with the context and discuss the structural changes in the capital market further to get to the second part of the worst investing mistake in 2024. 

It's no news that in recent weeks, and after several interest rate hikes, the dust is settling, and things are changing. The new economic data, such as the inflation figure, showed the Fed's efforts to bring down inflation are starting to pay off, and there might be no need for additional rate hikes. The interest rate may stop at its current level and gradually even come down. This means the yield investors expect from future bond issuances can go down, and the current higher-yield bonds will be more in demand and higher in price. We already see early signs of that change. Short to long-term treasury notes and bonds' yields are going down, and the price of already issued and circulating bonds are going up.

Buying bonds now may be a good strategy, assuming that the interest rates hang around at the current rate and then decline gradually. You get paid a higher yield, and the value of your bond can go up because the demand for your relatively higher-yield bond can go up. Ignoring the bond market, especially not investing in some high-yield treasury bonds with 4.5% to 5% yield now and in early 2024, can be a terrible mistake you can make.

Of course, buying individual bonds may not be as convenient for many of us retail investors. Still, you can easily find a few high-yield corporate bond ETFs or even focus on a broad bond market index ETF and enjoy a better return in your portfolio. 

If the worst investing mistake in 2024 is ignoring the bond market, and especially not considering any high-yield corporate bonds. You and I need to figure out how to find high-yield corporate bonds to invest in. Generally, investing in individual corporate bonds requires a significant amount of capital. They are rarely available at small denominators for you and me to buy them directly from our brokerage. But luckily, there is an ETF for that.

Some ETFs exclusively focus on high-yield corporate bonds.

I'll show you how if you go to your Stock Card account now. Under the tools, pull up the ETF Screener, and under the general filters, look for the Fund Manager's strategy. You can see we have grouped ETFs into corporate bonds and high-yield corporate bonds. Use this filter, and add a few other ones that make sense to you. For example, I always look for ETFs with more than 1 year of investment history and more than $50M in assets under management to filter out new and operationally unstable ETFs. 

There are other good filters to play with, too. For example, pick low-fee ETFs or filter out high-risk ones. Those are ETFs that borrow a lot of money to boost their return or have a high turnover of assets

You should try it for yourself and find your own High-Yield Corporate Bond ETFs to invest in. I saved this one I just created and here's the link so you can have a starting point for your research. 

Now, let's wrap up today's episode.

​The government has two types of spending: Mandatory and Discretionary. Mandatory spending represents two-thirds of the government spending and does not require annual voting. For example, military operations or social security payments, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve are deemed essential operations and won't be subject to government shutdown. Even if we talk about a full shutdown, it has nothing to do with two-thirds of spending. 

The remaining one-third of the spending requires annual voting, the topic of those 12 legislative bills. For example, while the military would continue protecting the country as an essential activity that is differently funded, it may not be able to conduct its recruitment events as planned because those may be nonessential activities during a shutdown. 

If Congress cannot agree on the discretionary bills by a specific deadline, the government shuts down its discretionary spending. The shutdown means no federal agency and program deemed nonessential can spend the discretionary budget until the bill is passed. 

But why is this happening to the U.S. quite frequently, and why can't we get it together as a nation and avoid it? 

 (source)​On the surface and optically, it appears that the United States is the only country that cannot govern itself, and the leaders aren't capable of achieving alignment. We have had 10 full or partial shutdowns of discretionary spending in the last four decades. And that is only a U.S. phenomenon. Other governments in the world may only experience a shutdown when there is a revolution, a natural disaster, or an invasion. That's why when the world hears about a government shutdown, naturally everyone reacts with horror. We've even seen credit rating agencies such as Moody's and the Fitch rating referencing government shutdowns as a reason to reduce the country's rating. 

But hang on! 

As fundamental investors, we don't take everything we hear at its face value. We tend to dig. If you dig into this matter, you'll realize the reason this is happening to the U.S. is structural and the direct result of the U.S. government's design. 

The reality is that the government continues to operate in the rest of the world even if their legislative body can't agree on the budget. Moreover, according to BBC, in most European democracies, the parliamentary system ensures the same party or coalition controls the executive and legislative bodies. This structure ensures there is no political misalignment that leads to shutdowns. 

In the rest of the world, if the parliament does not approve the head of government's budget, it triggers a new election, not a government shutdown. The government continues to run even in that scenario. In Belgium, the country had no elected government for 589 days between 2010 and 2011 and kept running normally. 

Only in the U.S. and after 1980 have government shutdowns become a recurring event and are used by political parties as a bargaining chip. That's because, in 1980, the Attorney General of President Carter's administration made it much stricter to continue spending without a budget. Before 1980, if there was a budget gap, the U.S. government continued to operate as normal, like most other governments worldwide.

Therefore, the shutdowns result from the difference between government structure and design in the U.S. and the rest of the world.

Like many things in the financial media, the shutdown isn't as wild and horrific a situation as the headlines make it seem. 

But we can't ignore the effect the shutdown has on the nation. There are still undesirable and in some cases damaging consequences. 

​The obvious and immediate impact is on people employed by the government and nonessential programs. They won't get paid on time and for the time period of the shutdown, even though they will be paid once the government gets out of the shutdown. 
Beyond people's salaries, the impact is not a clear-cut black-and-white list of what gets shut down or delayed. Because as the government goes through a shutdown, each affected agency has to work with the Office of Management and Budget (OMB) to set guidelines around what's deemed essential or nonessential. 

In the past, quite a few social programs have been impacted. For example, during the 1995-1996 shutdown, more than 10,000 Medicare applicants were temporarily turned away every day of the shutdown. Many parks operated by National Parks remained open during the 2018-2019 shutdown, though no visitor services were provided, and damage and trash build-up were reported at many sites. In 2013, a backlog of 1.2 million income and Social Security number verification requests delayed mortgage and other loan approvals, and billions of dollars of tax refunds were also delayed. 

However, the agencies have gotten a better sense of what is deemed non-essential over the years and during the last 10 government shutdowns in the past four decades. Therefore, mortgage and loan approval getting delayed again is unlikely. Those services have funds appropriated through the Inflation Reduction Act.

Let's move closer to the business of investing and how shutdowns can impact the companies we all like and want to invest in. Immediate implications and macro effects may trickle down to the businesses.

The immediate impact can be on the company's revenue, any sort of governmental registrations, fundraising, and important policy developments. 

Revenue:

• If a company is a contractor to any government agency and the project they are working on gets shut down, they won't get paid. This happens a lot in defense or consulting services to the government. It's important to note that in a shutdown, the full-time employees will get a payback once the shutdown is over, but contractors won't. 
• According to the Whitehouse website, "a shutdown would also make it harder for small businesses to access federal contracting opportunities by halting the processing of applications for nearly all government contracting programs."

Fundraising:

• The next possible impact is on smaller companies' ability to get loans. A government shutdown halted Small Business Administration (SBA) loan programs, and application reviews will be delayed. As public market investors, we may not invest in small companies, but many of them are the customers of the companies we invest in. For example, Yelp or Meta works with many small businesses that run ads on their platforms, and their inability to access funding may create short-term delays in payment to Yelp or Meta.
• It's possible that the SEC delays processing registration statements for companies planning to issue new shares or go public. This is not limited to IPOs. It can also impact those who want to issue crowdfunding through Regulation A+.
• On that line of thought, any alternative assets that require registration by the SEC will be on halt. While researching this episode, I came across an interesting company named Rally Rd that takes luxury cars public as an investment opportunity for individual people. The offering for each car has to be registered individually by the SEC and will be delayed during a shutdown.

Registration Requirements:

• If you are in the business of securitizing loans, for example, SoFi packages loans it issues and sells them to other financial institutions, will be impacted by the shutdown. They may not be able to get permission from the SEC to securitize their loans and are stuck with them on their balance sheet.  
• If the IRS can't verify mortgage applicants, financial technology companies working on mortgage initiation can be impacted, or their work can be delayed. 
• The SEC also processes registration on a new broker-dealer or other trading systems. A government shutdown will delay that registration, and if it takes too long, some platforms may end up with the risk of running their operations illegally and without registration.
• The shutdown may impact some segments of the market more than others. For example, the food and site inspection may be delayed in the healthcare or food industries for those waiting for approval from the FDA. 

Policy Developments:

• Several committees review the policy requirements and collaborate with businesses in new and innovative market segments, such as cyber security, anti-money laundering, or cryptocurrency. Those reviews and preparation for new policies can be delayed due to a shutdown. 

These are all consequential impacts of a possible government shutdown. However, for the most part, the government shutdown has been inconsequential for the stock market as a whole, with a history of both positive and negative market direction during the last 10 shutdowns. These kinds of delays and impacts are quite short-term by nature. The longest government shutdown lasted 35 days in 2018–2019, which impacted tax refund delays, and even air travel traffic controls were impacted. But, it is very rare to say 35 days will make or break the future of any company. 

The broader impact of the government shutdown and perhaps with a more damning impact on the U.S. brand is how the world sees us. Before researching this post, I had no idea the shutdown resulted from the structural government design in the U.S. The chances are most people in the world aren't aware of that either. It looks bad that the government shuts down in the U.S. The overall U.S. economy and the perception of the stability and functioning of the country's government is an important brand value the U.S. has cultivated for decades. It doesn't help that rating agencies such as Moody's and Fitch ratings have already downgraded the U.S. government debt, seeing the government shutdown as a sign of governing challenges and an inability to reach agreements in a timely manner. Shutdowns are bad for the U.S. image. And that's bad for all companies that operate under the brand image and umbrella of the U.S. economy. 

Talking about the brand image and the rating agencies reminded me of another post I published on Fitch Ratings' last downgrade of the U.S. debt. That's a good episode that goes with today's discussion. Link in the show notes. 
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I'll see you next time!

Whether you agree with author Michael Lewis, who seemingly believes SBF is a genius with good intentions, or among millions of FTX customers wanting him to go to jail for the rest of his life, you must accept SBF had a superpower – the unique power to get people to trust and believe in him. 

In 2017, he convinced several smart, young, and talented people to join him in starting Alameda Research – a trading firm focusing on bitcoin price arbitrage opportunities, known as Kimchi Premium. In 2018, he reportedly convinced high-profile, successful investors, such as the founder of Skype, to give him up to $100 million in assets to manage and trade. And that's not all! He was just getting started. He raised over a billion dollars in investment capital and convinced over 600 people to join his crypto exchange firm, FTX. 
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How did a math nerd, in his lawyer's words, with unkempt hair, wearing T-shirts and shorts without any business or startup experience, achieve all that early success? 

This is the story of a playbook that Sam Bankman-Fried followed masterfully to establish trust and make people believe in him and the future he promised.
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Just before we finalized this post, SBF was found guilty, even though he tried to apply his playbook by making a testimony in court. So, the playbook has its own limits.

​Being aware of the playbook teaches us that whenever you invest in a company, be aware of similar masterful skills and make investment decisions based on facts, not stories and the image the leadership paints. There is a post on our blog on researching a stock based on facts using a 6-part process that can help you. I'll leave a link to it ​below for you to watch next. 

I'll see you next time!